Audit Report on Advance Payments Made by the Department of Homeless Services to Adult Shelter Providers

Executive Summary

The New York City Department of Homeless Services (DHS) is the City agency responsible for providing temporary emergency shelter and social services to eligible homeless adults and families.  DHS contracts with nonprofit and for-profit entities to provide those services.  While these contracts generally provide for payment only after services have been provided, DHS’s contracts allow the service providers to request and receive cash advances in anticipation of services to be rendered.  During the two-year period that was the focus of the audit, DHS’s Human Service Providers Fiscal Manual (Fiscal Manual) prescribed four principal conditions for such advance payments to be made: (1) an advance could be given only at two designated points in time—the beginning of the contract term, and the beginning of each of the City’s fiscal years during the contract term; (2) an advance could be used only to cover allowable costs for the provision of shelter and social services under the contract; (3) the maximum amount of any advance would be 2/12^th of the annual contract amount; and (4) DHS would fully recoup any advance against the provider’s monthly invoices during the fiscal year in which the advance was made.  This audit examined whether advance payments made by DHS to Adult Shelter Providers were issued and recouped in accordance with the terms of the relevant registered contracts and with the DHS’s policies and procedures set forth in its Fiscal Manual that were applicable during the audit scope period, Fiscal Year 2015 and Fiscal Year 2016 (July 1, 2014, through June 30, 2016).

Audit Findings and Conclusions

DHS did not consistently follow its procedures for the issuance and recoupment of the payments it advanced to providers.  As a result, as of September 14, 2017, or approximately three months into Fiscal Year 2018, DHS had failed to recoup $11.8 million it had advanced to providers in two prior fiscal years, consisting of $75,704 advanced for Fiscal Year 2015 and $11.7 million advanced for Fiscal Year 2016.

In particular, our audit found:

• 50 instances in which advance payments to providers exceeded the amounts allowed by DHS’s written policies and procedures;
• 62 instances in which DHS advanced money to providers more than 30 days after the start of the fiscal year, contrary to its policies; some of those advances were disbursed as late as 10 months into the fiscal year, and two were made after the end of the fiscal year; and
• 45 instances in which DHS did not effectively track advance payments made to providers or did not adhere to its own schedule for recouping them.

In addition, the audit found:

• 3 instances in which DHS “recouped” advances and then immediately “reinstated” them, thereby, in effect, the agency rolled the outstanding balances forward into the next month, and in one instance, into the next fiscal year; and
• 2 instances in which DHS, as of September 2017, had not yet finalized contract close-outs and, as a result, had not fully recouped outstanding advances, for one contract from Fiscal Year 2015 and another from Fiscal Year 2016.

Our audit revealed that DHS failed to consistently comply with its policies and procedures for the issuance, tracking, and recoupment of advance payments and thereby did not fully recoup all advance payments made to providers during the two fiscal years covered by the audit.  Some of those uncollected advances remained outstanding as of September 2017, more than 14 months after the end of Fiscal Year 2016 (the most recent fiscal year covered by the audit), with no specific timetable for repayment.

In March 2017, while this audit was in progress, and again in July 2017, DHS revised its Fiscal Manual to: (1) increase the amount of its standard contract advance to 25 percent of the annual contract budget; (2) explicitly permit “exceptions,” specifically, additional advances against the contract budget “should the three-months [25 percent] advance prove insufficient;” and (3) permit DHS to extend the recoupment schedule from one fiscal year to the next or, alternatively, to allow providers to “reimburse the agency directly through a payment plan” in cases where the provider’s “final invoice fall[s] short of the amount to be recouped.”^[1]

In effect, the revised Fiscal Manual now formally permits several of the practices that we found DHS to have followed during the audit period, which were inconsistent with its Fiscal Manual in effect at that time.  Specifically, the audit found that DHS issued advances that exceeded standard maximums and allowed significant sums advanced to contract providers to go uncollected for increasingly long periods of time.  These uncollected balances remained outstanding at the conclusion of the audit with no specific timetable or plan for repayment.  By revising the Fiscal Manual to expressly allow the recoupment of a contract advance through a “payment plan” rather than scheduled deductions from contract payments, DHS now appears to permit unsecured extensions of credit that may expose the City to an increased risk of loss.

