STATES ENVIRONMENTAL PROTECTION AGENCY |,5~ OFFICE OF INSPECTOR GENERAL NORTHERN DIVISION 10 W. JACKSON BLVD.. 4TH FLOOR CHICAGO. ILLINOIS 6O6O4 OFFICE OF AUDIT 3t2/353-2466 July 7, 1987 OFFICE OF INVESTIGATION 312/333-2507 SUBJECT: * FROM: TO: Audit Report No. P5BG7-05-0537-71483 Interim Audit of Michigan Department of Natural Resources' Administration of Its Superfund Cooperative Agreements with EPA Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 For The Period July 30, 1982 through February 28, 1986 Anthony C. Carrollo Divisional Inspect Northern Division era! for Audits Ivars Antens, Chief Grants and Financial Management Branch Region 5 SCOPE AND OBJECTIVES An interim audit of the Michigan Department of Natural Resources' (MDNR) administration of its cooperative agreements with the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 has been completed. The audit included an examina- tion of costs incurred and claimed under thp referenced cooperative agreement from the inception dates through February 28, 1986. The audit field work and draft report were completed on August 1, 1986 by Tichenor, Resler & Eiche, Certified Public Accountants. The purpose of the audit was to determine: 0 the adequacy, effectiveness and reliability of procurement, accounting, and management controls exercised by the MDNR in administering its cooperative agreements with EPA. ! 0 the State's compliance with provisions of the cooperative agreements and applicable EPA regulations. 0 the State's compliance with provisions of the Letter of Credit - Treasury Financial Communications System Recipients' Manual. 0 the reasonableness, allocability, and allowability of costs claimed under the cooperative agreements with EPA. ------- The audit was performed In accordance with generally accepted auditing standards and the Standards for Audit of Governmental Organizations, Programs. Activities, and Functions(1981 revision) promulgated by the Comptroller General of the United States. Accordingly, the examination Included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. SUMMARY OF FINDINGS In our opinion, subject to the resolution of the questioned and set-aside costs summarized below and presented in Exhibit A of the attached report, the accepted amounts fairly present the reasonable, allocable, and allowable costs in accordance with the provisions of the cooperative agreement. Claimed Accepted Questioned Set-Aside Total $3,910,320 $3,637,217 $63.480 $63,480 Federal Share $3,450,819 $209.623 $209,020 This report questions and sets aside costs of $63,480 and $209,623, respec- tively. The questioned costs represent (1) drawdown of $11,332 in excess of allowable project costs for remedial measures not approved under the Remedial Investigation/Feasibility Study (RI/FS) activity phase and (2) expenditures of $52,148 which were ineligible because the contract did not include all the necessary provisions. The set-aside costs represent (1) an incomplete remedial investigation costing $203,597 and (2) "shut-down" expenses totalling $6,026 pertaining to a period'of inactivity caused by a scheduling conflict. Audited costs are defined as the total project costs claimed by the state. Questioned costs are costs claimed or incurred that we have concluded should not be reimbursed by EPA or incurred as part of project eligible costs because they are not allowable under the provisions of applicable laws, regulations, policies, cost principles, or terms of the cooperative agreement or contract. Set-aside costs are costs which cannot be accepted without additional informa- tion or evaluations and approvals by responsible Agency program officials. Recommendation We recommend that Region 5: 1. Recover the questioned Federal share of $63,480 from the MDNR. 2. Determine the allowability of the set-aside costs of $203,597 for an incomplete Remedial Investigation. 3. Ensure that the $6,026,(Federal share $5,423) claimed for "shut-down" expenses are properly credited on the final SF-269 or otherwise recovered by EPA. 4. Monitor submission of Federal Cash Transactions Reports to determine they are properly completed. -2- ------- 5. Require the MDNR to: a. Submit a copy of Its revised bid package and/or other documentation to ensure that all required EPA subagreement clauses are contained 1n future contracts. b. Provide documentation on the transfer of computer equipment to State inventory records. A draft report was sent to the MDNR for comments. In its response dated March 18, 1987, MDNR agreed with $6,026 cost set aside for shut-down, $11,332 for the remedial expenditure not approved for the RI/FS phase, and the $52,148 disallowed for the fence contract. MDNR did not agree with $203,597 set aside for an inadequate Remedial Investigation, but claims that portions of the Remedial Investigation were adequate and these costs should be allowed. To provide a balanced understanding of the issues, we have presented MDNR's position and the auditor's comments at the appropriate sections in the report. Additionally, a copy of the entire response has been previously provided. ACTION REQUIRED In accordance with EPA Order 2750, the action official is required to issue a final determination on the costs questioned