Date: August 8, 2013 To: Julio Molleda, Director, Finance Department Debra Carabillo, Assistant Director, Human Resources

Department From: H. Patrick Campbell, Chief Auditor City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1401

Tele:

860.757.9951

HPC

I. Executive Summary At the request of Mayors Office, we completed an audit in June 2013 of the City of Hartford Finance Department Payroll Accounts and Operations. The purpose of the audit was to evaluate and test internal accounting and operating controls, the accuracy and propriety of transactions processed, the degree of compliance with established operating policy and procedures, and to recommend improvements where required. The results of our examination were reviewed with J. Molleda, Director, Finance Department; L. A. Ralls, Controller; P. Beaudry, Supervising Payroll Manager; D. Carabillo, Assistant Director, Human Resources Department; and, other responsible members of operating management. The summary that follows includes only exceptions disclosed and recommended operating improvements. For each reported item, management agreed to implement our recommendations or take other appropriate corrective action unless specifically indicated otherwise. Included are managements actions taken or planned including timeframes to resolve each finding and/or recommendation in this report. We thank Finance Department management and staff for their cooperation and courtesies extended to us during our audit. Background The Payroll Unit of the Finance Department is responsible for processing payrolls for employees of the City of Hartford (the City). This includes the administration of bi-weekly, weekly and monthly payrolls for approximately 1,870 full-time, part-time and temporary employees. The Payroll Unit (Payroll) consists of a manager and three full-time employees. Data entry for payroll related transactions is decentralized with each department and operating unit responsible for entering transactions in the MUNIS Financial Management System Payroll module. The MUNIS Financial Management System (MUNIS) Payroll module was implemented in January 1, 2008 and is used to account for all payroll related transactions and activity including tracking employee vacation, sick and other attendance related transactions, computing the payroll the weekly and bi-weekly payrolls and generating related checks and direct deposits. It should be noted that there has been a significant amount of turnover in Payroll at both the staff and management level over the last four years including four different full time or Acting Supervising Payroll Managers during this period. The current Supervising Payroll Manager was recently hired as of February 2, 2013. For the eleven months ended May 31, 2013, the City payroll expense totaled more than $113 million.

City of Hartford Finance Department Payroll Accounts and Operations Audit

Scope The scope of our audit included various tests of transactions recorded during the fiscal year ending June 30, 2013. The following audit procedures were performed: Reviews and evaluations of policies, procedures and related internal operating and accounting controls; Performing tests and reviews of payroll transactions and activities during the transition period between full-time Payroll Managers from September 2012 through February 2013. Following-up to determine actions taken by management to address the findings and recommendations in our City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1202. General In general, we found that actions had not been taken by Finance Department management to follow-up on and address most of the findings and recommendations in our City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1202. This included, but was not limited to, not following-up on and recovering various actual and potential overpayments as noted in the details that follow. We also noted additional problems that developed and occurred after our last audit. This included not completing and filing state and federal 941 quarterly reports for the five quarters ended December 31, 2012 and state and federal 945 annual reports for the two calendar years ended December 31, 2012. Not filing federal and state tax forms as required can result in substantial fines and penalties. We also noted and were informed by various sources that a number of processing errors, overpayments and other problems occurred during the period from September 2012 through March 2013 when the Payroll Unit was being managed by an Acting Supervising Payroll Manager. During the course of our review, we noted that the newly hired Supervising Payroll Manager has taken action to improve the Payroll Unit and its operations while working to develop, document and implement policies, procedures and controls. II. Audit Results Follow-up on City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1202 Various reviews to determine what action was taken by management to follow-up on and address the findings and recommendations noted in the City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1202 disclosed the following: 1. Action has not been taken by management to follow-up on and address most of the items noted in the prior audit report.

