Audit Report Maryland Agricultural Land Preservation Fund Fiscal Year Ended June 30, 2006 OFFICE OF LEGISLATIVE AUDITS DEPARTMENT OF LEGISLATIVE SERVICES MARYLAND GENERAL ASSEMBLY
This report and any related follow-up correspondence are available to the public through the Office of Legislative Audits at 301 West Preston Street, Room 1202, Baltimore, Maryland 21201. The Office may be contacted by telephone at 410-946-5900, 301-970-5900, or 1-877- 486-9964. Electronic copies of our audit reports can be viewed or downloaded from our website at http://www.ola.state.md.us. Alternate formats may be requested through the Maryland Relay Service at 1-800-735-2258. The Department of Legislative Services Office of the Executive Director, 90 State Circle, Annapolis, Maryland 21401 can also assist you in obtaining copies of our reports and related correspondence. The Department may be contacted by telephone at 410-946-5400 or 301-970-5400.
March 20, 2007 Delegate Steven J. DeBoy, Sr., Co-Chair, Joint Audit Committee Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We have audited the Maryland Agricultural Land Preservation Fund for the fiscal year ended June 30, 2006. Our audit disclosed that easement inspections were not performed in accordance with federal grant agreements and the Fund s Board of Trustees Policy. These inspections are required to ensure that the landowners complied with the easement agreements in managing their properties to preserve the land for farming. Our audit also disclosed that the certification process for county agricultural land preservation programs, which affects the amount of agricultural land transfer tax revenue forwarded to the State, was inadequate and that the Fund s required annual reports for fiscal years 2003 through 2006 have not been submitted to the Governor and the General Assembly, as of November 8, 2006. A schedule of the Fund s financial activity for the fiscal year ended June 30, 2006 is included in this report for informational purposes. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor
2
Table of Contents Background Information 4 Agency Responsibilities 4 Current Status of Findings From Preceding Audit Report 4 Financial Information 4 Findings and Recommendations 6 Inspections * Finding 1 Easement Inspections Were Not Performed as Required 6 County Agricultural Land Preservation Program Certifications Finding 2 Process of Certifying the County Programs Was Inadequate 7 Annual Reports Finding 3 Annual Reports Were Not Submitted as Required 8 Audit Scope, Objectives, and Methodology 9 Exhibit A Schedule of Financial Activity 11 Agency Response Appendix * Denotes item repeated in full or part from preceding audit report 3
Agency Responsibilities Background Information The Maryland Agricultural Land Preservation Foundation (MALPF) was established to preserve productive agricultural land and woodland in Maryland. MALPF purchases easements on agricultural land/woodland and places certain restrictions on the use of the land (for example, the land cannot be subdivided for residential or commercial purposes). In addition, MALPF, in collaboration with the Department of Natural Resources, has acquired permanent conservation easements on environmentally significant land from funding allocated to the Maryland GreenPrint Program, as established by State law. This Program was ended by law as of June 30, 2006. The Agriculture Article of the Annotated Code of Maryland established the Maryland Agricultural Land Preservation Fund. MALPF uses the Fund to purchase easements and for related expenditures. MALPF generally derives revenues from State property transfer taxes, agricultural transfer taxes, local subdivision matching funds, and federal grants. Current Status of Findings From Preceding Audit Report Our audit included a review to determine the current status of the finding contained in our preceding audit report dated April 19, 2006. We determined that the Fund had not satisfactorily resolved this finding; therefore, it is repeated in this report. Financial Information Attached, as Exhibit A, is a schedule of the financial activity of the Fund for the fiscal year ended June 30, 2006. This schedule is not intended to and does not provide the financial position and results of operations in accordance with generally accepted accounting principles. Specifically, certain financial statements and disclosures (such as balance sheet, summary of significant accounting policies) have not been provided as would be required by generally accepted accounting principles. The schedule was prepared on a modified accrual basis of accounting which provides that revenues are recognized when they become available and measurable, and expenditures are recognized when the related liability is incurred. 4
The fund balance as of June 30, 2006 in the Special Revenue Fund ($31,938,998) represents funds available to finance future expenditures, including easement acquisitions. The fund balance as of June 30, 2006 in the Trust Fund ($5,473,591) represents funds committed for the payment of easements purchased on an installment basis. 5