and set aside and any other recom- mendations in this report within 150 days of the audit report date. Where the action official considers a position on the audit findings that differs from our recommendations, we would appreciate the opportunity to discuss manage- ment's position before the determination is issued to MDNR. A copy of the final determination should be provided to our office when issued. We have no objection to the release of this report at your discretion. Should you have any questions, please contact Kay Hudson. Enclosures Distribution: Chief, Grants and Financial Management Branch (5) (Responsible for distribution to auditee) Director, Grants Administration Division (PM-216) Chief, Superfund Accounting Branch, Financial Management Division (PM-226) Chief, State and Regional Coordination Branch, Headquarters Hazardous Site Control Division (WH-548E) Chief, Grants Policy and Procedures Branch, Grants Administration Division (PM-216) -3- ------- ooj REPORT OF INTERIM AUDIT OF MICHIGAN DEPARTMENT OF NATURAL RESOURCES' ADMINISTRATION OF ITS SUPERFUND COOPERATIVE AGREEMENTS WITH EPA UNDER THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF 1980 FOR THE PERIOD JULY 30, 1982 THROUGH FEBRUARY 28, 1986 ------- - as-0537- 7/y S3 2 TABLE OF CONTENTS SCOPE AND OBJECTIVES SUMMARY OF FINDINGS BACKGROUND AUDITORS' REPORT ON COOPERATIVE AGREEMENTS V005784, V005785, V005787, V005786, V005775, V005776, V005777, V005793, V005836, V005843 AND V005851 AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES AUDITORS' REPORT ON INTERNAL ACCOUNTING CONTROL AND COMPLIANCE FINDINGS AND RECOMMENDATIONS 1 - STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS IM- PROVEMENT 2 - LACK OF FIXED FEE MONITORING SYSTEM 3 - NONEXPENDABLE PERSONAL PROPERTY OMITTED FROM PROPERTY LIST 4 - FEDERAL CASH TRANSACTIONS REPORTS IMPROPERLY COMPLETED 5 - MINOR FINDINGS - CORRECTIVE ACTION TAKEN AFTER AUDIT 6 - MINOR FINDINGS - CORRECTIVE ACTION TAKEN DURING AUDIT EXHIBIT A - EXHIBIT B - COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOUR- CES SUMMARY OF COSTS CLAIMED, ACCEPTED, QUESTIONED AND SET-ASIDE FOR THE PERIOD JULY 30, 1982 THROUGH FEBRUARY 28, 1986 BERLIN AND FARRO INDUSTRIAL INCINERA- TOR COOPERATIVE AGREEMENT (V005784) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIM- ED, ACCEPTED, QUESTIONED AND SET-ASIDE FOR THE PERIOD JULY 30, 1982 THROUGH FEBRUARY 28, 1986 Page 1 2 5 7 9 11 12 13 14 16 17 19 20 ------- TABLE OF CONTENTS (Continued) EXHIBIT C - EXHIBIT D - EXHIBIT E - EXHIBIT F - EXHIBIT G - EXHIBIT H - LIQUID DISPOSAL, INCORPORATED INDUS- TRIAL INCINERATOR COOPERATIVE AGREE- MENT (V005785) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED, ACCEPTED AND SET-ASIDE FOR THE PERIOD MAY 1, 1983 THROUGH FEBRUARY 28, 1986 23 ROSE TOWNSHIP INDUSTRIAL WASTE DUMP COOPERATIVE AGREEMENT (V005787) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD SEPTEMBER 1, 1983 THROUGH FEBRUARY 28, 1986 26 NORTHERNAIRE PLATING, INCORPORATED INDUSTRIAL WASTE DISPOSAL COOPERATIVE AGREEMENT (V005786) AWARDED TO THE MICHI- GAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD NOVEMBER 1, 1983 THROUGH FEBRUARY 28, 1986 27 CEMETERY INDUSTRIAL WASTE DUMP COOPERA- TIVE AGREEMENT (V005775) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD MAY 21, 1984 THROUGH FEB- RUARY 28, 1986 28 SPRINGFIELD TOWNSHIP INDUSTRIAL WASTE DUMP COOPERATIVE AGREEMENT (V005776) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RE- SOURCES SCHEDULE OF COSTS CLAIMED AND AC- CEPTED FOR THE PERIOD MAY 21, 1984 THROUGH FEBRUARY 28, 1986 29 SPIEGELBERG/RASMUSSEN LANDFILL COOP- ERATIVE AGREEMENT (V005777) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RE- SOURCES SCHEDULE OF COSTS CLAIMED, AC- CEPTED AND QUESTIONED FOR THE PERIOD MAY 21, 1984 THROUGH FEBRUARY 28, 1986 30 ------- TABLE OF CONTENTS (Continued) EXHIBIT I - EXHIBIT J - EXHIBIT K - EXHIBIT L - EXHIBIT M - EXHIBIT N - VERONA WELL FIELD COOPERATIVE AGREE- MENT (V005793) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD OCTOBER 1, 1984 THROUGH FEBRUARY 28, 1986 32 METAMORA LANDFILL COOPERATIVE AGREEMENT (V005836) AWARDED TO THE/MICHIGAN DEPART- MENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD MARCH 10, 1985 THROUGH FEBRUARY 28, 1986 33 MULTI-SITE COOPERATIVE AGREEMENT (V005843) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIM- ED AND ACCEPTED FOR THE PERIOD APRIL 15, 1985 THROUGH FEBRUARY 28, 1986 34 MULTI-SITE COOPERATIVE AGREEMENT (V005851) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIM- ED AND ACCEPTED FOR THE PERIOD JUNE 15, 1985 THROUGH FEBRUARY 28, 1986 35 COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF MODEL SUBAGREEMENT CLAUSES OMITTED OR NOT EQUIVALENT FOR THE SUB- AGREEMENTS 36 DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES 37 APPENDIX 1 - MICHIGAN DEPARTMENT OF NATURAL RESOURCES' RESPONSE TO DRAFT AUDIT REPORT 47 . ------- REPORT OF INTERIM AUDIT OF MICHIGAN DEPARTMENT OF NATURAL RESOURCES' ADMINISTRATION OF ITS SUPERFUND COOPERATIVE AGREEMENTS WITH EPA UNDER THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION. AND LIABILITY ACT OF 1980 FOR THE PERIOD JULY 30, 1982 THROUGH FEBRUARY 28, 1986 SCOPE AND OBJECTIVES We performed an interim audit of the Michigan Department of Natu- ral Resources' (MDNR) administration of its cooperative agree- ments with the U.S. Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation, and Lia- bility Act of 1980. The primary objectives of our audit were to: 1. Determine the adequacy, effectiveness, and reliability of procurement, accounting, and management controls exercised by the MDNR in administering its cooperative agreements with EPA. 2. Ascertain the State's compliance with provisions of the co- operative agreements and applicable EPA regulations and in- structions. 3. Ascertain the State's compliance with provisions of the Let- ter of Credit - Treasury Financial Communications System Recipients' Manual (LOC-TFCS).! 4. Determine the reasonableness, allocability, and allowability of the costs claimed under the cooperative agreements with EPA. Specifically, our audit covered the following cooperative agree- ments: Berlin and Farro Industrial Incinerator; Liquid Disposal, Incorporated Industrial Incinerator; Rose Township Industrial Waste Dump; Northemaire Plating, Incorporated Industrial Waste Disposal; Cemetery Industrial Waste Dump; Springfield Township Industrial Waste Dump; Spiegelberg/Rasmussen Landfill; Verona Well Field; Metamora Landfill; Multi-Site I (Burrows Sanitation and Sludge Disposal, Charlevoix Municipal Well Field, Clare Mun- icipal Well Field, Forest Waste Disposal, G & H Landfill, Petoskey Municipal Well Field, Tar Lake Disposal and Verona Well Field); Multi-Site II (Butterworth Landfill, Cliffs Dow Dump, Ionia City Landfill, K L Avenue Landfill, Packaging Corporation of America, Novaco Industries and Berlin and Farro Industrial Incinerator). The audit included an examination of costs in- curred and claimed under the referenced cooperative agreements from the inception dates through February 28, 1986. Our audit was performed in accordance with generally accepted auditing standards and the Standards for Audit of Governmental Organizations, Programs, Activities, and Functions(1981re- vision)promulgated by theComptrollerGeneralof the United States. Accordingly, the examination included such tests of the accounting records and such other auditing procedures as we con- sidered necessary in the circumstances. -1- ------- SUMMARY OF FINDINGS FINANCIAL RESULTS OF AUDIT Subject to the effects on Exhibit A of EPA's ultimate resolution of the questioned and set-aside expenditures referred to in the Auditors' Report, Exhibit A (summarized below) presents the fi- nancial information and financial provisions of the cooperative agreements. Cooperat ive ^_^^™, AMOUNT Agreement CLAIMED ACCEPTED QUESTIONED" SET-AS IDE Berlin and Farro $ 600,880 $ 583,522 $11,332 $ 6,026 Liquid Disposal, Incorporated 443,299 239,702 - 203,597 Rose Township 658,299 658,299 Northernaire Plating, Incor- porated 383,536 383,536 Cemetery 346,296 346,296 Springfield Township 326,566 326,566 Spiegelberg/Ras- mussen 539,960 487,812 52,148 Verona 97,102 97,102 Metamora 401,714 401,714 Multi-Site I 86,615 86,615 Multi-Site II 26,053 26.053 - - Totals $3,910,320 $3,637.217 $63.480 $209.623 Federal Share $3,450.819 03.100.009 $63.480 $209.020 Questioned costs are costs claimed or incurred that we have con- cluded should not be reimbursed by the Government or incurred as part of project eligible costs because they are not allowable under the provisions of applicable laws, regulations, policies, cost principles, or terms of the cooperative agreement or con- tract. Set-aside costs are costs which cannot be accepted with- out additional information or evaluations and approvals by re- sponsible Agency program officials. STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS IMPROVEMENT The procedures utilized by MDNR to procure contractual services under its Superfund cooperative agreements were not in compliance with all requirements of the Federal regulations (40 CFR Part 33). MDNR's procurement procedures, which are shared with the Michigan Department of Management and Budget (MDMB), were not -2- ------- SUMMARY OF FINDINGS (Continued) fully integrated to conform with Federal regulations. Coopera- tive agreement recipients are required to comply with 40 CFR Part 33 as a condition of obtaining EPA funding. MDNR's procurement system did not: e Incorporate all required EPA subagreement clauses in the contracts awarded for contractual services. 0 Include in their bid package distributed to respon- dents, how to obtain a copy of 40 CFR 33.295, Subparts F and G. LACK OF FIXED FEE MONITORING .SYSTEM MDNR paid $114 of contractual service costs in excess of the specified contract fixed fee amount. According to 40 CFR 33.235(a), "Recipients must assure that only fair and reasonable profits are paid to contractors awarded subagreements under EPA assistance agreements." The payment of the excess fixed fee was a result of MDNR not monitoring the fixed fee portion of the con- tract. Consequently, MDNR paid the contractor and claimed $114 of fixed fee which was in excess of the fixed fee limitation in the cost-plus-fixed-fee (CPFF) contract with CMC & Associates (CMC). NONEXPENDABLE PERSONAL PROPERTY OMITTED FROM PROPERTY LIST MDNR did not include computer equipment, amounting to $4,935, on its property list. In accordance