Hawaii-2010-HB2186-Amended

SECTION 1. Chapter 37, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"PART . IMPROPER PAYMENTS ELIMINATION AND RECOVERY

§37‑A Definitions. For the purposes of this part, unless the context clearly requires otherwise:

"Agency" has the same meaning as defined in section 37D‑1.

"Improper payment":

(1) Means any payment that should not have been made or that was made in an incorrect amount, including overpayments and underpayments, under statutory, contractual, administrative, or other legally applicable requirements; and

(2) Includes any payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment for a good or service not received, except for payments authorized by law, and any payment that does not account for credit for applicable discounts.

"Payment" means any transfer or commitment for future transfer of state funds such as cash, securities, loans, loan guarantees, and insurance subsidies to any non-state person or entity that is made by a state agency, a state contractor, a state grantee, or a governmental or other organization administering a state program or activity.

"Payment for an ineligible good or service" includes a payment for any good or service that is rejected under any provision of any contract, grant, lease, cooperative agreement, or any other procurement mechanism.

§37‑B Improper payments elimination and recovery; identification of susceptible programs and activities. (a) The head of each state agency, in accordance with guidance prescribed by the director of finance, shall periodically review all programs and activities that the relevant agency head administers and identify all programs and activities that may be susceptible to significant improper payments.

(b) Reviews under this part shall be performed for each program and activity that the relevant agency head administers during fiscal year 2010-2011 and at least once every three fiscal years thereafter.

(1) Except as provided under paragraph (2), that improper payments in the program or activity in the preceding fiscal year may have exceeded:

(A) $ of all program or activity payments made during that fiscal year reported and 2.5 per cent of program outlays; or

(B) $ ; and

(2) With respect to fiscal years following June 30 of a fiscal year beginning before fiscal year 2013-2014 as determined by the department of budget and finance, that improper payments in the program or activity in the preceding fiscal year may have exceeded:

(A) $ of all program or activity payments made during that fiscal year reported and 1.5 per cent of program outlays; or

(B) $ .

(d) In conducting the reviews under this part, the head of each agency shall take into account those risk factors that are likely to contribute to a susceptibility to significant improper payments, including:

(1) Whether the program or activity reviewed is new to the agency;

(2) The complexity of the program or activity reviewed;

(3) The volume of payments made through the program or activity reviewed;

(4) Whether payments or payment eligibility decisions are made outside of the agency;

(5) Recent major changes in program funding, authorities, practices, or procedures;

(6) The level and quality of training for personnel responsible for making program eligibility determinations or certifying that payments are accurate; and

(7) Significant deficiencies in the audit report of the agency or other relevant management findings that might hinder accurate payment certification.

§37‑C Estimation of improper payments. With respect to each program and activity identified under section 37‑B, the head of the relevant agency shall:

(1) Produce a statistically valid or otherwise appropriate estimate of the improper payments made by each program and activity; and

(2) With applicable guidance of the department of budget and finance, include the estimates of improper payments in the accompanying materials to the annual financial statement of the agency required under law.

§37‑D Reports on actions to reduce improper payments. With respect to any program or activity of an agency with estimated improper payments, the head of the agency shall provide with the estimate a report on what actions the agency is taking to reduce improper payments, including:

(1) A description of the causes of the improper payments, actions planned or taken to correct those causes, and the planned or actual completion date of the actions taken to address those causes;

(2) To reduce improper payments to a level below which further expenditures to reduce improper payments would cost more than the amount the expenditures would save in prevented or recovered improper payments, a statement of whether the agency has the resources needed with respect to:

(A) Internal controls;

(B) Human capital; and

(3) If the agency does not have sufficient resources to establish and maintain effective internal controls, a description of the resources the agency has requested in its budget submission to establish and maintain the internal controls;

(4) Program-specific and activity-specific improper payments reduction targets that have been approved by the director of finance; and

(5) A description of the steps the agency has taken to ensure that agency managers, programs, and, where appropriate, counties are held accountable through annual performance appraisal criteria for:

(A) Meeting applicable improper payments reduction targets; and

(B) Establishing and maintaining sufficient internal controls, including an appropriate control environment, that effectively:

(i) Prevent improper payments from being made; and

(ii) Promptly detect and recover improper payments that are made.

§37‑E Reports on actions to recover improper payments. With respect to any improper payments identified in recovery audits conducted under section 37‑I, the head of the agency shall provide with the estimate a report on all actions the agency is taking to recover improper payments, including:

(1) A discussion of the methods used by the agency to recover improper payments;

(2) The amounts recovered, outstanding, and determined to not be collectable, including the percentage the amounts represent of the total improper payments of the agency;

(3) If a determination has been made that certain improper payments are not collectable, a justification for that determination;

(4) An aging schedule of the amounts outstanding;

(5) A summary of how recovered amounts have been disposed of;

(6) A discussion of any conditions giving rise to improper payments and how those conditions are being resolved; and

(7) If the agency has determined under section 37‑I that performing recovery audits for any applicable program or activity is not cost effective, a justification for that determination.

