Review report, state of Georgia, Department of Defense, year ended June 30, 1995

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STATE OF GEORGIA DEPARTMENT OF AUDITS
254 WASHINGTON STREET
ATLANTA. GEORGIA 30334

,t.~EIVEL
~=<J:~k "t 1995

REVIEW REPORT STATE OF GEORGIA DEPARTMENT OF DEFENSE YEAR ENDED JUNE 30, 1995

DEPARTMENT OF DEFENSE - TABLE OF CONTENTS -

SECTION I

FINANCIAL

INDEPENDENT ACCOUNTANT'S COMBINED REPORT ON REVIEW OF FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

EXHIBITS

FINANCIAL STATEMENTS

A COMBINED BALANCE SHEET (STATUTORY BASIS)

ALL FUND TYPES AND ACCOUNT GROUPS

2

B STATEMENT OF CHANGES IN FUND BALANCES

(STATUTORY BASIS)

GOVERNMENTAL FUND TYPE

3

C STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES

BUDGET FUND

4

D STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES

COMPARED TO BUDGET

BUDGET FUND

6

E NOTES TO THE FINANCIAL STATEMENTS

7

SUPPLEMENTARY INFORMATION

SCHEDULES

1 SCHEDULE OF APPROVED BUDGET

22

2 CASH AND CASH EQUIVALENTS

23

3 SCHEDULE OF GOVERNOR'S EMERGENCY FUND

24

4 SCHEDULE OF FEDERAL REVENUES

25

5 SCHEDULE OF OTHER OPERATING EXPENSES

26

6 SCHEDULE OF EXTRAORDINARY EXPENDITURES

27

SECTION II FINDINGS AND IMPROPER OR QUESTIONED COSTS SCHEDULE OF FINDINGS AND IMPROPER OR QUESTIONED COSTS

SECTION! FINANCIAL

CLAUDE L. VICKERS
STATE AUDITOR ('404) 6562174

DEPARTMENT OF AUDITS
254 Washington Street, S.W., Suite 214 Atlanta, Georgia 30334-8400
November 9, 1995

Honorable Zell Miller, Governor Members ofthe General Assembly of Georgia
and Honorable William P. Bland, Jr., Adjutant General Department ofDefense
INDEPENDENT ACCOUNTANT'S COMBINED REPORT ON REVIEW OF FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Ladies and Gentlemen:
We have reviewed the accompanying financial statements (Exhibits A through E) of the Department of Defense as of and for the year ended June 30, 1995, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. As described in Note 1, these financial statements were prepared on a prescribed basis of accounting that demonstrates compliance with the budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles. All information included in these financial statements is the representation of the management of the Department of Defense.
A review consists principally of inquiries of agency personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with the basis of accounting described in Note 1.
Our review was made for the purpose ofexpressing limited assurance that there were no material modifications that should be made to the financial statements in order for them to be in conformity with the basis of accounting described in Note 1. The accompanying supplementary information (Schedules 1 through 6) is presented only for supplementary analysis purposes. Such information has been subjected to the inquiries and

95ARL-4

analytical procedures applied in the review of the financial statements and we are not aware of any material modifications that should be made thereto.
Respectfully submitted,
~~
Claude L. Vickers State Auditor
CLV:cm 95ARL-4

FINANCIAL STATEMENTS -I-

EXHIBIT"A"

~ Cash and Cash Equivaients
(See Schedule)
Accounts Receivable Smm Applopriation Federal Financial Assistance Olher
FoxedAssels Equipment
Amount ID be Provided for Payment rA A<cnH,d Compensated Absences
Total Assets
L!Ai!!L!Il~l! AND 5!ND ~QUllY
Liabilities Accounts Payable Payroll Withholdings Compensated Absences
Tolal Liabilities
Fund Equity Investment in General F"OOtd Assets Fund Balanc:es ReseM>d Federal Financial Assistance Armory Funds Billeting Funds Unreserved Designated Surplus
Total Fund Equity
Total Liabilities and Fund Equity

GOVERNMENTAi. FUND TYPE BUDGET

ACCOUNT GROUPS

GENERAL

GENERAi.

FIXED

LONG-TERM

ASSETS

DEBT

TOTALS
tMemorandum OnM
JUNE30 1995 JUNE30 1994

1589486.38
38,952.96 50,825.51 107147.13
196925.60

826217.90

1 589 486.38 $ 123818827

38,952.96 $ 50,825.51 107147.13
196925.60 $

821.02 734203.82 44631.11
779655.95

826217.90 $

738580.16

679312.28 $

679312.28 $

482 837.94

1 786411.96 $ 826217.90 $ 679312.28 $ 3291 942.14 $ 3237.262.32

943,751.39 429.49

944180.88

826,217.90

618,107.05 85,46324
12,006.02

126654.77 842231.08 $

826217.90

679J1228 679312.28 $

943,751.39 $ 429.49
67931228
1 623 493.16 $

376,596.38 404.05
482837.94
859838.35

826,217.90 $

738,580.16

618,107.05 85,463.24 12,006.02

1,3TT,420.39 98,016.02 46,050.90

126654.n 1 668 448.98 $

117356.50 2377423.97

1786411.96 $ 826217.90 $ 679312.28 $ 3291 942.14 $ 3237262.32

See Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
The notes to the financial statements are an integral part of this statement.
2.