with 40 CFR Part 30, coopera- tive agreement recipients are required to maintain property re- cords that ensure that the interest of the.United States is ade- quately reflected and protected. The computer equipment was pur- chased by NUS Corporation (NUS) pursuant to a contract between NUS and MDNR for contractual services. MDNR was waiting to take physical possession before recording the equipment on its' proper- ty list. MDNR, by omitting the equipment from its property.list, failed to ensure that the interest of the Federal government was adequately reflected and protected. MDNR'S COMMENTS ON FINDINGS AND OUR EVALUATION An exit conference was held on August 1, 1986, with the following representatives of the MDNR: EPA Project Officer; Environmental Manager; Chief, Remedial Action Section; Federal Aid Coordinator; Office of Budget and Federal Aid; Internal Audit; Environmental Manager; De- partment Manager; Environmental Manager; Unit Chief, En- vironmental Hazard Control Unit. An exit conference was also held on August 1, 1986, with the fol- -3- ------- MDNR'S COMMENTS ON FINDINGS AND OUR EVALUATION (Continued) lowing representatives of EPA Region 5: Audit Manager, OIG; Chief, State Programs and Information Units Staff, Michigan Unit; Project Officer; Accountant; Staff, Grants Management; Chief, Grants Management Section; Acting Chief, Grants and Financial Management Board; Finan- cial Analyst; Staff, Superfund. The following significant items were discussed during the audit and communicated through Notifications of Significant Findings and/or at the exit conferences: 1. Significant findings and recommendations; 2. Exhibits to be presented in the audit report; 3. Explanation and justification for the auditors' opin- ion; . 4. The auditee's response to the draft audit report will be incorporated into the final audit report; and 5. The final audit report is subject to the Freedom of Information Act. MDNR provided us with formal written comments on pur draft report in a letter dated October 27, 1986. The Commissioner of MDNR generally concurred with our findings and recommendations, except as noted in the Findings and Recommendations and Notes to the Exhibits sections of this report, and indicated corrective ac- tions were taken or were planned to resolve the issue cited in the report. We concluded that MDNR's comments were generally responsive to our findings and recommendations, excep.t as noted in the Findings and Recommendations, and Notes to the Exhibits ; sections of this report. To provide a balanced understanding of the issues, we summarized MDNR's position at appropriate loca- tions in the report and included the response as Appendix 1.. The attachments included with and referenced in the response were considered too voluminous to include in Appendix 1. The:'entire response, including these attachments, is available for review in the Office of Inspector General, Internal Audit Division, in Washington, D.C. -4- ------- BACKGROUND The "Superfund" program was established by the Comprehensive En- vironmental Response, Compensation, and Liability Act of 1980 (CERCLA), Public Law 96-510, enacted on December 11, 1980. The Superfund program was created to protect public health and the environment from the release, or threat of release, of hazardous substances from abandoned hazardous waste sites and other sources where response was not required by other Federal laws. A Trust Fund was established by CERCLA to provide funding for responses ranging from control of emergency situations to provision of per- manent remedies at uncontrolled sites. CERCLA authorized a $1.6 billion program financed by a five-year environmental tax on in- dustry and some general revenues. CERCLA requires that response, or payment for response, be sought from those responsible for the problem, including property owners, generators arid transporters. The basic regulatory blueprint for the Superfund Program is the National Oil and Hazardous Substances Contingency Plan (NCP), 40 CFR Part 300. The NCP was first published in 1968 as part of the Federal Water Pollution Control Plan, and has been substantially revised to meet CERCLA requirements. The NCP lays out two broad categories of response: removals and remedial response. Removals are relatively short-term responses, and modify an earlier pro- gram under the Clean Water Act. Remedial response is long-term planning and action to provide permanent remedies for serious abandoned or uncontrolled hazardous waste sites. * CERCLA recognizes that the Federal government can only assume responsibility for remedial response at a limited number of sites representing the greatest public threat. It therefore requires the maintaining of a National Priorities List (NPL), which must be updated at least annually. The NPL is composed primarily of sites which have been ranked on the basis of a standard scoring system which evaluates their potential threat to public health. In addition, each State was allowed to name its highest priority site without regard to the ranking system. ' CERCLA section 104(c)(3) provides that no remedial actions shall be taken unless the State in which the release occurs enters into a contract or cooperative agreement with