§37‑F Government-wide reporting. At least twenty days prior to the convening of each regular session, the director of finance shall submit a report to the governor and the legislature with respect to the preceding fiscal year on actions agencies have taken to report information regarding improper payments and actions taken to recover improper payments. The report shall include:

(1) A summary of the reports of each agency on improper payments and recovery actions submitted;

(2) An identification of the compliance status of each agency to which this part applies;

(3) Government-wide improper payments reduction targets; and

(4) A discussion of progress made towards meeting government-wide improper payments reduction targets.

§37‑G Guidance by the department of finance. Not later than December 31, 2010, the director of finance shall prescribe guidance for agencies to implement the requirements of this part. The guidance shall not include any exemptions to the requirements not specifically authorized by this part. The guidance shall prescribe:

(1) The form of the reports on actions to reduce improper payments, recovery actions, and government-wide reporting; and

(2) Strategies for addressing risks and establishing appropriate prepayment and postpayment internal controls.

§37‑H Determination of agency readiness for opinion on internal control. Not later than July 1, 2011, the director of finance shall develop:

(1) Specific criteria as to when an agency should initially be required to obtain an audit opinion on internal control over financial reporting; and

(2) Specific criteria for an agency that has demonstrated a stabilized, effective system of internal control over financial reporting, whereby the agency would qualify for a multiyear cycle for obtaining an audit opinion on internal control over financial reporting, rather than an annual cycle.

§37‑I Recovery audits. (a) In general, with regard to recovery audits, except as provided under section 37‑K and if not prohibited under any other provision of law, the head of each agency shall conduct recovery audits with respect to each program and activity of the agency that expends $ or more annually if conducting the audits would be cost-effective. In conducting recovery audits under this section, the head of an agency:

(1) Shall give priority to the most recent payments and to payments made in any program or programs identified as susceptible to significant improper payments under section 37‑B;

(2) Shall implement this section in a manner designed to ensure the greatest financial benefit to the State; and

(3) May conduct recovery audits directly, by procuring performance of recovery audits by contract, subject to the availability of appropriations, or by any combination thereof.

(b) With respect to recovery audits procured by an agency by contract:

(1) Subject to subsection (a)(3), the head of the agency may authorize the contractor to notify entities, including persons, of potential improper payments made to the entities; respond to questions concerning potential improper payments; and take other administrative actions with respect to improper payment claims made or to be made by the agency; and

(2) The contractor shall have no authority to make final determinations relating to whether any improper payment occurred and whether to compromise, settle, or terminate improper payment claims.

(c) The agency shall include in each contract for procurement of performance of a recovery audit a requirement that the contractor shall:

(1) Provide to the agency periodic reports on conditions giving rise to improper payments identified by the contractor and any recommendations on how to mitigate such conditions; and

(2) Notify the agency of any improper payments identified by the contractor pertaining to the agency or to any other agency or agencies that are beyond the scope of the contract.

(d) An agency shall take prompt and appropriate action in response to a report or notification by a contractor under subsection (c)(2), to collect improper payments and shall forward to other agencies any information that applies to the agencies.

§37‑J Disposition of amounts recovered. (a) Amounts collected by agencies each fiscal year through recovery audits conducted under this part shall be treated in accordance with this section.

(b) Not more than twenty-five per cent of the amounts collected by an agency through recovery audits:

(1) Shall be available, subject to appropriation, to the head of the agency administering the program or activity to carry out the financial management improvement program of the agency under section 37‑K;

(2) May be credited, if applicable, for the financial management improvement program of that agency by the head of an agency to any agency appropriations and funds that are available for obligation at the time of collection; and

(3) Shall be used to supplement and not supplant any other amounts available for the financial management improvement program of the agency and shall remain available until expended.

(1) Shall be credited to the appropriation or fund, if any, available for obligation at the time of collection for the same general purposes as the appropriation or fund from which the improper payment was made; and

(2) Shall remain available for the same period and purposes as the appropriation or fund to which credited.

(d) Funds made available under subsection (b) shall be:

(1) Deposited into the appropriate program accounts of the agency administering the program or activity; and

(2) Expended only as authorized by appropriation.

(e) Amounts collected that are not applied in accordance with subsection (b) or (c) or to meet obligations to recovery audit contractors shall be deposited in the state general fund.

§37‑K Financial management improvement program. (a) The head of each agency shall conduct a financial management improvement program, consistent with rules prescribed by the director of finance.

(b) In conducting the program, the head of the agency:

(1) As the first priority of the program, shall address problems that contribute directly to agency improper payments; and

(2) May seek to reduce errors and waste in other agency programs and operations."

SECTION 2. In codifying the new sections added by section 1 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 3. This Act shall take effect on July 1, 2020.

HOUSE OF REPRESENTATIVES	H.B. NO.	2186
TWENTY-FIFTH LEGISLATURE, 2010		H.D. 1
STATE OF HAWAII