DEPARTMENT OF DEFENSE STATEMENT OF CHANGES IN FUND BALANCES (STATUTORY BASIS)
GOVERNMENTAL FUND TYPE YEAR ENDED JUNE 30 1995

EXHIBIT"B"

FUND BALANCES - JULY 1
Reserved Unreserved
Designated Surplus
ADDITIONS
Adjustments to Prior Year's Accounts Payable Excess of Funds Available over Expenditures
Exhibit"C" Restatement of Prior Year Balance for Inclusion
of Armory Funds Reimbursement of Prior Year's Expenditures
DEDUCTIONS
Unreserved Fund Balance (Surplus) Returned to Office of Treasury and Fiscal Services Year Ended June 30, 1993 Year Ended June 30, 1994
Adjustments to Prior Year's Accounts Receivable Refund of Unexpended Funds to Granter
Reserved Fund Balance Carried Over from Prior Year as Funds Available
FUND BALANCES - JUNE 30
(To Exhibit "A")

BUDGET FUND YEAR ENDED JUNE 30, 1995 JUNE 30, 1994

$ 1,521,487.31 $

21,760.30

117,356.50 $ 1,638,843.81 $

200,905.91 222,666.21

$

17,975.38 $

16,396.10

909,457.95

1,495,261.12

0.00 735.11

154,966.67 360.73

$

928,168.44 $ 1,666,984.62

$

0.00 $

117,356.50

7,869.66 78,067.70

1,521,487.31

$ 1,724,781.17 $

200,905.91 0.00
28,140.81 0.00
21,760.30
250,807.02

$

842,231.08 $ 1,638,843.81

See Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
The notes to the financial statements are an integral part of this statement.
-3-

DEPARTMENT OF DEFENSE STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES
BUDGET FUND YEAR ENDED JUNE 30 1995

EXHIBIT"C"

FUNDS AVAILABLE
REVENUES
STATE APPROPRIATION General Appropriation Amended Appropriation Governor's Emergency Fund (See Schedule)
Total State Appropriation
FEDERAL REVENUES (See Schedule)
OTHER REVENUES RETAINED Armory Donations Rents Sale of Timber
Total Other Revenues Retained
Total Revenues
CARRY-OVER FROM PRIOR YEAR
Transfer from Reserved Fund Balance Federal Financial Assistance Armory Funds Billeting Funds
Total Carry-Over from Prior Year

TOTALS
YEAR ENDED JONE 3cJ 1995 JONE 3cJ 1994

$ 4,087,965.00 $
980,506.00 143709.00

3,858,508.00 253,000.00
0.00

$ 5 212180.00 $ 4111 508.00

$ 18 712156.81 $ 14 243 037.26

$

84,931.47$

419,574.93

0.00

$

504506.40 $

$ 24 428 843.21 $

62,148.63 414,593.51
2,682.50
479424.64
18 833 969.90

$ 1,377,420.39 $ 98,016.02 46050.90
$ 1 521 487.31 $

21,760.30 0.00 0.00
21760.30

Total Funds Available

$ 25 950 330.52 $ 18 855 730.20

EXPENDITURES
PERSONAL SERVICES
Salaries and Wages Employer's Contributions for:
F.I.C.A. Retirement Health Insurance Personal Liability Insurance Unemployment Compensation Insurance WOJl<ers' Compensation Insurance Assessments by Merit System
REGULAR OPERATING EXPENSES
Motor Vehicle Expenses Supplies and Materials Repairs and Maintenance Util~ies Rents (Other than Real Estate) Insurance and Bonding Other Operating Expenses (See Schedule) Extraordinary Expenditures (See Schedule) Publications and Printing
See Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
The notes to the financial statements are an integral part of this -ement.
. 4.

10,318,941.50 $
669,588.20 930,755.94 767,412.18
74,970.00 9,674.00
161,335.00 34430.57
$ 12 967107.39 $

5,848,554.66
382,630.14 806,250.00 652,951.53
27,984.00 10,907.00 163,158.00 31476.63
7923911.96

153,450.18 $ 1,415,510.66 3,045,964.02 2,458,567.53
156,331.17 68,868.31
889,229.26 1,626,550.84
15258.61
9 829 730.58 $

16,565.16 900,607.45 2,925,859.40 2,805, 160.31
97,759.81 66,401.21 470,607.30 13,311.71 14595.98
7310868.33

DEPARTMENT OF DEFENSE STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES
BUDGET FUND YEAR ENDED JUNE 30 1995

EXHIBIT"C"

EXPENDITURES TRAVEL MOTOR VEHICLE PURCHASES EQUIPMENT
Equipment Purchases COMPUTER CHARGES
Other Costs Supplies and Materials RepatrS and Maintenance
Software Equipment
Equipment Purchases Computer Billings, DOAS
REAL ESTATE RENTALS TELECOMMUNICATIONS PER DIEM FEES AND CONTRACTS
Per Diem and F Contracts
CAPITAL OUTLAY Per Diem, F - and Contracts Contracts Total Expendttures
Excess of Funds Available over Expendttures

TOTALS
9~REFJOEC JDFJE~ 1~ JOI\IE 30 1!l!l4

$

82669.45 $

$

0.00 $

28991.53 13646.00

134 813.03 $

315873.81

839.93 $ 28,105.88
5,339.00

40,638.98 1998.68

$

76922.47 $

$

64 466.13 $

1129 605.42 $

2,026.16 1,759.00 65,888.68
73,138.44 1228.75
144 041.03
45732.20
525304.94

334,936.82 $ 420621.28
755558.10 $

143,783.54 390472.86
534256.40

0.00 $ 25,040,872.57 $
909457.95

517842.88 17,360,469.08
1 495261.12

$ 25 950 330.52 $ 18 855 730.20

See lnder,endent Accountant's Combined Report on Review of Financial Statements and Supplementary lnfonnation.
The notes to the financial statements are an integral part of this statement.
-5-

DEPARTMENT OF DEFENSE STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES
COMPARED TO BUDGET BUDGET FUND
YEAR ENDED JUNE 30 1995

EXHIBIT"[)"

FUNDS AVAILABLE REVENUES
State Appropriation Federal Revenues Other Revenues Retained
CARRY-OVER FROM PRIOR YEAR Transfer from Reserved Fund Balance
EXPENDITURES Personal Services Regular Operating Expenses Travel Equipment Computer Charges Real E - Rentals Telecommunications Per Diem, Fees and Coniracts
Excess of Funds Available over Expenditures

BUDGET

ACTUAL

VARIANCEFAVORABLE (UNFAVORABLE!