Audit Recommendations

To address the issues identified in this audit, we make the following nine recommendations, seven to DHS and two to the Mayor’s Office.

DHS should:

• Develop and implement a plan to recoup the $11.8 million in outstanding advance payments made for Fiscal Years 2015 and 2016.
• Ensure that requests and approvals for advances in excess of the 25 percent allowed by the new Fiscal Manual are properly tracked and documented.
• Document, track, and reconcile all recoupments made via checks received from providers and assignments until Accelerator is updated and able to reflect this information.
• Limit advance payments to amounts that can reasonably be recouped under the contract. In cases where advanced funds cannot be fully recouped on schedule, formally establish an alternative recoupment plan that is documented, implemented, and tracked to ensure that advances are fully recouped.
• Finalize the two contracts and fiscal year close-outs for the two fiscal years cited in the report.
• Ensure that all future contracts and fiscal year close-outs are completed soon after contract termination or the submission of the final invoice for the fiscal year which should occur a short time after September 1st.
• In light of the audit’s findings, evaluate the policy changes reflected in the recently revised Fiscal Manual that permit increased amounts of contract advances, extended recoupment schedules, and the use of recoupment-payment plans to ensure that funds are not being put at risk.

The Mayor’s Office should:

• Conduct a comprehensive assessment of Accelerator functionality and system controls and determine whether it is feasible to:
  • Implement system edits that prevent advance payment requests made after the beginning of the fiscal year from being approved and processed in Accelerator without written justifications and executive level approval.
  • Implement system edits that would allow advance recoupments made via checks or assignments to appear as an offset to an advance and be reflected accordingly in the system instead of continuing to appear as outstanding.
• In light of the audit’s findings, evaluate the policy changes reflected in the recently revised Fiscal Manual that permit increased amounts of contract advances, extended recoupment schedules, and the use of recoupment-payment plans to ensure that funds are not being put at risk.

Agency Response

In the response submitted by the New York City Department of Social Services (DSS) on behalf of DHS, the agency agreed with two of seven recommendations and disagreed with the remaining five audit recommendations.  However, in its response, DSS refers to actions that have been taken to address the issues identified in this audit, including ongoing efforts that have been made to recoup outstanding advance balances from DHS’s Fiscal Years 2015 and 2016 contracts.  In its response, DSS also stated that the “audit took place while the Department of Homeless Services . . . was in the midst of a significant reorganization, and had undertaken a significant examination and reform of many of the very policies and processes at issue in this audit.”  DSS’s response refers specifically to the integration of DHS within DSS and the issuance of a new Fiscal Manual, effective July 2017—one year after the audit scope period.  Accordingly, the new policies and procedures referenced in DSS’s response were not in effect during the scope of our audit.  Moreover, it is not clear that those new policies and procedures are intended to—or will—result in the timely recoupment of DHS’s advance payments to adult shelter providers because the new policies and procedures have effectively removed previous maximum limits on the amounts of money DHS may advance, and they expressly permit unrecouped advances to remain outstanding from one year to the next, with no clear deadline for recoupment, such as the expiration of the contract in which the advances were paid.

[1] The changes made to DHS’s Fiscal Manual reflect City-wide changes instituted in April 2017, through the Nonprofit Resiliency Committee (NRC), formed in 2016.  Based on NRC’s work, the City adopted new fiscal policies that: (1) lifted established maximum limits on advances; and (2) allows reasonable accommodations to the recoupment schedule.  According to the new City policy, “All eligible contracts can initiate an advance request equivalent to at least 25% of their fiscal year budget.”  In addition, “the City will make reasonable accommodations to the recoupment schedule to ensure operational continuity based on the financial situation and cash flow needs of the providers.”  The policy further states, “Once all invoices have been submitted, any unrecovered advance will be owed to the City.”