EPA to provide certain assurances, including cost-sharing. At most sites, the State must pay 10 percent of the costs of remedial action. Preremedial activities (preliminary assessments, site inspections) remedial planning (remedial investigations, feasibility studies, remedial designs) and removals may be funded 100 percent by EPA. For facilities operated by a State or political subdivision at the time of disposal of hazardous substances, the State must pay at least 50 percent of all response costs, including removals and remedial planning previously conducted. MDNR is the designated State agency for identifying and ranking sites which pose a risk to the public or the environment, and -5- ------- BACKGROUND (Continued) performance of remedial investigation, design, and clean up at hazardous waste sites. During our audit, MDNR was actively in- volved in eleven cooperative agreements with EPA. A description of each site has been provided in Exhibit N. ------- TICHENOR, RESLER & EICHE CERTIFIED PUBLIC ACCOUNTANTS THE SUMMIT, SUITE 200 4350 BROWNSBORO ROAD LOUISVILLE. KENTUCKY 40207 (502) 893-0700 Mr. Kenneth D. Hockman U.S. Environmental Protection Agency Divisional Inspector General for Audit Internal Audit Division Office of the Inspector General Washington, D.C. _°N COOPERATIVE AGREEMENTS V005784. V005785, V005787,7005786, V005775. V005776. V005777, y005793. V005836. V005843 AND 7005851~^~ AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES . . ! We have examined the expenditures incurred and claimed by the Michigan Department of Natural Resources for remedial investiga- tions and feasibility studies, community relations programs and assistance,1 operations and maintenance, and technical management assistance where applicable at the Berlin and Farro Industrial Incinerator; Liquid Disposal, Incorporated Industrial Incinera- tor; Rose Township Industrial Waste Dump; Northemaire Plating, Incorporated Industrial Waste Disposal; Cemetery Industrial Waste Dump; Springfield Township Industrial Waste Dump; Spiegelberg/- Rasmussen Landfill; Verona Well Field; Metamora Landfill; Multi- Site I and Multi-Site II cooperative, agreements for July 30, 1982, through February 28, 1986, as detailed in Exhibit A. Our examination was performed in accordance with generally accepted auditing standards and the Standards for Audit of Governmental Organizations, Programs, Activities,and Functions(1981 revi- sion) .Accordingly, our examinationincluded such tests of the accounting records and such other auditing procedures as we con- sidered necessary in the circumstances. The Summary of Costs Claimed (Exhibit A) was prepared on the ba- sis of regulations and criteria established by the Environmental Protection Agency relating to hazardous waste disposal coopera- tive agreement projects pursuant to Public Law 96-510. Accord- ingly, Exhibit A is not intended to present financial position and results of operations in conformity with generally accepted accounting principles. As part of our examination, we determined the allowability of costs claimed under the project in accordance with the provisions of the agreement and applicable Federal regulations. Exhibit A sets forth the costs which we questioned or set aside in this re- gard and includes an explanation of the reasons such costs were questioned or set aside. In our opinion, subject to the effects on Exhibit A of EPA's ul- timate resolution of the questioned or set-aside expenditures referred to in the preceding paragraphs, Exhibit A presents fair- ------- Mr. Kenneth D. Hockman Page 2 ly the costs claimed by the Michigan Department of Natural Re- sources under the Berlin and Farro Industrial Incinerator; Liquid Disposal, Incorporated Industrial Incinerator; Rose Township In- dustrial Waste Dump; Northernaire Plating, Incorporated Indus- trial Waste Disposal; Cemetery Industrial Waste Dump; Springfield Township Industrial Waste Dump; Spiegelberg/Rasmussen Landfill; Verona Well Field; Metamora Landfill; Multi-Site I and Multi-Site II cooperative agreements with EPA on the basis described above. This report is intended for use in connection with the coopera- tive agreements to which it refers and should not be used for any other purpose. TICHENOR, RESLER & EICHE Louisville, Kentucky August 1, 1986 -8- ------- TICHENOR, RESLER & EICHE CERTIFIED PUBLIC ACCOUNTANTS THE SUMMIT, SUITE 200 4350 BROWNSBORO ROAD LOUISVILLE. KENTUCKY 40207 (502) 893-0700 Mr. Kenneth D. Hockman U.S. Environmental Protection Agency Divisional Inspector General for Audit Internal Audit Division Office of the Inspector General Washington, D.C. AUDITORS' REPORT ON INTERNAL ACCOUNTING CONTROL AND COMPLIANCE We have examined the expenditures incurred and claimed by the Michigan Department of Natural Resources (MDNR) related to the uncontrolled hazardous waste disposal for the Berlin and Farro Industrial Incinerator; Liquid Disposal, Incorporated Industrial Incinerator; Rose Township Industrial Waste Dump; Northernaire Plating, Incorporated Industrial Waste Disposal; Cemetery Indus- trial Waste Dump; Springfield Township Industrial Waste Dump; Spiegelberg/Rasmussen Landfill; Verona Well- Field; Metamora Land- fill; Multi-Site I and Multi-Site II cooperative