$ 5,212,180.00 $ 5,212,180.00 $

20,016,299.00 18,712,156.81

561,912.00

504,506.40

$ 25,790,391.00 $ 24,428,843.21 $

0.00 -1,304,142.19
-57,405.60
-1,361,547.79

0.00

1,521,487.31

1,521,487.31

$ 25,790,391.00 $ 25,950,330.52 $

159,939.52

$ 13,073,067.00 $ 12,967,107.39 $

10,325,888.00

9,829,730.58

85,910.00

82,669.45

145,644.00

134,813.03

102,334.00

76,922.47

69,491.00

64,486.13

1,131,212.00

1,129,605.42

856,845.00

755,558.10

105,959.61 496,157.42
3,240.55 10,830.97 25,411.53
5,024.87 1,606.58 101,286.90

$ 25,790,391.00 $ 25,040,872.57 $

749,518.43

$

909457.95 $

909,457.95

See Independent Accountant's Combined Report on Review of Financial S-ments and Supplementary Information.
The notes to the financial -ments are an integral part of this statement.
-6-

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE30 199S

EXHIBIT"E"

NOTE I: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY The Department ofDefense, an organizational unit of the State of Georgia, is part ofthe executive branch of the government of the State of Georgia. The Department was created by an act of the General Assembly (O.C.G.A 38-2-130), and presently consists ofa Military Division and Administrative Services Division. The Adjutant General is the Executive Officer ofthe Department. The tenure of office of the Adjutant General is at the pleasure ofthe Governor, who is designated as Commander-in-Chiefof all militia and other military and naval forces ofthe State of Georgia.
The Department of Defense does not have authority to determine the amount offunding it will receive from the State of Georgia for any given fiscal year. Such authority is vested in the General Assembly of Georgia. The Department also does not have authority to retain unexpended State appropriations (surplus) for any given fiscal year. Accordingly, the Department ofDefense is included within the State of Georgia reporting entity for financial reporting purposes because of the significance of its legal, operational and financial relationships with the State of Georgia. These reporting entity relationships are defined in Section 2100 of the Governmental Accounting Standards Board Codification of Governmental Accounting and Financial Reporting Standards.
FUND ACCOUNTING The Department ofDefense uses a fund and account groups to report on its financial position and the results ofits operations determined in conformity with accounting practices prescribed or permitted by statutes and regulations ofthe State of Georgia. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds are maintained consistent with legal and managerial requirements. Account groups are a reporting device used to account for certain assets and liabilities of the governmental funds not recorded directly in those funds. The fund and account groups presented in the accompanying financial statements are as follows:
GOVERNMENTAL FUND TYPE
BUDGET FUND - The fund used to account for activities and functions as set forth in the Amended Appropriations Act of 1994-199S. The Budget Fund is similar in nature to a General Fund as identified in generally accepted accounting principles in that the Budget Fund is used to account for all activities except those required to be accounted for in some other fund.
ACCOUNT GROUPS
GENERAL FIXED ASSETS - The account group used to account for fixed assets used in governmental fund type operations. Fixed assets purchased are recorded at cost or at estimated historical cost if historical cost is not practically determinable. Donated fixed assets are recorded at fair market value on the date donated. Disposals are deleted at recorded values. No depreciation has been provided on general fixed assets.
- 7-

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE30 1995

EXfilBIT "E"

NOTE I: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FUND ACCOUNTING
ACCOUNT GROUPS
GENERAL FIXED ASSETS The cost ofnormal maintenance and repairs that do not add to the value ofthe asset or materially extend assets' lives are not included in the General Fixed Assets Account Group. Material improvements adding to the value or useful life of the assets are included in the General Fixed Assets Account Group.
GENERAL LONG-TERM DEBT - The account group used to report the noncurrent portions ofcertain governmental long-term liabilities, such as claims, judgments and compensated absences, which will be paid from future resources.
BASIS OF ACCOUNTING MEASUREMENT FOCUS
The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. Governmental funds should be accounted for using the flow ofcurrent financial resources measurement focus. With this measurement focus, operating statements present increases and decreases in net current assets and unreserved fund balance is a measure ofavailable spendable resources. In accordance with accounting practices prescribed or permitted by statutes and regulations of the State of Georgia, the Budget Fund remits its unreserved fund balance (surplus) to the Office of Treasury and Fiscal Services in the subsequent fiscal year.
GOVERNMENTAL FUND TYPE BUDGETFUND
Except as disclosed in the following paragraphs, units of government of the State of Georgia record their Budget Fund revenues and expenditures in accordance with the modified accrual basis of accounting. Under the modified accrual basis ofaccounting, revenues are recognized when susceptible to accrual (i.e., when they are "measurable and available"). "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to pay liabilities of the current period. Revenues that are accrued include primarily State appropriations, Federal grants and entitlements, and certain amounts earned under operating agreements with other parties. Expenditures are recorded when the related fund liability is incurred, except for unmatured interest on general long-term debt which is recognized when due, and certain compensated absences, claims and judgements which are recognized when the obligations are expected to be liquidated with expendable available financial resources.
Contractual obligations for services which have not been performed and for goods which have not been delivered at the end of the fiscal year are recognized as expenditures and liabilities in the accompanying financial statements. This accounting practice causes expenditure-driven grant revenues to be accrued based, in part, on the unexecuted portion of contracts for goods and services. The recognition ofencumbrances as expenditures and liabilities is in conformity with accounting practices prescribed or permitted by statutes and regulations ofthe State ofGeorgia, but is not consistent with generally accepted accounting principles, which
- 8-

