AUGUSTA – An independent financial study has found that accounting errors are to blame for more than $31 million in federal funds reported missing from Maine’s Temporary Assistance for Needy Families program. Gov. John Baldacci released the study report at a Friday press conference at the State House.

“There is no indication of fraud or misappropriation of funds in the review of over $4 billion in federal grant funds,” Baldacci announced. “The money went exactly where it was supposed to go.”

The study blames financial discrepancies on poor bookkeeping, and finds “a fundamental disconnect” between reported expenditures and reported federal income throughout the Department of Human Services, which administers more than 80 programs, including the TANF program.

“The accounting processes in place at DHS are wholly inadequate to handle the volume and complexity of the programs being administered,” the report said. “DHS has insufficient resources to adequately manage its fiscal operations.”

DHS administers about $1.2 billion in federal funds each year.

Baldacci ordered the study in May, after state auditor Gail Chase revealed an almost $19 million discrepancy between federal cash received for the TANF program and money spent on its behalf during fiscal year 2000 to fiscal year 2002. “The department’s convoluted accounting system, lack of fiscal staff, and lack of reconciliation between cash needs and cash draws contributed to the problem,” Chase’s report read.

The independent follow-up study, undertaken by accounting firm PricewaterhouseCoopers, examined the entire Department of Human Services budget for fiscal years 1999 through 2002, with a special focus on the TANF program. The study was funded with $100,000 from Maine’s General Fund, with matching dollars from the federal Department of Health and Human Services.

The study found a total of $31 million – $11 million more than the state audit figure – unaccounted for from fiscal years 1999 to 2002 from TANF. Examiners attributed the dollar difference primarily to “different methodologies” – a more detailed look at the flow of dollars through the program.Examiners found no indication of theft or intentional misappropriation within the TANF program. Rather, it determined the overdrawn status of TANF’s accounts was caused by “deficiencies in the DHS accounting and reporting processes,” with three primary problems identified:

. $2.1 million in state TANF expenditures were mistakenly excluded from the state’s report to the federal TANF office. This oversight resulted in a financial understatement of the state program’s expenditures and a failure to draw matching federal funds.

. $13.7 million is owed to TANF by other DHS programs. TANF historically has been tapped to pay administrative and operating costs for some other programs with the understanding that these expenses will be reimbursed. The Food Stamp program, Child Support Enforcement, Medicaid and other programs owe money to TANF.

. $21 million was withdrawn from TANF accounts that DHS should have been collecting from a different program.

PricewaterhouseCoopers also found the state was eligible for an additional $5.6 million in federal dollars for TANF, bringing the total of “missing” funds to nearly $37 million.

The study identified lesser discrepancies within other DHS programs, which showed the state reporting spending a total of $6.2 million more in federal funds than it received.

State Controller Ed Karass said resources exist within the various DHS programs to restore funds drawn inappropriately from TANF. “Everything will net close to zero across all the programs,” he said.

The $5.6 million in untapped federal funds that the report indicates Maine is eligible to receive is close to the study’s margin of error, he said. The state will wait until PricewaterhouseCoopers completes its audit of DHS books through fiscal year 2003 before deciding whether to “send a bill to the federal government.” He expects the study to be complete by late fall.

Baldacci said he has taken immediate action in response to the report. In accordance with its recommendations, he said, he already has authorized five new high-level positions to strengthen the accounting process within DHS. The salaries will be covered by funds already earmarked for other unfilled positions within the department. He also has directed state controller Karass to work with agency staff and the auditor’s office to restructure the DHS financial division, including creating separate divisions for program accounting and overall agency budget. Other staffing needs will be studied and filled as necessary, the governor said.

The prompt commissioning of the report and response to its findings will prevent the tangled finances at DHS from having negative effects on Maine’s bond rating, a key consideration as lawmakers consider a new bond package in the upcoming special session of the state Legislature, Baldacci said.

Other state agencies will undergo a systematic evaluation of their accounting processes by the controller’s office and the state auditor, he added.

The PricewaterhouseCoopers report has a silver lining, according to the governor. The identification and correction of accounting weaknesses at DHS will support his plan to merge the unwieldy and overlapping Departments of Human Services and Behavioral and Developmental Services into one streamlined agency, a process just getting under way at the State House.