City of Hartford Finance Department Payroll Accounts and Operations Audit

2. Policies, procedures and controls were not documented in narrative form for many key processes and functions. One of the key processes where policies and procedures were not documented is relating to payroll error identification, investigation, follow-up and correction. During this review, we noted that error correction documentation needed improvement. 3. Finance Department management indicated that action has been taken to reduce the number of standard payroll checks issued to employees and retirees; switch to net-zero checks to direct deposits and advices; and, switch hard copy direct deposit advices to email payment notifications. While Finance Department management indicated that improvements have been made in these areas, additional work will be required until all employees and retirees are paid in the most efficient and cost effective manner possible. 4. Payroll processing procedural issues and errors that resulted in actual and potential overpayments were not addressed. a. Two overpayments totaling $10,602 paid to one employee were not recovered. At the time of our prior audit, the Supervising Payroll Manager and a Workers Compensation representative from the Travelers agreed with this overpayment. This overpayment was reconfirmed during our current audit. b. The MUNIS workflow process has not been changed to require that Department Heads or their designees review, approve and release departmental payrolls prior to payment. 5. While Finance and Human Resources Department management took action to follow-up on and collect a majority of unpaid furlough balances totaling an estimated $16,600 due from 29 employees, approximately $1,400 still remains to be recovered from nine employees. 6. Policies, procedures and controls relating to security and access to the MUNIS Payroll module were not documented. In addition, it was not clear that Finance Department management addressed the other MUNIS Payroll module system security and access control issues identified. 7. Although Finance Department management informed us that they had implemented a new process to address the issues we previously identified with the payment of Military Leave, related policies and procedures were not documented and formally implemented with Department management. In addition, it was not clear that any action had been taken to follow-up on and determine the feasibility of recovering an estimated $37,000 in military leave related overpayments identified during our prior audit. 8. It was not clear that Human Resources Department management had followed-up on and addressed all of the findings and recommendations relating to their operations. It should be noted that the Director position in the Human Resources department has turned over twice in the last two years. This included the following: a. Monitoring, maintaining and adjusting as required employee accruals for earned time-off. Current Human Resources Management informed us that they were not aware of the previous audit report, however, several part-time employees accruals were reviewed and zeroed out (they are paid for a certain number of hours if they meet a threshold of 750 hrs). Previously, the hours were just entered but never zeroed out when paid. In our recent year end processing report of accruals, we noticed this and they were corrected. We also have taken internal steps to ensure that accrual balances on Form Bs match MUNIS and make appropriate corrections as needed. Current Human Resources management also indicated that they are not aware if a legal opinion was provided as to whether they can zero out balances once and employee leaves. As to the caps on certain accruals, last year was the last year to carry over 320 hours for

City of Hartford Finance Department Payroll Accounts and Operations Audit

HMEA members, unless a written request is submitted by the Appointing Authority and approved by the HR Director. This year the same is being done for Police, Local 1716, MLA, CHPEA and Non Union and Unclassified employees. In order to avoid excessive overtime costs, Fire will have two years to get their vacation balances to 320 per a pending agreement with the Fire Union. While Human Resources Department management informed us that they had addressed many of the issues we identified in our prior report regarding employee accruals and time-off, it appears that additional work is required in this area including developing, documenting and implementing policies and procedures for periodically reviewing employee accruals for unusual balances following up on and adjusting them as deemed appropriate. b. During our prior audit, Human Resources management agreed to perform reviews to determine the propriety of $50,861 in overtime that was paid at a time and a half and double time rate to various Hartford Municipal Employees Association (HMEA) members and work to develop clear and concise requirements for HMEA overtime payments as noted in the details of the report. Current Human Resources management indicated that they were not aware of this item at all and would need more details. We provided Human Resources management with a detailed list of the $50,861 in overtime noted above for their review, follow-up and action as deemed necessary. We recommend that Finance and Human Resources Department management take action to ensure that all of the findings and recommendations noted in the City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1202 are followed-up on and addressed. This includes, but is not limited to, recovering any overpayments noted. Management Response Due Date: December 31, 2013 Responsible Person: J. Molleda, Director, Finance Department, D. Carabillo, Assistant Director, Human Resources Department Finance has worked on various items from the audit report 1202 even though there has been substantial turnover in the payroll division. It took over six months to obtain a permanent Supervising Payroll Manager despite numerous requests to expedite this process due to the importance of this role. Finance has recently procured a consultant, starting August 5, 2013, to assist with creating a department policy and procedures manual for the payroll division. This manual will include all the key processes and functions of payroll such as operational transactions, accruals, reimbursements military leave and system security. Finance is anticipating completion of this manual by December 31, 2013. Additionally, some of the audit recommendations require the involvement of HR and Treasury to complete such as the conversion to direct deposit and electronic pay stubs. HR has successfully negotiated mandatory direct deposit in the new 1716 contract as well as the tentative agreement for CHPEA. Currently, HMEAs contract is under negotiations with the intent to request mandatory direct deposit. Finance is working with the Treasurers Office to set up a bank fair in September 2013 to encourage enrollment at local banking institut ions. Payroll is also working with HR to establish a deadline for all members to be enrolled on direct deposit. Payroll has been consistently pushing direct deposit and electronic pay stubs. These types of process changes are an ongoing commitment that takes time and input from multiple departments. Finance