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXIIlBIT "E"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING GOVERNMENTAL FUND TYPE BUDGETFUND
provide for the recording of encumbrances as a reservation of fund balance. Further, revenue recognition for expenditure-driven grants should be based upon expenditures determined in accordance with generally accepted accounting principles.
Prior period adjustments and certain other items are reported as additions to and deductions from fund balances ofthe Budget Fund in the accompanying financial statements. This presentation is in accordance with accounting practices prescribed or permitted by statutes and regulations of the State of Georgia, but differs from generally accepted accounting principles in that immaterial adjustments should be reported as current period revenues and expenditures.
BUDGET Appropriation allotments to the Department of Defense are on the basis of a budget submitted by the Department and approved by the Legislature and the Governor. The budget is adopted on a basis consistent with accounting practices prescribed or permitted by statutes and regulations of the State of Georgia and is compiled in the same manner as all State departments. Expenditures are classified by budget unit object classes as provided in Act No. 1208 of Georgia Laws 1994 (as approved April 18, 1994) and amended by Act No. 6 of Georgia Laws 1995 (as approved February 22, 1995), which is an appropriated budget and is referred to in these notes as the Amended Appropriations Act of 1994-1995.
Overexpenditure of a budget unit object class, except for the "common object classes", included in the Department's final amended budget is in violation of Section 80 of the 1994-1995 Amended Appropriations Act. Expenditures ofno more than 102% of the stated amount for each common object class are authorized by Section 80. However, the total expenditure for the group of common object classes may not exceed the sum of the stated amounts for the separate object classes ofthe group. The common object classes include Personal Services, Regular Operating Expenses, Travel, Motor Vehicle Purchases, Equipment, Computer Charges, Real Estate Rentals, Telecommunications and Postage.
CASH AND CASH EQUIVALENTS Cash and Cash Equivalents include currency on hand and demand deposits with banks and other financial institutions.
INVENTORIES No inventories ofsupplies are reported in the current financial statements. Expendable supplies are recorded as expenditures at the time of purchase.
RESERVED FUND BALANCE Reserves represent those portions of fund equity not appropriable for expenditure or legally segregated for a specific future use. The following is a brief description of the reserves reflected in the accompanying financial statements:
-9-

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXHIBIT "E"

NOTE I: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESERVED FUND BALANCE
FEDERAL FINANCIAL ASSISTANCE The residual portion ofFederal financial assistance revenues not yet expended or encumbered. This amount is restricted for expenditure in future years. This accounting treatment differs from generally accepted accounting principles in that the unearned portion of Federal financial assistance should be reflected as deferred revenue.
ARMORY FUNDS The residual portion ofnonappropriated revenues not yet expended or encumbered for all State National Guard Armories. Balances in this fund are reserved so that no part thereof will be deposited in the general treasury.
BILLETING FUNDS The residual portion of nonappropriated revenues not yet expended or encumbered for all State billeting funds. Balances in this fund are reserved each year so that no part thereof will be deposited in the general treasury.
UNRESERVED FUND BALANCE In accordance with accounting practices prescribed or permitted by statutes and regulations of the State of Georgia, the Budget Fund's unreserved fund balance is remitted to the Office ofTreasury and Fiscal Services in the subsequent fiscal year as surplus. This amount ofunexpended general appropriations is available to the State for reappropriation in subsequent years.
COMPENSATED ABSENCES Compensated absences represent obligations of the Department relating to employee's rights to receive compensation for future absences based upon services already rendered. This obligation relates only to vesting accumulating annual leave in which payment is probable and can be reasonably estimated. No liability has been recorded in the individual funds for the current portion of this obligation as this amount will not be liquidated with expendable available financial resources. Funds are provided in the appropriation offunds each year to the Department to cover the cost ofannual leave paid to terminated employees.
The liability for compensated absences at year end is reported in the General Long-Term Debt Account Group for governmental funds.
MEMORANDUM ONLY - TOTAL COLUMNS Total columns on the Combined Balance Sheet (Statutory Basis) are captioned "Memorandum Only" because they do not represent consolidated financial information and are presented only to facilitate financial analysis. The columns do not present information that reflects financial position, results of operations or changes in financial position in conformity with generally accepted accounting principles. Neither are such data comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data.
- IO -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE30 1995

EXHIBIT"E"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPARATIVE DATA Comparative total data for the prior year have been presented in selected sections of the accompanying financial statements in order to provide an understanding of the changes in the Department's financial position and operations. Comparative totals have not been included on statements where their inclusion would not provide enhanced understanding of the Department's financial position and operations or would cause the statements to be unduly complex and difficult to understand. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year's presentation.
NOTE 2: CUSTODIAL CREDIT RISKS OF CASH DEPOSITS
STATE OF GEORGIA COLLATERALIZATION STATUTES AND POLICIES Funds ofthe State of Georgia cannot be placed in a depository paying interest longer than ten days without the depository providing a surety bond to the State. In lieu of a surety bond, the depository may pledge as collateral any one or more ofthe following securities as enumerated in the Official Code of Georgia Annotated Section 50-17-59:
(1) Bonds, bills, certificates of indebtedness, notes, or other direct obligations ofthe United States or ofthe State of Georgia.
(2) Bonds, bills, certificates ofindebtedness, notes, or other obligations of the counties or municipalities ofthe State of Georgia.
(3) Bonds ofany public authority created by the laws of the State of Georgia, providing that the statute that created the authority authorized the use ofthe bonds for this purpose.
(4) Industrial revenue bonds and bonds of development authorities created by the laws ofthe State of Georgia.
(5) Bonds, bills, certificates of indebtedness, notes, or other obligations ofa subsidiary corporation of the United States government, which are fully guaranteed by the United States government both as to principal and interest, and debt obligations issued by the Federal Land Bank, the Federal Home Loan Bank, the Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Association, and the Federal National Mortgage Association.
(6) Guarantee or insurance of accounts provided by the Federal Deposit Insurance Corporation.
As authorized in the Official Code ofGeorgia Annotated Section 50-17-53, the State Depository Board has adopted policies which allow agencies ofthe State of Georgia the option of exempting demand deposits from the collateral requirements.

