COUNTY OF MONTEREY AUDITOR-CONTROLLER DEPARTMENT INTERNAL AUDIT DIVISION NATIVIDAD MEDICAL CENTER MEDICAL OFFICE BUILDING REVIEW

Transcription

1 COUNTY OF MONTEREY AUDITOR-CONTROLLER DEPARTMENT INTERNAL AUDIT DIVISION NATIVIDAD MEDICAL CENTER MEDICAL OFFICE BUILDING REVIEW County of Monterey Michael J. Miller Auditor-Controller Alfred Friedrich Assistant Auditor-Controller

2 COUNTY OF MONTEREY AUDITOR-CONTROLLER DEPARTMENT INTERNAL AUDIT DIVISION NATIVIDAD MEDICAL CENTER MEDICAL OFFICE BUILDING REVIEW Introduction The County of Monterey owns two stand-alone office buildings near the campus of Natividad Medical Center (NMC) referred to as Building 151, comprising 11,410 square feet, and Professional Building 400 comprising 62,165 square feet. Building 151 is utilized by the County of Monterey Health Department s patient care clinics which occupy 7,558 square feet or approximately 66%. A children s center, Kids at Play, occupies the rest of the square footage of Building 151. Building 400 is utilized by private occupants as well as by the County of Monterey Health Department Behavioral Health Service as a patient care clinic. Private lessees occupy 10,779 square feet (approximately 17%), Behavioral Health occupies 22,026 square feet (approximately 35%), NMC occupies 14,752 square feet (approximately 24%) and 14,608 square feet (approximately 23%) of Building 400 is vacant. NMC is currently working to finish out the vacant space with the intention of leasing to the Health Department. In addition, NMC provides space within the hospital, known as Building 200, to the County of Monterey Health Department which occupies 16,900 square feet as patient care clinics. 785 square feet is rented by two physician administrative offices and the residency program administration. Building 200 is encumbered by the NMC 09 and 10 Certificates of Participation which encumbers the core hospital campus. Property management services were being provided by Stockman & Associates until January 1, 2006 when that company was acquired by Manco Abbott Real Estate Management (MA). Pursuant to a contract dated May 1, 2011, MA has been engaged to manage the buildings, provide tenant support, and lease negotiations.

3 Executive Summary Objective: There were two objectives to this audit. First, we evaluated the occupancy composition, lease provision compliance, and lease rate calculation to determine compliance with the Office of Management and Budget (OMB) Circular A-87 which governs intergovernmental charges. Secondly, we evaluated the compliance by the property manager in fulfilling the terms of the Property Management Agreement. Scope: Lease agreements for all three buildings were reviewed to determine public and private occupancy. Financial reports provided monthly by the property manager to NMC were reviewed and traced to NMC s Meditech sub-accounting system and eventual recordation in the County s Advantage Financial accounting system. Detail testing of operating expenses and rental income was performed for the period of July 2012 through December Lease agreements with tenants date from 2001 forward, with many having been automatically renewed. Many contain escalators based on CPI and other variables. Payments to and from MA were reviewed for the period July 1, 2012 through February 21, Conclusion: Lease agreements between the County of Monterey Health Department and NMC require monthly rental payments comprised of three per-square-foot components: base rent; Common Area Maintenance; and Premise Operational Expense. The lease for Suite 16 of Building 151, dated July 1, 2005, calls for monthly base rent of $1.887, common area maintenance of $0.45, and premises expenses of $0.235, bringing the monthly per square foot rental to $ NMC records the entire lease payment to rental revenue, with no specific tracking as to whether common area maintenance or premises expenses adequately cover actual costs or whether a profit center is created for NMC. Office of Management and Budget (OMB) Circular A-87, schedule B (Federal Register 2 CFR Part 225, Section 37. a. through d. entitled Cost Principles for State, Local, and Indian Tribal Governments ) provides that government unit to government