Findings and Recommendations Inspections Finding 1 Easement inspections were not performed as required. Analysis The Fund did not ensure that inspections of easement properties were performed, as required by federal grant agreements and its Board of Trustees Policy. Specifically, we noted the following conditions: For the 109 easement properties funded by the Federal Farm and Ranch Lands Protection Program (FRPP) with annual inspection reports due in January 2006, reports were not on file as of November 2, 2006 for 71 of these properties (65 percent) as required by the related grant agreements. As of October 25, 2006, the Fund had not obtained 70 of 166 inspection reports due in January 2006 from 10 counties for calendar year 2005. The Board s Policy requires each county to annually inspect at least 10 percent of the easement properties in its local subdivision. Because the required inspections were not performed, there was a lack of assurance that landowners were in compliance with the provisions stipulated in the easement agreements in managing their properties to preserve the land for farming. For example, the Fund disclosed that, in September 2005, one landowner sold a parcel of land for which an easement was purchased without approval from the Fund as required by law. The new landowner used the land for non-agricultural purposes. Furthermore, the lien to record the easement was apparently recorded in the wrong county. Fund management did not know if inspections of the property had been performed, which could have alerted the Fund of this activity. The Fund has begun legal proceedings related to this case. A similar condition related to inspections required by the Board of Trustees Policy has been commented upon in our four preceding audit reports dating back to June 3, 2003. We also commented upon inspections required by federal grant agreements in our preceding audit report. Recommendation 1 We again recommend that the Fund take appropriate action to ensure that easement inspections are performed in accordance with established requirements. 6
County Agricultural Land Preservation Program Certifications Finding 2 The process of certifying county agricultural land preservation programs was inadequate. Analysis The certification process for county agricultural land preservation programs was inadequate. State regulations specify that the Fund and the Maryland Department of Planning (MDP) are jointly responsible for certifying county agricultural land preservation programs. Such certifications are significant, from a fiscal standpoint, because State law generally requires that counties with certified programs forward, on a monthly basis, 25 percent of the agricultural land transfer tax revenue to the State Comptroller. If a county s program is not certified, the county must remit a greater portion (that is, two-thirds) of the tax revenue. Our test of 17 county programs disclosed the following conditions: The Fund s management considered seven county programs as certified through June 30, 2006 even though the certifications had expired and the counties had not requested to be recertified, as required by State regulations. For one of these counties, the certification had expired in 1999. Our limited test of transfer tax revenue for selected months during fiscal year 2006 disclosed that three of these counties improperly retained approximately $60,000 in transfer taxes because the programs were considered certified. For five other counties, the Fund and MDP did not recertify the programs in a timely manner, even though the counties properly submitted a request for recertification. As a result, the certification period was retroactively applied for up to 15 months. For two other counties, the Fund and MDP retroactively certified the programs even though the counties did not submit the required request for recertification. According to State regulations, MDP and the Fund are jointly responsible for certifying and recertifying county agricultural land preservation programs for periods of two years. At the end of the two year period, a county may request a recertification for an additional two years. State regulations also stipulate that a county that does not submit the required materials for recertification, and has not been notified of recertification by the expiration date of its current certification 7
period, may not continue to retain 75 percent of its agricultural land transfer revenues until it has been recertified. Recommendation 2 We recommend that the Fund ensure that the counties remit the proper amount of agricultural land transfer tax as required. We further recommend that, for the county agricultural land preservation programs in which the certifications had expired, the Fund determine the legality of recovering the excessive amounts retained by the counties, including the aforementioned $60,000, and take appropriate action. Finally, we recommend that the Fund, in conjunction with MDP, ensure that when requests are made the county programs are recertified in a timely manner. Annual Reports Finding 3 The Fund did not submit its annual reports for fiscal years 2003 through 2006 to the Governor and General Assembly as required by law. Analysis As of November 8, 2006, the Fund had not submitted its annual report for fiscal years 2003 through 2006 as required by law. The Agriculture Article, Section 2-506 of the Annotated Code of Maryland requires that, on or before November 1 of each year, the Fund transmit to the Governor and General Assembly a report of the Fund s activities for the preceding fiscal year. Recommendation 3 We recommend that the Fund submit its annual reports to the Governor and General Assembly as required by State law. 8