City of Hartford Finance Department Payroll Accounts and Operations Audit

and HR did work collaboratively to collect the furlough time from fiscal year 2010. As of today, nine people still owe the city for a total of $1,416. Finance is actively seeking collection on old furlough money. We will take action to ensure that all of the findings and recommendations noted in the City of Hartford Finance Department Payroll Accounts and Operations Audit Report 1202 are followed-up on and addressed. This includes, but is not limited to, recovering any overpayments noted. Payroll Processing Various tests of payroll transactions processed during the eight months ended February 28, 2013 and reviews of related operations and processes disclosed the following: 1. We found that three employees were overpaid $1,321. These overpayments resulted from a reported computer malfunction or glitch. As noted in the details that follow, other overpayments of a similar nature were identified and, for the most part, corrected with a few amounts still being followed-up on for collection. It was not clear why these three overpayments totaling $1,321 were not subsequently identified, followed-up on and corrected by either the originating Department or Payroll. These overpayments were also not brought to light by the employees nor were they detected by an independent review and reconciliation of payroll input and output. Finance Department management agreed to take immediate action to recover the three overpayments totaling $1,321 noted above and determine why they were not disclosed by the employees or detected by management. We also recommend that Finance Department management develop, document and implement policies and procedures requiring Department management to reconcile payroll input and output and follow-up on and resolve any variances including overpayments identified. 2. During our review, the current Supervising Payroll Manager discovered that the previous two Acting and full-time Supervising Payroll Managers had not filed the following federal and state tax forms as required. a. Five Form 941s Employers Quarterly Federal Tax Returns for the five quarters ended December 31, 2012 b. Five Form CT-941s Connecticut Quarterly Reconciliation of Withholding for the five quarters ended December 31, 2012 c. Two Form 945s Annual Return of Withheld Federal Income Tax for the two calendar years ended December 31, 2012 d. Two Form CT-945s Connecticut Annual Reconciliation of Withholding for Nonpayroll Amounts for the two calendar years ended December 31, 2012 Not filing federal and state tax returns as required can result in substantial fines and penalties. The current Supervising Payroll Manager took immediate action to complete and file all but the two Form CT-945 returns. In addition, the Supervising Payroll Manager informed us that Finance Department management is working to complete and file the Form CT-945 returns by August 31, 2013 and working with federal and state officials to limit, to the greatest extent possible, any fines or penalties resulting from filing the tax forms noted above late. According to

City of Hartford Finance Department Payroll Accounts and Operations Audit

Finance Department management, they have historically had to file quarterly returns multiple times with the IRS and that they are known to consistently misplace filings or that filings were made in the wrong IRS location. It should be noted, however, that there were no records on file to support that these forms were completed and submitted. We recommend that Finance Department management develop, document and implement policies and procedures relating to completing and filing all federal and state tax returns and meeting all other any other standard payroll related reporting requirements. 3. A review of Finance Department timekeeping transactions during the month of December 2012 and reviews of related operations disclosed the following: a. The Finance Directors timesheet transactions from the weeks ending July 7, 2012 to March 9, 2013 were not recorded in the MUNIS Payroll module. We noted that 48 hours of vacation time, 228.5 hours of compensatory time and 72 hours of holiday time were not recorded in MUNIS during this period. b. Four timesheets were not signed by supervisory employees as required. c. Two timesheets were not on file for one employee. d. Fourteen coding errors were made entering data from the timesheets into the MUNIS Payroll module. e. A timesheet for one employee was completed and signed by another employee based on an email notification of hours worked by the employee. These errors and omissions could have been detected and corrected if independent reviews and reconciliations of payroll input and output were being performed. The Finance Director informed us that he tried on several occasions to follow-up on and address his timekeeping omissions. We provided Finance Department management with details to support these processing omissions for follow-up, resolution and correction. As previously noted, we also recommend that Finance Department management develop, document and implement policies and procedures requiring Department management to reconcile payroll input and output and follow-up on and resolve any variances including overpayments identified. 4. Deductions for furlough time off are not being made from employees pay during periods when they are on unpaid leave. When this occurs, employees are being overpaid. Because unpaid time off is not a common occurrence, we would expect that the overall financial exposure related to this situation to be limited. We recommended that Finance Department management take action to identify the extent of these overpayments to employees due to the lack of furlough time off deductions during periods of unpaid time off and recover amounts due to the City. Human Resources management informed us that an administrative decision was made not to take out additional funds for those weeks in which the person received no pay, as the City saved the persons entire salary for that week. Human Resources management als o indicated that other errors, missed payments, etc. were identified and the monies will be recuperated in FY 2013-14 for FY 2012-2013. Administrative decisions to forego furlough and other payments should also be documented. 5. The terms and conditions relating to time off allowed by employees for the death of a relative or friend also referred to as bereavement are noted in the City of Hartford Personnel Rules and Regulations and bargaining unit contracts. Employees record their hours worked and any