4 unit transactions must not provide for any profit potential but only the actual cost of maintaining the physical plant which includes building depreciation at 2% per year or a use allowance, taxes, and insurance. NMC has not created documentation to illustrate that the rents being charged on these intergovernmental leases are being provided at cost, as legally required. MA s contract established an imprest fund, set at $70,000, to be used by MA to pay for operating expenses. Monthly, MA provides NMC with paid invoices and a check register detailing payments remitted from the imprest fund. The audit verified that expenditures remitted from the imprest fund pertain solely to buildings 400, 151, and 200. NMC enters the expenditure detail into Meditech and Advantage to generate a check to reimburse the imprest fund. Rental income is tracked by building on an Excel spreadsheet by NMC s Accounting Department. Due to delays caused by deficiencies with NMCs Accounts Payable procedures, MA often does not have sufficient funds in the imprest account to pay expenses in a timely manner, causing aged payables, sometimes in excess of 90 days. In fact, checks to pay at least three invoices in June had to be voided by MA due to insufficient funds in the imprest account. The MA aged trial balance for 7/11/2012 showed balances past due 31 to 60 days of $26, and balances past due 61 to 90 days of $6, Background: NMC has an agreement with MA for the term May 1, 2011 through April 30, The agreement requires MA to: manage and operate the property in a commercially reasonable manner that is consistent with local industry practices, enforce all leases with tenants of the property in accordance with their terms, and notify County of any matter, which in the opinion of Contractor is material to the operation of the property. Part of operating the property is to have it in first-class condition comparable to similar properties in the market area. MA incurs operating costs other than depreciation, i.e. janitorial services, preventive maintenance, garbage service, etc. for maintaining the buildings. MA shall negotiate leases on behalf of County or NMC using only model lease templates approved by County and all leases must comply with applicable laws and regulations.

5 Observations Observation One: Intergovernmental Leases Condition: The lease agreements between the County of Monterey Health Department and NMC indicate per square foot base rent, common area maintenance, and premises operational expenses that appear to be reflective of market rates in the Salinas area. Many contain escalation provisions based on CPI or other market factors. Criteria: Office of Management and Budget (OMB) Circular A-87, schedule B provides that intergovernmental transactions must be at cost and not provide for any profit potential. Cause: NMC failed to comply with the provisions of OMB Circular A-87 by: 1) structuring leases with escalation provisions; 2) structuring leases at market rates; and 3) failing to track actual costs considered allowable under the regulation to assure that the leases did not provide for profit. Effect: The Health Department has paid rents to NMC in excess of costs allowable under OMB Circular A-87 resulting in unallowable profits for the NMC enterprise fund. Those overpayments caused reports filed by the Health Department (approved and signed by the Office of the Auditor/Controller) to misrepresent operational costs regarding federal and state grant funding, resulting in overpayments to the County of Monterey Health Departments by Federal and State granting agencies. Additionally, non-operating revenues for the NMC enterprise fund have been overstated. Recommendations: 1. Leases between the County of Monterey Health Department and NMC must be terminated immediately and rewritten to comply with OMB Circular A-87. Term escalators which increase rents not based on actual costs must be eliminated.

6 2. NMC will immediately refund $4,367, to the Health Department to reimburse improperly charged rents for the period of leases included in this audit. For the time period July 2005 thru February 2013, gross rentals amounted to $8,323, Accounting records indicated operating expenditures of $3,577, for that period resulting in a net overpayment by the Health Department for that period of $4,746, From February 2001 to June 30, 2005, gross rentals totaled $1,384, Pursuant to correspondence from NMC accounting personnel, accounting records are not available for that time period due to a change in sub-accounting software. Therefore, the auditors applied the ratio of unallowable rental payments to gross rentals experienced during the period for which documentation was available to gross rentals for the period in which documentation was not available to calculate the overpayment amount. The formula utilized is: $4,746, / $8,323, = * $1,384, = $789, plus $3,577, = total estimated overcharge of $4,367, The Health Department and NMC must promptly report this matter to grant and aid providers which may result in penalties, fines, and/or reimbursements. 4. Any funds determined by the granting agencies to remain with the County of Monterey will be returned to the County General Fund to be used as determined by the Board of Supervisors. Management s Action Plan: Observation Two: Duplication of Expenses Condition: On July 24, 2012, the hospital controller signed off on the MA request for replenishment of the imprest checking account for expenditures dated May 16 through July 11 totaling $55, Had NMC reconciled those invoices, a $0.03 error on an invoice for Republic Services would have been discovered. Instead, the reimbursement was approved at the higher incorrect amount. The reimbursement was paid on August 15 via check, initiated by GAX Although this is