agreements from July 30, 1982 through February 28, 1986, as detailed in Exhibit A. Our examination was performed in accordance with generally accepted auditing standards and the financial and compliance pro- visions of the Standardsfor Audit of Governmental Organizations, Programs, Activities, and Functiolnis"(1981 revision). Solely to. assist us in planning and performing our examination, we made a study and evaluation of the significant internal accounting con- trols of MDNR. For the purpose of this report, we have classifi- ed the significant internal accounting controls into the follow- ing categories: 0 Disbursements Payroll 0 Contractor procurement 0 Contractor performance and billings 0 Cash management (letter of credit system) 0 Property and equipment /• Our study included all of the control systems listed above. That study and evaluation was limited to a preliminary review of the system to obtain an understanding of the control environment and the flow of transactions through the accounting system. Be- cause the audit could be performed more efficiently through addi- tional analysis and substantive audit tests, thus placing very little reliance on the internal accounting control system, our study and evaluation of the internal accounting controls did not extend beyond this preliminary review phase. Accordingly, we do not express an opinion on the system of internal accounting con- trols taken as a whole. Also, our examination, made in accor- dance with the standards mentioned above, would not necessarily disclose all material weaknesses in the system of internal ac- counting control. Our examination did not disclose any condi- -9- ------- V, Mr. Kenneth D. Hockman Page 2 tions, other than those presented in the Findings and Recommen- dations, that we believe to be material weaknesses. As part of our examination, we performed certain tests to deter- mine whether or not Federal funds were expended in accordance with the provisions of the cooperative agreements and applicable Federal laws, regulations, policies, and cost principles. The results of our tests indicated that for the items tested, MDNR complied with the provisions of the cooperative agreements and applicable Federal laws, regulations, policies, and cost princi- ples, except for the conditions described in the Notes to the Exhibits. Further, for the items not tested, based upon our ex- amination referred to above, nothing came to our attention which indicated that MDNR had not complied with the provisions of the cooperative agreements and applicable Federal laws, regulations, policies, and cost principles, beyond the conditions described in the Findings and Recommendations. This report is intended for use in connection with the coopera- tive agreements to which it refers and should not be used for any other purpose. TICHENOR, RESLER & EICHE Louisville, Kentucky August 1, 1986 •10- ------- FINDINGS AND RECOMMENDATIONS 1. STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS IMPROVEMENT The procedures utilized by MDNR to procure contractual services under its Superfund cooperative agreements were not in compliance with all requirements of the Federal regulations (40 CFR Part 33). MDNR's procurement procedures, which are shared with the Michigan Department of Management and Budget (MDMB), were not fully integrated to conform with Federal regulations. Coopera- tive agreement recipients are required to comply with 40 CFR Part 33 as a condition of obtaining EPA funding. MDNR's procurement system did not: 0 Incorporate all required EPA subagreement clauses in, the contracts awarded for contractual services. 0 Include in their bid package distributed to respon- dents, how to obtain a copy of 40 CFR 33.295, Subparts F and G. A. Subagreement Provisions Our review disclosed that subcontracts awarded under the cooperative agreements did not contain several of the required subagreement clauses required by 40 CFR 33.1030, in whole or in part, and did not contain equivalent clauses (see Exhibit M). The clauses referred to described- the minimum assurances, guarantees, indemnity and other, con- tractual requirements necessary to ensure that the Federal government's best interests are protected. MDMB's omission of the model subagreement clauses was dtie . to. its ;use of, a standard contract form which did not contain the required model subagreement clauses. As a result, "the best.interests of the Federal government may not be adequately protected if any contractual claims or disputes arise between; MDNR and the subcontractors retained under its cooperative agree- ments . ' . B. Lack of 40 CFR 33.295. Subparts F and G in Bid Packages MDNR's procurement procedures did not provide adequate pub- lic notice of how to obtain a copy of 40 CFR 33.295, Sub- parts F and G. In addition, these subparts were not inclu- ded in the "bid package" distributed to respondents of the request for qualifications. Federal regulation 40 CFR 33.510(b) states: "The notice of a request for proposals must state how to obtain associated documents, including a copy of §33.295, Subparts F and G, the basis for subagree- ment award, and, if appropriate, EPA Form 5720-4 'Labor Standards Provisions for Federally Assisted Construction