THE MISSISSIPPI LEGISLATURE

Introduction

PEER received complaints that general funds in the Military Department's rifle team bank account were not returned to the State Treasury at the end of FY 1992 as required by state law, but were transferred to a new bank account to be used for headquarters refurbishment. During this review, PEER sought to determine the expenditures of the rifle team fund, in particular, and whether the Military Department had operated that fund and other military unit bank accounts in accordance with the statutes of the State of Mississippi.

Background

For more than twenty years the Military Department has provided state general funds to national guard armory units bank accounts. As of January 1995, the Military Department was overseeing 104 military unit bank accounts and 140 military units, including national guard armories, the Mississippi Military Academy, and the State Guard.

Overview

The Military Department used monies appropriated for armory contractual services for other purposes such as rifle team travel and office equipment and decorations. Besides disbursing funds contrary to legislative intent, the Military Department violated budgetary and financial control statutes by:

• misusing state general funds in violation of MISS. CODE ANN. Section 27-104-17, which restricts agencies from changing the budget categories of legislative appropriations;
• depositing general funds into armory bank accounts that were not authorized by the Department of Finance and Administration (DFA) as required by MISS. CODE ANN. Section 7-7-59; and,
• not following internal control regulations that DFA has established to comply with MISS. CODE ANN. Section 7-7-3 (6) (d).

DFA made possible the Military Department's expenditure of funds contrary to legislative appropriations by disbursing funds without ensuring that goods and services had been received. DFA's actions violated MISS. CODE ANN. Section 7-9-41. DFA's lack of oversight has also allowed the Military Department to use appropriations in one fiscal year for expenditures in the next fiscal year, a violation of Section 64 of the MISSISSIPPI CONSTITUTION.

Findings

The Military Department has violated budgetary control statutes by using state general funds contrary to purposes outlined in legislative appropriation bills, depositing such funds into unauthorized armory bank accounts, and managing these accounts without proper internal controls (see page 9).

The Military Department disburses state general funds to the armories that it supervises and has violated laws which the Legislature developed to help ensure oversight of those funds.

-The Military Department spent monies appropriated for armory contractual services expenditures on other purposes, such as rifle team travel and office fund equipment and decorations, in violation of MISS. CODE ANN. Section 27-104-17 (see page 9).

In FY 1991 through FY 1993, the Military Department distributed a portion of the contractual services funds appropriated by the Legislature to the department's rifle team bank account to be used for non-contractual services expenditures, including travel and commodities. On September 18, 1992, the Military Department closed the rifle team bank account and transferred the balance to a new Headquarters Fund. Since August 1992, the Military Department has used the Headquarters Fund as an office fund, paying for items such as a headquarters vacuum and a television, office decor items (such as a plant rental service), landscaping plants, and holiday decorations.

The Military Department's violation of MISS. CODE ANN. Section 27-104-17, which restricts expenditures in excess of budget categories of appropriation bills and prohibits additional equipment spending, occurred because:

- Military Department managers intended to use armory contractual services funds for rifle team/headquarters non-contractual services expenditures. Minutes of the HQS MSARNG Armory Fund Council's July 22, 1992, meeting show that the council discussed changing the rifle team fund to a headquarters fund that would "secondarily" support marksmanship teams. The council also discussed purchasing office decor items and made the decision not to designate the Riverside Drive Headquarters building as an armory.

- Military Department regulations allow contractual services funds not spent on utilities to be expended for other (non-contractual services) items. The Military Department has not written its regulations in a way to prohibit armory personnel from spending state contractual services funds on commodities or equipment, but in a way that encourages the practice. Military Department Regulation No. 230-1-1, paragraph 7.b., states that armory/activity funds not spent on utilities may be spent for items such as letterhead stationery or photographic support of accident and survey reports.

- The Military Department has deposited state general fund money into bank accounts that have not been approved by the State Fiscal Officer as required by MISS. CODE ANN. Section 7-7-59 (see page 15).

MISS. CODE ANN. Section 7-7-59 states that the Department of Finance and Administration may allow agencies to have commercial bank accounts in some cases, but these must be approved and monitored by the State Fiscal Officer. The Military Department has not requested DFA's approval to establish and operate 104 armory bank accounts. DFA knew about these accounts but did not require the Military Department to submit them for approval and monitoring. Therefore, DFA has not exercised the level of oversight and accountability required by state law relative to state general funds held in commercial bank accounts.

- The Military Department has not followed internal control regulations that DFA has established to comply with MISS. CODE ANN. Section 7-7-3 (6) (d) (see page 16).