City of Hartford Finance Department Payroll Accounts and Operations Audit

applicable time off on timesheets which are then used to record this information in the appropriate pay code in the MUNIS Financial Management System (MUNIS) so that it is properly accounted for and paid. The terms and conditions relating to the time off allowed by employees for the death of a relative or friend noted in the City of Hartford Personnel Rules and Regulations (PRRs) and bargaining unit contracts are not consistent. In addition, depending on the contract or agreement, bereavement time off can either be paid or unpaid. Not properly accounting for bereavement time off in accordance with PRRs and bargaining unit contracts can result in overpayments. While it is understood that bargaining and non-bargaining unit contract terms and conditions are separately negotiated and established, we recommend that action be taken to negotiate and establish the same terms and conditions in bargaining unit contacts and PRRs in the future. This will make it easier to account for, record and control bereavement time off and ensure that it is properly recorded as either paid or unpaid. Management Response Due Date: October 31, 2013 Responsible Person: J. Molleda, Director, Finance Department, D. Carabillo, Assistant Director, Human Resources Department The current Supervising Payroll Manager has been actively seeking reimbursements for employee overpayments, including the $1,321. All overpayments are tracked and letters are sent to employees stating the overpayments and their options for repayment. The Payroll Manager has also implemented new analytical procedures while processing payroll to review all time to make sure that employees are being paid for the appropriate number of hours. The manager also reviews every paycheck issued for more than $3,000 for accuracy. The procedures regarding payroll errors will be included in the payroll policies and procedures manual that management anticipates will be completed by the end of calendar year 3013. Accordingly, all federal and state tax forms and filings were completed as of July 31, 2013. Regarding Finance Directors accrual balances, it was our understanding that the Executive Assistant to the COO was responsible for entering all Department Heads timesheets. The Finance Directors timesheets were routinely turned in to the COOs Office. The Finance Director noticed when reviewing paystubs that leave time taken was not being deducted from accrual balances. The Finance Director initiated action to notify and rectify the situation. Going forward, the Executive Assistant to the Finance Director has the correct access in MUNIS to enter the recorded time. Finance will develop, document and implement policies and procedures relating to completing and filing all federal and state tax returns and meeting any other standard payroll related reporting requirements. These procedures will be developed and included in the previously noted procedures manual. Finance will also ensure that all forms and reports are filed timely with state and federal agencies in the future. Policies and procedures requiring Department management to reconcile payroll input and output and follow-up on and resolve any variances including overpayments identified will also be developed, documented and implemented. From a Human Resources perspective, bereavement should be paid if the deceased is listed as an eligible family member in the applicable contract or PRRs. If the person is not an eligible family member, then the employee may use sick leave for the purpose of attending these types of bereavement up to a maximum of three days. If there is no sick leave available, then it would be unpaid. Also, although we often provide unions in negotiations with internal comparisons, it is illegal under the State Statutes regarding collective bargaining to agrue/require parity among the