Audit Scope, Objectives, and Methodology We audited the Maryland Agricultural Land Preservation Fund for the fiscal year ended June 30, 2006. The audit was conducted in accordance with generally accepted government auditing standards. As prescribed by the State Government Article, Section 2-1221 of the Annotated Code of Maryland, the objectives of this audit were to examine the Fund s financial transactions, records and internal controls, and to evaluate its compliance with applicable State laws, rules, and regulations. We audit the Fund annually as required by the Agriculture Article, Section 2-505 of the Code. We also determined the current status of the finding contained in our preceding audit report. In planning and conducting our audit, we focused on the major financial-related areas of operations based on assessments of materiality and risk. Our audit procedures included inquiries of appropriate personnel, inspections of documents and records, and observations of the Fund s operations. We also tested transactions and performed other auditing procedures that we considered necessary to achieve our objectives. Data provided in this report for background or informational purposes were deemed reasonable, but were not independently verified. Our audit did not include certain support services provided to the Fund by the Department of Agriculture. These support services (such as purchasing, data processing, maintenance of accounting records, and related fiscal functions) are included within the scope of our audit of the Department. Our audit scope was limited with respect to the Fund s cash transactions because the Office of the State Treasurer was unable to reconcile the State s main bank accounts during the audit period. Due to this condition, we were unable to determine, with reasonable assurance, that all Fund cash transactions were accounted for and properly recorded on the related State accounting records as well as the banks records. Maryland Agricultural Land Preservation Foundation management is responsible for establishing and maintaining effective internal control. Internal control is a process designed to provide reasonable assurance that objectives pertaining to the reliability of financial records, effectiveness and efficiency of operations including the safeguarding of assets, and compliance with applicable laws, rules and regulations are achieved. 9
Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. Also, projections of any evaluation of internal control to future periods are subject to the risk that conditions may change or compliance with policies and procedures may deteriorate. Our reports are designed to assist the Maryland General Assembly in exercising its legislative oversight function and to provide constructive recommendations for improving State operations. As a result, our reports generally do not address activities we reviewed that are functioning properly. Our audit did not disclose any conditions that we consider to be significant deficiencies in the design or operation of internal control that could adversely affect the Fund s ability to maintain reliable financial records, operate effectively and efficiently and comply with applicable laws, rules, and regulations. Our report does, however, include findings regarding significant instances of noncompliance with applicable laws, rules, or regulations. Other less significant findings were communicated to the Fund that did not warrant inclusion in this report. The Department of Agriculture s response, on behalf of the Fund, to our findings and recommendations is included as an appendix to this report. As prescribed in the State Government Article, Section 2-1224 of the Annotated Code of Maryland, we will advise the Department regarding the results of our review of its response. 10
Exhibit A MARYLAND AGRICULTURAL LAND PRESERVATION FUND SCHEDULE OF FINANCIAL ACTIVITY FISCAL YEAR ENDED JUNE 30, 2006 Governmental Fiduciary Fund Type Fund Type Total Special (Memorandum Revenue Trust Only) REVENUES: State property transfer taxes $ 20,534,015 $ 20,534,015 Agricultural transfer taxes 9,486,262 9,486,262 Local subdivision matching funds for easement purchases 5,543,972 5,543,972 Interest earnings on funds reserved for installment purchases $ 196,307 196,307 Sale of land included in prior easement acquisitions 62,186 62,186 Total Revenues 35,626,435 196,307 35,822,742 EXPENDITURES: Easement acquisitions 19,392,479 19,392,479 Administration 835,712 835,712 Land appraisal, legal and settlement fees 315,995 315,995 Total Expenditures 20,544,186 20,544,186 EXCESS OF REVENUES OVER EXPENDITURES 15,082,249 196,307 15,278,556 OTHER SOURCES (USES) OF FINANCIAL RESOURCES: Federal reimbursement of Special Revenue Fund expenditures for easement acquisitions 1,773,335 1,773,335 State reimbursements from GreenPrint Program 1,753,241 1,753,241 