In carrying out the requirements of MISS. CODE ANN. Section 7-7-3, the Department of Finance and Administration has established internal control regulations that agencies must follow. The Mississippi Agency Accounting Policies and Procedures Manual requires "division of duties," which means that no one individual is to have complete control of any type of assets. The Military Department's Regulation 230-1-1 (3) and (4) violates state internal control regulations by requiring the custodian of each armory fund to perform both receipt and deposit functions, as well as all disbursement and bookkeeping activities.

In violation of MISS. CODE ANN. Section 7-9-41, the Department of Finance and Administration made possible the Military Department's expenditure of contractual services funds contrary to legislative appropriations by disbursing funds without ensuring that goods and services have been received (see page 18).

The Department of Finance and Administration normally issues warrants made payable to specific vendors for goods sold and services performed and mails them to the state agencies to be distributed to their vendors. However, DFA deviates from this procedure for military units by allowing the units to receive lump-sum contractual services amounts through warrants made to the order of each armory or unit. The military units then may spend the funds at their own discretion with no further pre-audit control exercised by DFA for any expenditure amount or by the Military Department for expenditures totaling $500 or less. Such practice is contrary to MISS. CODE ANN. Section 7-9-41 (1), which specifically prohibits lump-sum withdrawals from the State Treasury to pay for operating expenses of agencies, requiring that warrants be issued separately to pay directly for goods sold and services performed.

Although previous Department of Finance and Administration managers established the current lump-sum procedures for disbursing funds to armories many years ago, current DFA managers have not reviewed the procedures and tested them against good management principles and legal requirements. Also, by disbursing funds to armories without ensuring that goods or services have been received, DFA actually enables the Military Department to disburse funds appropriated for one fiscal year to the military units to be used for expenditures during the following year, a practice which violates Section 64 of the MISSISSIPPI CONSTITUTION.

Recommendations

1. The Military Department should immediately return all state general funds in the "HQ MSARNG Armory Fund" (Headquarters Fund) to the State Treasury. PEER calculated the amount of these funds to be $10,518 as of June 30, 1995.
2. The Department of Finance and Administration should handle the disbursements for the Military Department armories in the same manner in which disbursements from other state agencies are handled. DFA should control the expenditures from contractual services account number 61770 in one of the following ways, as deemed appropriate. DFA should either:
   • pre-audit the expenditures as required by MISS. CODE ANN. Section 7-7-33, by requiring the Military Department to provide an original invoice showing that goods have been received or services performed; or
   • handle the expenditures as petty cash under MISS. CODE ANN. Section 7-7-59, by requiring the Military Department to request reimbursement from its petty cash account using DFA-approved procedures.
3. The Military Department should submit the armory and military unit bank accounts to the Department of Finance and Administration for approval, as required by MISS. CODE ANN. Section 7-7-59. DFA should establish a maximum balance for each account as outlined in the Mississippi Agency Accounting Policies and Procedures Manual.
4. Military Department management should comply with MISS. CODE ANN. Section 27-104-17, which restricts expenditures in excess of budget categories of appropriation bills and prohibits additional equipment spending.
5. The Military Department should revise its internal Regulation 230-1-1 to state that general fund contractual services appropriations cannot be spent on equipment, commodities, or other non-contractual services expenditures. The regulation should also be revised to state that the division of duties regarding receipt, disbursement, and accounting of funds will be the policy of the department.
6. The Military Department should not violate MISSISSIPPI CONSTITUTION Section 64 by expending appropriations from one fiscal year for expenditures of the next fiscal year. For example, general funds appropriated for contractual services during Fiscal Year 1996 that are not earmarked for expenditures incurred by June 30, 1996, must be returned to the State Treasury.
7. If the Military Department wishes to continue disbursing funds to armory accounts without the statutorily-required controls, the Military Department should present its request for funds to the Joint Legislative Budget Committee as a request for grants to armories, not for contractual services expenditures. According to the statutes discussed in this report, only the Legislature can determine that funds can be granted to armories without budgetary and financial controls.
   In the event the Legislature, in response to a Military Department request, decides to appropriate grant funds for armories, the Legislature should specify that the grants can only be spent on certain items, such as utilities, and should place accounting, audit, and reporting conditions on the disbursement of the grants to the armories.
8. The Department of Audit should perform periodic audits of the armory accounts until:
   • DFA begins routine pre-audit or petty cash procedures required by MISS. CODE ANN. Section 27-104-17 and MISS. CODE ANN. Section 7-7-59, respectively, handling disbursements for armories in the same manner as for other agencies; or,
   • the Military Department requests and the Legislature approves that disbursements to armory accounts will be made from the Subsidies, Loans, and Grants budget category.
9. The Military Department should require that general funds disbursed to armories be placed in bank accounts designated for state general funds only. Local revenues and self-generated funds should be placed in separate bank accounts so that the state general funds may retain their identity.

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