- 11 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
RINE 30 1995

EXHIBIT"E"

NOTE 2: CUSTODIAL CREDIT RISKS OF CASH DEPOSITS

CATEGORIZATION OF DEPOSITS For purposes of analysis of custodial credit risk, cash deposits consist of all bank balances which include demand deposits and/or interest bearing accounts. The bank balances as of June 30, 1995, are categorized below in order to provide infonnation about the extent to which such deposits are exposed to custodial credit risk.

Category 1 - Amounts covered by depository insurance or collateralized with securities (at market value) held by the Department or by its agent in the Department's name.

Category 2 - Amounts collateralized with securities (at market value) held by the pledging financial institution's trust department or agent in the Department's name.

Category 3 - Amounts collateralized with securities (at market value) held by the pledging financial institution or by its trust department or agent, but not in the Department's name, and amounts uncollateralized.

Cash Deposits

Carrying Amount

Bank Balances

S J 589286 36 S 2 59) 639 J7

Risk Categories 2
25042115 s._ _=oo~o

S234J 21802

NOTE 3: CHANGES IN GENERAL FIXED ASSETS

In accordance with the statutory definition of moveable personal property as defined in Official Code of Georgia Annotated Section 50-16-161, only those items with an acquisition cost of$1,000.00 or greater are reflected in the General Fixed Assets Account Group.

The following is a summary of changes of equipment in the General Fixed Assets Account Group during the fiscal year:

Balance July 1, 1994

$ 738,580.16

Additions Deductions

91,287.74 3 650.00

Balance June 30, 1995

$ 826 217 90

NOTE 4: GENERAL LONG-TERM DEBT

CHANGES IN GENERAL LONG-TERM DEBT During the year ended June 30, 1995, the following changes occurred in the compensated absences liability reported in the General Long-Term Debt Account Group:

- 12 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXEilBIT "E"

NOTE 4: GENERAL LONG-TERM DEBT

CHANGES IN GENERAL LONG-TERM DEBT Balance July 1, 1994

$ 482,837.94

Additions Annual Leave Earned and Utilized (Net) Salaries Salary Related Fringe Benefits

182,512.16 13 962.18

Balance June 30, 1995

$ 679 312 28

NOTES: RISKMANAGEMENT

Public Entity Risk Pool

The State Personnel Board, Merit System ofPersonnel Administration internally administers for the State of Georgia a program of health benefits for the employees ofunits ofgovernment ofthe State of Georgia and units of county government and local education agencies located within the State of Georgia. This plan is funded by participants covered in the plan, by employers' contributions paid by the various units of government participating in the plan, and appropriations made by the General Assembly of Georgia. The State Personnel Board, Merit System ofPersonnel Administration has contracted with Blue Cross Blue Shield of Georgia to process claims in accordance with the State Employees' Health Benefit Plan as established by the State Personnel Board.

Other Risk Management

The Department ofAdministrative Services (DOAS) has the responsibility for the State of Georgia of making and carrying out decisions that will minimize the adverse effects of accidental losses that involve State government assets. The State believes it is more economical to manage its risks internally and set aside assets for claim settlement. Accordingly, DOAS services claims for risk of loss to which the State is exposed, including general liability, property and casualty, workers' compensation, unemployment compensation, and law enforcement officers' indemnification. Limited amounts of commercial insurance is purchased applicable to property, employee and automobile liability, fidelity and certain other risks. The Department ofDefense is part of the State of Georgia reporting entity, and as such, is covered by the State of Georgia risk management program administered by DOAS. Premiums for the risk management program are charged to the state agencies by DOAS to provide claims servicing and claims payment.

NOTE 6: DEFERRED COMPENSATION PLAN

The State ofGeorgia offers its employees a deferred compensation plan in accordance with Internal Revenue Code Section 457. The plan, available to employees of the State of Georgia and county health departments, permits such employees to defer a portion oftheir salary until future years. Participation in the plan is optional. Participants choose the option or options in which they wish to participate. The deferred compensation is not

- 13 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE30 1995

EXHIBIT"E"

NOTE 6: DEFERRED COMPENSATION PLAN
available to employees until termination, retirement, death, or unforeseeable emergency. All amounts of compensation deferred under the plan, all property and rights purchased with those amounts, and all income attributable to those amounts, property, or rights are (until paid or made available to the employee or other beneficiary) solely the property or rights of the State of Georgia subject only to the claims of the State's general creditors. Participant's rights under the plan are equal to those of a general creditor of the State of Georgia in an amount equal to the fair market value of the deferred account of each participant. Financial information relative to the plan is presented in the financial report ofthe State Personnel Board - Merit System ofPersonnel Administration for the year ended June 30, 1995.
NOTE7: RETIREMENTPLANS
EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA
Plan Description The Department ofDefense participates in the Employees' Retirement System of Georgia ("ERS"), a singleemployer, defined benefit plan established by the General Assembly of Georgia for the purpose of providing retirement allowances for employees of the State of Georgia. The Department's payroll for the year ended June 30, 1995, for employees covered by ERS was $5,924,144.14. The Department's total payroll for all employees was $10,318,941.50.
Benefits The benefit structure ofERS was significantly modified on July 1, 1982. Unless elected otherwise, an employee who currently maintains membership with ERS based upon State employment that started prior to July 1, 1982, is an "old plan" member subject to the plan provisions in effect prior to July 1, 1982. All other members are "new plan" members subject to the modified plan provisions.
Members become vested after IO years of creditable service. A member may retire and receive normal retirement benefits after completion of 10 years of creditable service and attainment of age 65. Retirement benefits paid to members are based upon a formula which considers the monthly average of the member's highest eight consecutive calendar quarters of salary, the number of years of creditable service, and the member's age at retirement. Postretirement cost-of-living adjustments are also made to member's benefits. The normal retirement pension is payable monthly for life; however, options are available for distribution of the member's monthly pension at reduced rates to a designated beneficiary upon the member's death. Death and disability benefits are also available through ERS. If IO years of service is completed and age 60 is reached, the member may retire with a reduced benefit. Additionally, there are certain provisions allowing for retirement after 30 years of service regardless of age.
Contributions Required and Contributions Made Under the old plan, member contributions consist of employee contributions paid by the employee of 1.25% ofannual compensation and 4.75% ofannual compensation paid by the Department on behalf of the employee. Under the new plan, member contributions consist solely of 1.25% of annual compensation paid by employee.
- 14 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXHIBIT "E"