Contracts'." The lack of adequate public notice of how to obtain 40 CFR 33.295, Subparts F and G was due to the fact -11- ------- FINDINGS AND RECOMMENDATIONS (Continued) that MDNR's procurement procedures were not fully integrated with applicable Federal regulations. As a result, the best interests of MDNR and EPA may not be adequately protected. CORRECTIVE ACTION TAKEN BY MDNR The Deputy Director of MDNR stated in response to the recom- dations in our draft report: A. The auditors are correct. We have instituted a process to insure that all required EPA subagreement clauses are contained in future contracts. B. ' We are revising our bid package to include all model subagreement clauses to comply with advertising requirements contained in 40 CFR 33. ^ The proposed actions are responsive to the intent of our recommendations and consequently, we make no further recommendation. 2. LACK OF FIXED FEE MONITORING SYSTEM MDNR paid $114 of contractual service costs in excess of the specified contract fixed fee amount. According to 40 GFR 33.235(a), "Recipients must assure that only fair and reasonable profits are paid to contractors awarded subagreements under EPA assistance agreements." The payment of the excess fixed fee was a result of MDNR not monitoring the fixed fee portion of the con- tract. Consequently, MDNR paid the contractor and claimed $114 of fixed fee which was in excess of the fixed fee limitation in the cost-plus-fixed-fee (CPFF) contract with CMC. We noted that MDNR paid CMC $203,597, of which $11,524 related to the fixed fee. MDNR's contract with CMC specified a fixed fee of $11,410. Therefore, the specified contract fixed fee amount was exceeded by $114. MDNR did not have procedures for monitoring limitations within contracts, although they did monitor the total contract limit. As a result, MDNR paid CMC $114 of excess profit and claimed it as an eligible expenditure for EPA participation. Without proper monitoring, all CPFF contracts have the potential for this type of problem. CORRECTIVE ACTION TAKEN BY MDNR We recommended in our draft report that the Regional Admin - trator, Region 5 instruct MDNR to institute a monitoring system for their various Superfund subagreements, to prevent fixed fees -12- ------- FINDINGS AND RECOMMENDATIONS (Continued) from exceeding specified contract amounts. The Deputy Director of HDNR stated in response to the recommendation in our draft report: We have modified the ledger sheets used to document payments to contractors to specify the fixed fee amount in the contract and the amounts paid to date. No further actions on this item are necessary. The proposed action is responsive to the intent of our recommen- dations and consequently, we make no further recommendation. 3. NONEXPENDABLE PERSONAL PROPERTY OMITTED FROM PROPERTY LIST 'I > ; ~ , , . MDNH did not include computer equipment, amounting to $4,935, on 'its property list. In accordance with 40 CFR Part 30, coopera- tive agreement recipients are required to maintain property re- cords that ensure the interest of the United States is adequately reflected and protected. The computer equipment was,purchased by NUS pursuant to a contract between NUS and MDNR for .contractual services. MDNR was waiting to take physical possession before recording the equipment on its property list. MDNR, by omitting the equipment from its property list, failed to ensure that the interest of the Federal government was adequately reflected and protected. In accordance with 40 CFR 30.531, property recipients are re- quired to maintain accurate records to include a complete de- scription of the property and. maintain identification of Federal- ly owned property. MDNR officials stated at the exit conference .that the equipment was not included in its Federally funded pro- perty list because the equipment was still in the possession of the .contractor. MDNR had planned to add the computer "to f the --list " when it was transferred at the end of the projectj - 'Addi- tionally, MDNR stated that the equipment was tracked''in the pro- ject files, including information listed under 40'CFR 30'.531. CORRECTIVE ACTION TAKEN BY MDNR We recommended that in our draft report that the Regional Administrator, Region 5 instruct MDNR to record all applicable Federally funded equipment . on its Federally funded property listing as soon as it is purchased, regardless of who has possession of the equipment. The Deputy Director of MDNR stated in response to the recommendations in our draft report: All Federally funded equipment purchases, with the exception of the noted computer equipment which was in the possession of the contractor, have been recorded on State inventory -13- ------- FINDINGS AND RECOMMENDATIONS (Continued) records in accordance with 40 CFR 30.531. Information on the computer equipment, equivalent to 40 CFR 30.531 was maintained in the project files. Neither the State nor EPA Chicago staff were aware of the requirements to maintain inventory records for equipment which the State does not yet have possession of. We question the appropriateness of this finding. Since the audit, the computer equipment has come into the possession of the State and the relevant information has been entered into the State inventory records. The proposed action is responsive to the intent of our recommen- dation and consequently, we make no further recommendation. 