Child Services Audit Disputed by County : Welfare: Report finds that department overbilled state by up to $12 million. Ineligible children were kept on caseload, state says.

Los Angeles County officials are disputing the results of a state audit that found that the county’s Department of Children’s Services overbilled the state by as much as $12 million by including ineligible children in its caseload--among them an infant who had been dead for nearly five years.

Both sides say the $12-million figure is preliminary and likely to be adjusted downward, but they could not say by how much. A final figure is expected within the next two weeks after the state and county conclude negotiations on the audit, according to Kathleen Norris, spokeswoman for the state Department of Social Services.

The audit has been a focal point of the state’s long-running feud with the county over management of its $457-million child welfare system. Its findings are important because the state allocates money to the county based on the number of children the county agency serves.

The audit, and the complaints of state officials after it was conducted, triggered a call in June by the Legislature for the Department of Social Services to take over the county’s child welfare system. The takeover will occur in October unless the county can prove it is able to comply with state regulations.

Under normal circumstances, a finding that the county overestimated its caseload could result in a significant budget cut. However, state budget analysts said Friday they will recommend that the county--which has been criticized for failing to care for abused and neglected children--keep the money to improve its child welfare programs.

“Because of the severe situation down there it has been decided that the best course of action is to essentially put that money aside for compliance in other areas,” said Traci Stevens, a Senate budget analyst. “There is an agreement among (the Senate’s fiscal and policy staff) to not rip that money out of Los Angeles but to keep it there and clean up the problem.”

The four-month audit reviewed 4,040 cases handled in June, 1989. While its complete findings have not been made public, preliminary figures obtained in June showed that 14% of the cases the state reviewed--representing $12 million in state aid--were not eligible for funding. The county has agreed with the state’s findings in two-thirds of the cases, and is either disputing or has not provided a response to the other cases.

According to the audit, the county included the following children in its caseload:

* A child who was born on Sept. 2, 1984, and died shortly thereafter of crib death, according to handwritten notes of county employees. The case was still open in June, 1989.

* A child seeking political asylum from Guatemala. The case was opened in November, 1988, but the child never received county assistance.

* A child who had moved to Arkansas. The child’s sibling was later referred for assistance and the state was billed for both children.

Department of Children’s Services officials declined comment on the audit’s findings. Elwood Lui, who is serving as the department’s interim manager in the wake of the resignation of former director Robert L. Chaffee, said, “We’re looking into it and working with the state.”

The audit also turned up the larger problems that resulted in the state’s threatened takeover of the county agency. Those problems included lack of visits by social workers to children, inadequate plans to reunify families and shoddy record keeping.

In a recent “notice of noncompliance” issued by the state to the county, Linda S. McMahon, director of the state Social Services Department, said the audit review team “could not help but notice” problems within the county department. “My belief that the county is substantially failing to comply is based upon these observations,” she wrote.