NOTE7: RETIREMENTPLANS

EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA

Contributions Required and Contributions Made The Department also is required to contnbute at a specified percentage of active member payroll determined annually by actuarial valuation. For the year ended June 30, 1995, the ERS employer contribution rate for the Department amounted to 14.85% of covered payroll and included the 4.75% contributed on behalf of the employee referred to above. Contributions are also made on amounts paid for accumulated leave of retiring employees.

Total contributions to the plan made during fiscal year 1995 amounted to $960,378.25, ofwhich $886,324.86 was made by the Department and $74,053.39 was made by employees. These contributions met the requirements of the plan.

Funding Status and Progress Pension Benefit Obligation
The amount shown as the "pension benefit obligation" is a standardized disclosure measure of the present value ofpension benefits, adjusted for the effects ofprojected salary increases and step-rate benefits, estimated to be payable in the future as a result of employee service to date. The measure is intended to help users assess the funding status ofERS on the going-concern basis, assess progress made in accumulating sufficient assets to pay benefits when due and make comparisons among employers. The measure is the actuarial present value of credited projected benefits, and is independent of the funding method used to determine contributions to the plan.

The pension benefit obligation was computed as part of an actuarial valuation performed as of June 30, 1994. Significant actuarial assumptions used in the valuation include the following:

1) The present value offuture pension benefits paid was computed using a discounted rate of 7.5 percent. This rate is also the same rate assumed to be earned on investments in the plan in future years.

2) Future pension payments reflect the following assumed salary increases as a result ofinflation and merit increases:

~ 20 25 30 35 40 to 65

Percentage 9.5% 8.5% 6.5% 6.0% 5.7%

- 15 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXHIBIT "E"

NOTE 7: RETIREMENT PLANS

EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA

Funding Status and Progress Pension Benefit Obligation
3) ERS has the authority to grant cost-of-living adjustments by state statute. As ofJune 30, 1994, cost-ofliving adjustments have been included in the pension benefit obligation.

The total unfunded pension benefit obligation ofERS as of June 30, 1994, was $310,149,000, as follows:

Pension Benefit Obligation:

Retirees and Beneficiaries Currently Receiving Benefits and Terminated Employees Entitled to Benefits but Not Yet Receiving Benefits

$ 2,227,653,000

Current Employees

Accumulated Contributions

648,516,000

Employer-Financed Vested

1,085,190,000

Employer-Financed Nonvested

1206805 000

Total Pension Benefit Obligation

$5,168,164,000

Net Assets Available for Benefits

4 858 015 000

Unfunded Pension Benefit Obligation

$ 310149000

The measurement ofthe total pension benefit obligation is based on an actuarial valuation as of June 30, 1994. Net assets available for benefits were valued as of the same date. ERS does not make separate measurements of assets and pension benefit obligation for individual employers.

Funding Policy The ERS funding policy provides for periodic employer contributions at actuarially determined rates that, expressed as percentages ofannual payroll, are sufficient to accumulate sufficient assets to pay benefits when due. Level percentage of payroll employer contribution rates are determined using the entry age funding method. ERS also uses the level percentage of payroll method to amortize the unfunded liability within approximately 20 years following the valuation date.

- 16 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXHIBIT "E"

NOTE 7: RETIREMENT PLANS
EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA
Funding Status and Progress Funding Policy
Total contributions from all employers to ERS for the year ended June 30, 1995, were $256,624,679.00. The Department's contnbution was actuarially determined and represented 0.35% oftotal contributions made by all participating employers.
Significant actuarial assumptions used to compute contributions are the same as those used to compute the standardized measure of pension obligation.
Trend Information Historical trend information is presented in the financial report ofERS for the year ended June 30, 1995. This information gives an indication of the progress made in accumulating sufficient assets to pay benefits when due.
GEORGIA DEFINED CONTRIBUTION PLAN
Plan Description The Department ofDefense participates in the Georgia Defined Contribution Plan ("GDCP") which is a singleemployer defined contribution plan established by the Georgia General Assembly in July 1993 for the purpose ofproviding retirement coverage for State employees who are temporary, seasonal, and part-time and are not members of a public retirement or pension system. GDCP is administered by the Employees' Retirement System Board ofTrustees. The Department's payroll for the year ended June 30, 1995, for employees covered by GDCP was $67,251.70. The Department's total payroll for all employees was $10,318,941.50.
Benefits A member may retire and elect to receive periodic payments after attainment of age 65. The payment will be based upon mortality tables and interest assumptions to be adopted by the Board. If a member has less than $ 3,500 credit to his/her account, the Board has the option ofrequiring a lump sum distribution to the member in lieu of making periodic payments. Upon the death of a member, a lump sum distribution equaling the amount credited to his/her account will be paid to the member's designated beneficiary.
Contributions and Vesting Member contributions are seven and one-half percent (7.5%) of gross salary. There are no employer contributions. Earnings are credited to each member's account in a manner established by the Board. Upon termination of employment, the amount of the member's account is refundable upon request by the member.
Total contributions made by employees during fiscal year 1995 amounted to $5,043.97 which represents 7.50% of covered payroll. These contributions met the requirements of the plan.

