Audit reveals Richmond Retirement System paid $550,000 to deceased retirees, other errors

RICHMOND, Va. (WRIC) -- City auditors found that a massive error made by the Richmond Retirement System (RRS) impacted multiple forms -- including payments being sent to deceased retirees totaling more than $550,000 -- and was only discovered after the forms were issued, requiring corrections and reissuance to affected retirees.

The 1099-R form is required to reflect the previous year's benefit payments to retirees. In 2022, RRS issued one-time bonus payments misclassified as "non-taxable" in its payroll system.

As a result, the Office of the City Auditor (OCA) conducted an audit of the RRS, which provides retirement, disability retirement and survivor benefits to more than 4,000 members.

According to the OCA, this audit was conducted to evaluate the effectiveness of how the RRS calculates retiree benefits, uploads payments to ensure they are taxable and identifies discrepancies in properly identifying dead retirees -- primarily through the year-end 1099 form.

City auditors investigated their activities related to a 13-month period ending on Jan. 31, 2024, and focused mainly on 2023 activities.

Failure to properly identify dead retirees

Following an analysis of the review of marked deaths in the retirement system, 45 members were considered dead, and the OCA found that 44 retirees received overpayments of $554,661.50 after their date of death, ranging from 10 days to over seven years. Thirty-two of these received payments at least 60 days after the day they died.

After finding a notable gross overpayment in June 2022 from a February 2015 death, they found the first new report since the updated report -- which took effect in February 2024 -- identified nine retirees who died sometime between January 2019 and October 2023, with total gross overpayments of $110,037.89.

Through the audit, they found that death audit reports were incomplete, and seven of the nine retirees did not appear in any previous death reports RRS reviewed.

The audit also found issues in how they managed dead retirees, which included incomplete death audit reports, failure to follow collection procedures, inadequate management oversight, outdated policies and delays in notifying the Board of Trustees of overpayment issues.

RRS aims to ensure these issues are treated, implementing weekly reviews and altering the collection approval process to make sure there are better ways to control finances.

RRS is responsible for ensuring that retirees and their surviving families receive their respective benefits and stopping payments when the retiree dies to prevent overpayments. The Fiscal Unit in the system must then identify and recover the funds.

According to the audit, there is an increased risk that fraud occurred based on "the volume and age of improper payments," and RRS emphasizes that they review all accounts with outstanding balances.

Overpayments, "outstanding" amounts above $550,000

The OCA found that the RRS failed to prevent, detect and recover improper payments to dead retirees, resulting in $554,661.50 in overpayments made, with $415,660.76 unrecovered.

They found that RRS last updated its Standard Operating Procedures (SOPs) governing the overpayment collection process more than a decade ago in 2014, and most of the payments went uncollected.

Specifically, of the 44 accounts reviewed, only 10 were fully collected. The remaining 34 had an outstanding balance of $415,660.76.

A notable amount of $101,277.46 in taxes and insurance premiums remains outstanding, and the audit states that RRS may not be able to recover them.

Significant deficiencies in how RRS uses Standard Operating Procedures

RRS management informed OCA that a former payroll accountant was in charge of ensuring the SOP was being followed, and that most senior management were unaware of significant overpayments, with some management and staff adding that they did not review the SOP until after the audit started. They should have had all the tools needed to identify and address the overpayments, and according to the audit, "did not take appropriate action."

The review found that there were significant deficiencies in SOP, including:

• Overpayment calculations:
  • Staff were instructed to calculate overpayments based on gross amounts instead of net amounts, resulting in at least $204.46 being over-collected between five retirees.
  • About 16 to 45 retirees reviewed had incorrect death dates in the system.
• Internal recoupments:
  • After staff were supposed to stop payments or reverse deposits, the OCA failed to receive documentation for $4,806.12 in system-recorded reversals across five accounts.
• Tracking uncollected overpayments:
  • The OCA found there to be two separate tracking files, indicating that it's unclear how they track record keeping, since only two were in the original file, which showed overpayments before 2024.
  • The employee's manager did not know how overpayments were tracked, as the former employee, was in isolation.
• Collection letters:
  • The audit found that there was no specific timeframe or designated responsibility in the SOP, resulting in missing and inaccurate collection letters, failure to send second collection letters and management itself could not verify if these letters were sent.

Despite these issues, the RRS reportedly created a new tracking file, holds regular oversight meetings, designed a new approval process for overpayment collection and new letters for those with errors were reissued.

Failure to inform Board of Trustees about dead retiree overpayments

The OCA found that the RRS did not communicate their overpayments with the Board of Trustees, which is responsible for supervising the administration of the retirement plan and determining and awarding retirement benefits -- resulting in a lack of reporting and inability for the Board to evaluate any financial issues.

RRS staff stated they did not inform management of other retirees who had been overpaid besides retirees found in June 2022 and February 2024, which showed at least nine retirees.

RRS did not inform the Board of Trustees that benefit overpayments occurred until Dec. 5, 2024.

Overpayment collection policy had incorrect information

Aside from the SOP not being last updated since May 30, 2014, and the use of the gross amount over the net amount, the OCA noted the following deficiencies in the SOP for processing overpayments:

• Lack of definition of who is responsible for sending collection letters or writing off accounts as uncollectible.
• Lacks timeframe requirements for when collection letters should be sent, and
  when accounts should be written off.
• Failure to establish clear criteria for determining when to write off amounts as
  uncollectible, other than a lack of response from the retiree’s family or estate.

RRS management said they either did not know about the SOP or did not realize they were even assigned certain responsibilities, so they did not read it before the audit started.

All of OCA's recommendations were agreed upon

The OCA made several recommendations on how RRS management and staff can improve the 1099-R process from the audit report.

Each set of recommendations was tailored to a particular finding, resulting in a total of nine. According to the report, RRS agreed to the city auditors' findings in all nine cases.

According to the report, RRS agreed to take certain actions to address the following issues within management:

• Implement a formal process to identify dead retirees
• Ensure accurate recording of death dates
• Review all dead retiree accounts with post-death payments
• Pursue the collection of all recoverable overpayments
• Coordinate with tax and insurance agencies
• Enhance oversight of overpayment processes
• Clarify the oversight responsibilities of the Board of Trustees
• Update the SOP
• Establish a continuity plan for overpayment handling

Of the nine cases, eight of them are are intended to be implemented by May 2025. The recommendation requiring the Richmond Retirement System Executive Director to collaborate with the Board of Trustees to "clarify oversight responsibilities and timeframes" is scheduled to be implemented by fiscal year 2026. All nine cases have a respective employee responsible.

The recent implementation of a new database to obtain death records, CertiDeath issued in early 2024, has "shown improvement," and after more than a year of reviewing and testing, RRS has also made staffing changes "related to stop[ping] pensions at death." Both of these changes occurred before the audit began, and SOPs were updated during the internal audit.