7 certainly an immaterial amount, it is indicative of a much more serious lack of internal controls. On August 29, 2012, the hospital controller submitted a claim to reimburse the imprest fund in the amount of $32, by GAX that was paid on 9/18/2012. All items on this reimbursement were duplicates of expenditures included in the July reimbursement request. MA ed the hospital controller upon receipt to notify NMC of the duplicate payment. The hospital controller responded that he had checked his records and that there had not been a duplication of payments. Our review of the imprest reimbursement claims verified that duplicate payments totaling $32, had been made and needed to be recouped. Due to the verification by the audit team, the error was corrected by lowering the December 2012 payment request submitted on 2/19/13 (GAX 66514) from $61, to $29, Criteria: NMC must reconcile the reimbursement requests to assure proper, timely reimbursement. Cause: Failure to reconcile and perform due diligence concerning remittances from the imprest fund caused the duplicate payment. Effect: Duplicate payments are made and not discovered nor corrected in a timely manner. Recommendation: 5. Entering an accounting line for each invoice as established by County Accounts Payable should continue and the current practice of entering journal entries from financial reports should be discontinued utilizing, instead, NMC Accounts Payable for accounting data entry into both Meditech and Advantage, until such time as an adequate interface is established. 6. NMC should match the reimbursement requests to original documentation by performing regular and timely reconciliations. Management s Action Plan:

8 Observation Three: Expenses in Meditech Condition: The Meditech Trial Balance report for August and September 2012 indicated a $5,000 overage each month in account Other Services (Account 660) due to an entry made by NMC accounts payable department. The $5,000 was identified as the management fee paid each month to MA ($3,000 for building 400 and $1,000 each for buildings 151 and 200). The $5,000 should have been made in the Management Fee account (640) and allocated to the specific buildings. Criteria: A management review of the data entered into Meditech on a monthly basis would identify these timing and allocation errors. Management reports by department should be reviewed monthly as part of the financial management of the hospital. Cause: Miscoding entries by account or time period results in faulty financial reports. Effect: Total expenses for each month in building 400 are overstated and misstate any calculation made as to operating costs. Management fees cannot be included when calculating operating costs. Recommendation: 7. All expenses should be placed in their proper accounts for reporting and tracking purposes. Management s Action Plan: Observation Four: NMC Billing for Services Condition: NMC sends invoices to MA for common area maintenance and security provided by NMC. MA remits checks to NMC pursuant to the invoices. The security services are provided by First

9 Alarm, which NMC pays monthly for that service provided to the entire hospital complex. The portion invoiced to MA segregates a portion of the original bill to the medical office buildings. NMC books the expense when the original invoice is paid. NMC books the expense again when reimbursing the imprest fund. Checks remitted by MA for those invoices are recorded at NMC as rental revenue. GAX and contained 12 invoices totaling $9,150, of which $4,800 was for security and $4,350 for common area maintenance performed by NMC engineering. Criteria: The property manager should be responsible for payments actually made in the fulfillment of their contractual obligations. No checks should be written to NMC for services performed by hospital personnel. Cause: As explained by NMC accounting management, the procedure of writing these checks allows for a degree of separation of the MOBs from hospital operation. The cited advantage is not warranted. Effect: Revenues and expenditures are overstated in NMC records as are billings to the Health Department resulting in overcharges to grant programs. Recommendation: 8. At the time of original payment, NMC should allocate costs to the entity incurring the expense. Management s Action Plan:

10 Additional Observations: 9. Leases should have a standard format to include how monthly rent is calculated. Rents should be recorded as such, with common area maintenance and operating expenses recorded separately. 10. Reimbursements to the MA imprest account are not made timely. Since reimbursement requests are not date stamped, it is not possible to accurately identify the timeline of the payment process. However, a review of correspondence indicates that MA periodically holds insufficient funds to pay invoices. At a minimum, the reimbursement process should be amended to assure that adequate funds are available to pay invoices in a timely manner. 11. Because OMB Circular A-87 clearly disallows management fees, the MA contract should be amended to eliminate charges for space utilized by governmental entities. 12. Control of the MOBs was granted to NMC when NMC was experiencing massive operating losses, with the expectation that the space would be leased to non-governmental entities who would pay market rate rents to offset those operating losses. NMC has been unable to secure leases from non-governmental entities sufficient to fill the available space. As a result, NMC executed market rate leases with the Health Department in violation of OMB Circular A-87. Therefore, the Board of Supervisors should review MOB operations to determine whether control of those buildings should be transferred to the Health Department or the County, in light of the aforementioned circumstances. Management s Action Plan:

11 Distribution Natividad Medical Center: Harry Weis, Chief Executive Officer Daniel Leon, Chief Financial Officer Charles Vold, Hospital Controller Health Department: Ray Bullick, Director Audit Team Ron Holly, Chief Deputy Auditor-Controller William L. Gray, Internal Auditor III Kimberly Munckton, Internal Auditor II Issued this day of, 2013 Michael J. Miller, CPA, CISA Monterey County Auditor-Controller