- 17 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE30 1995

EXIIlBIT "E"

NOTE 8: LEAVE POLICIES
Employees earn ten hours of sick leave each month with a maximum accumulation ofninety days. Unused accumulated sick leave does not vest with the employee and is forfeited upon retirement or termination of employment.
Employees earn annual leave ranging from ten to fourteen hours each month depending upon the employees' length ofcontinuous State service with a maximum accumulation offorty five days. Employees are paid for unused accumulated annual leave upon retirement or termination of employment. See Note 1 - Compensated Absences.
Certain employees who retire with one hundred and twenty days or more offorfeited annual and sick leave are entitled to additional service credit in the Employees' Retirement System of Georgia.
NOTE 9: NONMONETARY TRANSACTIONS
The Georgia State Financing and Investment Commission (GSFIC), a unit of State government, is responsible for the issuance of state debt and for the investment and accounting for proceeds derived from the issuance of state debt. In addition, GSFIC is authorized to acquire and construct projects for the benefit of units of State government or to contract with units of State government for the construction or acquisition of capital outlay projects. During the fiscal year ended June 30, 1995, the Georgia State Financing and Investment Commission paid $1,139,723.86 to various vendors for approved projects related to the Department of Defense.
NOTEl0: CONTINGENCIES
Amounts received or receivable from granter agencies are subject to audit and adjustment by granter agencies. This could result in refunds to the granter agency for any expenditures which are disallowed under grant terms. The amouilt of expenditures which may be disallowed by the granter cannot be determined at this time although the Department expects such amounts, if any, to be immaterial to its overall financial position.
Litigation, claims and assessments filed against the Department of Defense, if any, are generally considered to be actions against the State of Georgia. Pursuant to the Official Code of Georgia Annotated, the Department of Administrative Services maintains a program of purchased insurance and self-insurance which provides coverage for such litigation, claims and assessments. Accordingly, significant litigation, claims and assessments pending against the State ofGeorgia are disclosed in the State of Georgia Comprehensive Annual Financial Report for the fiscal year ended June 30, 1995.
NOTE 11: BONDING INFORMATION
The Commissioner and all employees of the Department of Defense are bonded under a Public Employees Blanket Bond written by Employers Insurance of Wausau, their Bond No. 1450-00-110723, on which the premium was paid to October 1, 1995. Under this agreement the Public Employee Dishonesty Coverage insures the Department to a maximum of$1,000,000.00 against loss sustained through fraudulent or dishonest
- 18 -

DEPARTMENT OF DEFENSE NOTES TO THE FINANCIAL STATEMENTS
JUNE 30 1995

EXHIBIT "E"

NOTE 11: BONDING INFORMATION
acts by its employees. The Faithful Performance ofDuty Coverage insures the Department to a maximum of $1,000,000.00 against loss sustained from failure of its employees to perform faithfully their duties or to account properly for all monies and property received by virtue of their position or employment.
All employees ofthe Department ofDefense are also bonded under Commercial Crime Policies written by the United States Fire Insurance Company, their Policy Nos. 626 012292 6 and 626 012294 4, on which premiums were paid to October 1, 1995. Under these additional public employee dishonesty coverages, the policies insure the Department to a maximum of$9,000,000.00 against loss sustained through fraudulent or dishonest acts by its employees.
Unit Commanders ofthe Georgia Army National Guard and the Georgia Air National Guard are also bonded under a Public Employees Blanket Bond written by the Glens Falls Insurance Company, their Policy No. BND00l 95 95, on which the premium was paid to September 19, 1995. Under insuring agreement No. 2 with the Blanket Bond insures the Department ofDefense to a maximum of $2,500.00 against loss sustained through fraudulent or dishonest act by the specified employees.

- 19 -

20

SUPPLEMENTARY JNFORMA TION - 21 -

QEPARTMl;NT OF DEFENSE
SCHEDULE OF APPROVED BUDGET YEAR ENDED JUNE 30 1995

SCHEDULE "1"

FUNDS AVAi~!;
~
State Appropriation Federal Revenues Olher Revenues Retained

ORIGINAL APPROPRIATION

AMENDED APPROPRIATION

GOVERNOR'S EMERGENCY FUND

BUDGET ADJUSTMENTS

TOTAL

4,087,965.00 $ 8,378,162.00

980,506.00 $

143,709.00 $

11,638,137.00 561912.00

5,212,180.00 20,016,299.00
561912.00

12 466127.00 $

980506.00 $

143 709.00 $ 12200049.00 $ 25 790 391.00

~lle!;NQ!!\,!B~S
Personal Services Regular Operating Expenses Travel Equipment Computer Chargfi Real Estate Rentals Telecommunications Per Diem, Fees and Contracts

7,084,802.00 $ 4,724,530.00
22,550.00 24,000.00 11,000.00 10,000.00 41,845.00 547400.00

394,156.00 285,000.00 $
1,550.00 500.00
1,900.00
281,400.00 16000.00

12 466 127.00 $

980506.00 $

143,709.00

5,594,109.00 $ 5,172,649.00
61,810.00 121,144.00 89,434.00 59,491.00 807,967.00 293445.00

13,073,067.00 10,325,888.00
85,910.00 145,644.00 102,334.00
69,491.00 1,131,212.00
856845.00

143,709.00 $ 12 200 049.00 $ 25 790 391.00

See accompanying notes and Independent Accountanfs Combined Report on Review of Financial Statements and Supplementary Information.
-22-

DEPARTMENT OF DEFENSE CASH AND CASH EQUIVALENTS
JUNE 30 1995

SCHEDULE "2"

NONINTEREST BEARING ACCOUNTS NationsBank of Georgia, N. A., Atianta, Georgia State Armory Operating Accounts (List on File)
INTEREST BEARING ACCOUNTS State Armory Operating Accounts (List on File) State Billeting Operating Accounts (List on F~e)
OTHER Cash on Hand