Proceeds from sale of general obligation (GO) bonds 5,471,388 5,471,388 Transfers in from Special Revenue Fund for easement acquisitions purchased on an installment basis 951,991 951,991 Payments made on easement acquisitions purchased on an installment basis (2,380,581) (2,380,581) Net Other Sources (Uses) of Financial Resources 8,997,964 (1,428,590) 7,569,374 EXCESS OF REVENUES OVER EXPENDITURES AND NET OTHER SOURCES (USES) OF FINANCIAL RESOURCES 24,080,213 (1,232,283) 22,847,930 FUND BALANCES, July 1, 2005 7,858,785 6,705,874 14,564,659 FUND BALANCES, June 30, 2006 $ 31,938,998 (1) $ 5,473,591 $ 37,412,589 (1) The Special Revenue Fund balance is substantially reserved for easement acquisition offers that were approved by the Foundation's Board of Trustees, but were not presented to the landowners as well as offers accepted by the landowners that were awaiting Board of Public Works approval or settlement at year end. 11
MARYLAND DEPARTMENT OF AGRICULTURE MARYLAND AGRICULTURAL LAND PRESERVATION FOUNDATION LEGISLATIVE AUDIT RESPONSES FISCAL YEAR ENDED JUNE 30, 2006 Inspections Finding 1 Easement inspections were not performed as required. MALPF Response: MALPF concurs. Issues about the number of inspection of easement properties have been discussed for several years. The options we have tried in the past two years have not been fully successful. In an effort to attain a higher number and more regular audit schedule, MALPF will now hire a contractual employee with its own funds to primarily perform easement reviews throughout the year. Most of these inspections had historically been performed by local government program administrators. However, as more of these positions have been re-engineered in the past five years, time to perform inspections for MALPF has been decreasing. Additionally, MALPF is also in the final stages of filling a new staff position and along with the two other staff positions, each will have a requirement to visit their respective jurisdictions during the year and perform additional inspections. These two administrative actions should result in meeting the required inspection policy guidelines. County Agricultural Land Preservation Program Certifications Finding 2 The process of certifying county agricultural preservation programs was inadequate. MALPF Response: MALPF concurs in part. MALPF agrees that the administration of the joint (MALPF and MDP) certification program should be structured so that the re-certification can take place in a timely manner. MALPF also agrees that counties should remit the appropriate amount of agricultural land transfer taxes to the state based on their certification status. It must be noted here, however, that this process is complicated by many factors outside the control of the local jurisdictions. MALPF has a long standing policy of considering a county, once certified, as certified until a determination has been made to not certify. The primary workloads of all concerned may not enable the process to be completed in the required timeframes. To penalize the local government s for inaction by the state is, in our opinion, not appropriate and the local government is continuing to use these funds for land preservation purposes. 1
MALPF Audit FY06 Page 2 of 2 As of now, the State has not rejected any applications for certification. Our primary objective is a cooperative partnership with local government to preserve agricultural lands. The conditions surrounding land use policies in the state and at the local level are changing continually and the two state agencies are trying to be responsive to both the intent of the certification program and the great diversity of agriculture and land use planning across the state. We disagree with the recommendation to recover agricultural transfer taxes from those counties where formal certification is behind prior year approvals. We will seek legal advice concerning timing of amounts retained by counties and any appropriate collection required. MALPF would note here that MALPF and the Maryland Department of Planning are processing regulation changes to more clearly define our long standing practices for certification and revenues. Annual Reports Finding 3 The Fund did not submit its annual reports for fiscal years 2003 through 2006 to the Governor and General Assembly as required by law. MDA Response: MALPF concurs. This audit exception is the result of the demanding workload on the existing small MALPF staff and previous vacancies. MALPF is now at full strength and is also adding a third staff member. The most important elements of the annual report historically produced by MALPF have been completed in each of these years. MDA has a short summary of MALPF in the larger MDA agency annual report and more detailed and specific MALPF details on easements and the Fund are presented with our budget each year. However, the more comprehensive MALPF report has not been completed. MALPF expects to produce a combined 2003-2006 report by June 30, 2007 and we expect to produce the traditional Annual Report for FY07 as required by statute by November 1, 2007. 06MALPFauditFinal 2
AUDIT TEAM Laura R. Morgan, CPA Audit Manager Nadine L. Forgenie Senior Auditor Jason A. Harris Staff Auditor