City of Hartford Finance Department Payroll Accounts and Operations Audit

unions. We will make sure that all administrative decisions to forego furlough and other payments are documented in the future. In addition, we will review bereavement contract and PRR terms and conditions and related payroll accounting processes address any potential exposures of overpayments or other timekeeping issues. Other Payroll Related Matters As previously noted, there has been a high level of turnover in the Supervising Payroll Manager position over the last four years. In 2009, the then Supervising Payroll Manager resigned to take a similar position in another city. The position was filled by another individual that started in September 2009 and held the position until September 2012. The position was then filled with a city employee in an Acting capacity until a new full-time could be hired. This employee worked in the Acting Supervising Payroll Manager role from September 2012 until the current Supervising Payroll Manager was hired on February 3, 2013. Finance Department management informed us that the Acting Supervising Payroll Manager was a temporarily assigned these duties without Payroll related experience and training while at the same time continuing to perform the assigned duties as the Financial Systems Manager. At the request of the Mayors Office, we performed various reviews of payroll activity that occurred during the time period associated with the Acting Supervising Payroll Manager to determine the extent of any related errors omissions or any other problems that may have occurred and the adequacy of corrective actions taken. These reviews disclosed the following: 1. Forty three Police Officers and one other employee were overpaid $21,376.13 due to a reported system malfunction. These overpayments were not identified and followed-up on until a Police Officer notified the Hartford Police Department Payroll Specialist that he had been overpaid. It should also be noted that three of these overpayments totaling $1,321 were not identified and followed-up on until we brought them to the attention of the current Supervising Payroll Manager. The Finance Department has recovered a majority of these overpayments and is actively pursuing the remaining amounts outstanding. The Internal Audit Department is also performing additional reviews and followup on these overpayments. 2. Various pension related problems were identified as noted by the following: a. As a result of a change in the Collective Bargaining Agreement between the City of Hartford and the Hartford Police Union, changes were required to employee pension and medical deductions. We were informed that the deduction amounts were not properly set up in the MUNIS Payroll module and, as a result, 88 employees were overcharged a total $47,672.51 because the deductions amounts were too high and 51 employees were undercharged a total of $15,625.34 because the deduction amounts were too low. Apparently, the deduction changes were not tested prior to being implemented in MUNIS. We recommend that Finance Department management make sure that all MUNIS system changes are properly tested prior to being implemented in the future. b. One retiree was paid $25,750.57 in error. This amount should have been paid to the Municipal Employees Retirement Fund (MERF) for the employees sick exchange. This error was identified by Pension Unit management and was subsequently recovered from the employee and deposited in the MERF as required. c. A number of problems were noted with the 1099 reporting process.

City of Hartford Finance Department Payroll Accounts and Operations Audit

i. About 100 retirees that passed away in 2012 received both a 1099R and W-2 forms. ii. One retirees 1099R form was overstated by $1,800 because a tax withholding change was incorrectly recorded in MUNIS. iii. A reimbursement for a pension overpayment made to a deceased retiree was not properly accounted in MUNIS. As a result, the former retirees 1099R was overstated. iv. Twenty-nine 1099Rs were overstated by $423.97 because imputed life corrections were not properly accounted for in MUNIS. We were informed by Pension Unit management that these errors were all corrected after they were identified and brought to the attention of the Finance Department Payroll Unit. 3. During our review, we became aware of a potential issue that was raised regarding the processing and reissuing of payroll checks. As a result of our follow-up on this matter, we noted that an unusually large number of manually processed checks were issued in November and December of 2012 when the then Acting Supervising Payroll Manager was in charge of the Payroll Unit and also in August 2012 before the Acting Supervising Payroll Manager was assigned to the Payroll Unit. In addition, we noted that the dollar amount of manually processed checks was unusually high in July 2012. During the course of our audit, we referred these matters to Finance and Human Resources Department management for their information, followup and appropriate action. We will work with Finance Department management to determine the reason for and propriety of the instances noted of high volume and dollar of manually processed checks. Management Response Due Date: October 31, 2013 Responsible Person: J. Molleda, Director, Finance Department, D. Carabillo, Assistant Director, Human Resources Department We will use the information noted above to make improvements to the ongoing management and oversight of the Finance Department operations and employees as deemed appropriate. It should be noted that the transactional errors that occurred under the Acting Supervising Payroll Manager are typical in nature for a payroll as large as the City of Hartford. Overpayments have occurred under the previous Supervising Payroll Managers and have been immediately recovered. Also, all transactional errors that occurred have been addressed and subsequently corrected or are in process of being corrected. In addition, we will work with the Internal Audit Department to follow-up on the matters noted relating to manually processed checks.

City of Hartford Finance Department Payroll Accounts and Operations Audit

Distribution: City Council Members Internal Audit Commission Members S. K. Borges, Acting Chief Operating Officer A. Cloud, City Treasurer J. Figueroa, Chief of Staff, Mayors Office J. Mazzuoccolo, McGladrey & Pullen, LLP J. Sanchez, Director, Management and Budget P. Segarra, Mayor

Audit Team: P. Campbell J. Caruso

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