$ 1,491,817.10 77,023.91 $ 1,568,841.01

$

8,439.33

12,006.02

20,445.35

200.00

$ 1.589.486.36

See accompanying notes and Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
-23-

DEPARTMENT OF DEFENSE SCHEDULE OF GOVERNOR'S EMERGENCY FUND
YEAR ENDED JUNE 30 1995
Assist with Expenses in Connection with the Flood of 1994

SCHEDULE "3" $ 143,709.00

See accompanying notes and Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
-24-

DEPARTMENT OF DEFENSE SCHEDULE OF FEDERAL REVENUES
YEAR ENDED JUNE 30 1995

PROGRAM
Defense, U. S. Department of National Guard Bureau Direct
Federal Emergency Management Agency Through the Office of the Governor Disaster Assistance
Justice, U.S. Department of Drug Control and System Improvement - Formula Grant Direct

CFDA NUMBER
N/A
83.516
16.579

SCHEDULE "4"
AMOUNT $ 12,750,418.54
5,907,143.96 54,594.31
$ 18 712,156.81

See accompanying notes and Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
-25-

DEPARTMENT OF DEFENSE SCHEDULE OF OTHER OPERATING EXPENSES
YEAR ENDED JUNE 30 1995

SCHEDULE "5"

REGULAR OPERATING EXPENSES
Association Dues Bank Charges Clipping Service Commercial Contractors Airport Use Agreements Conference and Registration Fees Examinations and Testing Field Trips Freight, Express and Storage Legal Advertising National Guard Civilian Youth Opportunities Program
Student Allowances and Stipends Student Laundry Student Lunches Student Testing Subscriptions and Dues

$

1,631.00

2,010.47

771.10

45,000.00

20,800.00

52,236.06

9,927.84

7,053.48

2,286.58

$ 705,069.07 24,989.44 10,072.50 5,745.33

745,876.34 1,636.39

$ 889,229.26

See accompanying notes and Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
-26-

DEPARTMENT OF DEFENSE SCHEDULE OF EXTRAORDINARY EXPENDITURES
YEAR ENDED JUNE 30 1995
REGULAR OPERATING EXPENSES Georgia Army National Guard Aviation Missions Flown in Support of Georgia Emergency Management Agency
Georgia National Guard Subsistence Expenses Severe Weather Conditions

SCHEDULE "6"
$ 1,175,122.67 451,428.17
$ 1.626.550.84

See accompanying notes and Independent Accountant's Combined Report on Review of Financial Statements and Supplementary Information.
-27-

SECTION II FINDINGS AND IMPROPER OR QUESTIONED COSTS

DEPARTMENT OF DEFENSE SCHEDULE OF FINDINGS AND IMPROPER OR QUESTIONED COSTS
YEARENDEDJUNE30 1995

STATUS OF PRIOR YEAR FINDINGS AND IMPROPER OR QUESTIONED COSTS

The status ofthe finding disclosed in the review report for the year ended June 30, 1994, is summarized below:

Audit Control Number

Status ofFinding

411-94-01

See Audit Control Number 411-95-01

PRIOR YEAR/CURRENT YEAR

ACCOUNTING CONTROLS (OVERALL) - Financial Statements ADMINISTRATIVE REQUIREMENTS - Federal Financial Assistance Inadequate Separation ofDuties Major/Nonmajor Programs Audit Control Number 411-95-01

The review report for the year ended June 30, 1994, noted that internal accounting control procedures ofthe Department of Defense did not provide for an adequate separation of duties in the performance of certain accounting functions and related procedures. For the year under review, a limited review of these procedures revealed that the Department had made no significant changes that would provide for an adequate separation of duties in the following control categories:

(1) Cash and Cash Equivalents

(2) Revenues/Receivables/Receipts

(3) General Ledger

(4) General Fixed Assets/Property Management

The Department should review the accounting procedures in place, design procedures which would enhance segregation ofduties relative to the above control categories, and implement those procedures to strengthen the internal controls over the accounting function.

Federal Financial Assistance Programs Affected and CFDA Numbers:

16.579 83.516 NIA

Drug Control and System Improvement - Formula Grant Disaster Assistance National Guard Bureau

DEPARTMENT OF DEFENSE SCHEDULE OF FINDINGS AND IMPROPER OR QUESTIONED COSTS
YEARENDEDJUNE30 1995
PRIOR YEAR/CURRENT YEAR
CASH AND CASH EQUIVALENTS Inadequate Bank Reconciliation Procedures Financial Statements Audit Control Number 411-95-02
For the year ended June 30, 1995, the Department ofDefense's accounting procedures were insufficient to provide for adequate control over the bank reconciliation process for armory bank accounts. The following deficiencies were noted:
1. Certain bank accounts were not properly reconciled to the armory's subsidiary ledger or the Department's general ledger.
2. Certain bank statements were not available for examination.
3. One armory's bank account was closed during the year under review, but a cash balance remained on the Department's general ledger as ofJune 30, 1995.
The Department ofDefense should establish the necessary procedures to ensure that armory bank accounts are properly reconciled on a monthly basis and agree with subsidiary ledgers and the Department's general ledger.
GENERAL LEDGER Deficiencies in Accounting Procedures Financial Statements Audit Control Number 411-95-03
For the year ended June 30, 1995, certain armory subsidiary ledgers did not balance to the Department's general ledger. The Accounting Procedures and Instructions manual, as published by the State Auditor, states that at the end of each accounting period all subsidiary ledger amounts should be reconciled with the general ledger control account. The above situation occurred because the Department's accounting procedures were insufficient to provide for adequate controls over the balancing of armory subsidiary ledgers to the Department's general ledger.
The Department ofDefense should establish the necessary procedures to ensure that armory subsidiary ledgers are accurately and timely balanced to the Department's general ledger.