4. FEDERAL CASH TRANSACTIONS REPORTS IMPROPERLY COMPLETED MDNR did not file properly completed Federal Cash Transactions Reports (SF-272). Also, MDNR failed to file all of the required SF-272s. Assistance recipients are required to submit SF-272s quarterly. EPA uses the SF-272s to monitor the recipients' fis- cal activity. Without accurate information, potential problems, such as excess cash being drawn down, could go undetected. MDNR did not file the SF-272 reports consistently, until the quarter ended September 30, 1985 (see Minor Finding - Corrective Action Taken, for a further discussion of this issue). When re- porting on more than one assistance agreement, an addition to the SF-272 called the Federal Cash Transactions Report Continuation SF-272A is required. The SF-272A reports the Federal share of net disbursements, both for the current period and cumulatively, for each assistance agreement covered by the SF-272 for the re- porting period. The cumulative net disbursements for each as- sistance agreement reported by MDNR on SF-272As were incorrect. The cumulative amount for quarters when no SF-272 was submitted was excluded from the cumulative column on SF-272AS submitted, thereby producing an understatement in the cumulative net dis- bursements to date amounts. EPA grants management personnel use the SF-272s to monitor the financial activities of MDNR cooperative agreements. Without these reports being prepared accurately, grants management per- sonnel cannot determine whether funds drawn down were expended in a timely manner, whether there were long delays between the in- curring of expenditures and requests for drawdowns, or whether excess cash had been drawn down. -14- ------- FINDINGS AND RECOMMENDATIONS (Continued) MDNR'S COMMENTS ON FINDING We recommended in our draft report that the Regional Administra- tor, Region 5: A. Instruct MDNR to correct the SF-272As to reflect accurate data; and B. Monitor submission of the SF-272s to determine they are properly completed in the future. The Deputy Director of MDNR stated in response to the recommen- dations in our draft report: The auditors are correct. Federal Cash Transaction Reports were never submitted to EPA until September 30, 1985. We have always assumed these reports were only for advance drawdowns. Our method of billing is on a reimbursement basis only. We also received confirmation from the U.S. Department of Treasury that we didn't need to file this report. This confirmation was submitted to EPA in 1980? a response from them was received. EPA contacted us late in 1985 explaining our non-compliance. In our opinion, the Federal Cash Transaction Reports we are. submitting are accurate. When the new Letter of Credit process was initiated by EPA and the Department of Treasury, all of our balances agreed to their authorization. We have been using that as our reconciling balance. If the . financial management section of EPA disagrees with our reports, please let us know. We would be more than happy to discuss the correct balances. We are currently meeting the requirements of OMB Circular A-102. No other corrective action will be taken without written instructions from EPA. OUR EVALUATION OF MDNR'S COMMENTS It is our belief that this issue should be resolved between MDNR and Region 5. It appears that communication on this matter needs to be improved. RECOMMENDATIONS We recommend that the Regional Administrator, Region 5: A. Coordinate with MDNR to ensure that the SF-272As reflect ac- curate data; and B. Monitor submission of the SF-272s to determine they are pro- perly completed in the future. -15- ------- FINDINGS AND RECOMMENDATIONS (Continued) 5. MINOR FINDINGS - CORRECTIVE ACTION TAKEN AFTER AUDIT A. MDNR did not submit the required quarterly progress reports to the Region 5 Project Officers . The quarterly reports were required by the special conditions of each cooperative agreement. As a result, EPA Region 5 did not have written documentation detailing expenditures, estimates of work com- pleted, cost and time variances, and dates of completion. B. MDNR did not report the theft of Federally funded equipment (a steam generator) that was purchased under the Spiegel- berg/Rasmussen cooperative agreement. In addition, MDNR's Federally funded equipment list, submitted to EPA Region 5 in March 1986, did not reflect the theft of this item, which occurred in January 1986. Recipients must maintain accurate records according to 40 CFR 30.531(a) As a result, MDNR's Federally funded equipment list, submitted to EPA Region 5, was not accurate and EPA was unaware of the theft of this item. C. Several items of equipment, on MDNR's Federally funded equipment list were not listed at cost. Recipients are re- quired by 40 CFR 30.531 to maintain a property management system that "meets the following minimum standards: main- tain accurate records reflecting..;unit acquisition date and cost..." MDNR personnel explained that they entered the cost from purchase requisitions which sometimes differed from acquisition cost. MDNR submitted to EPA Region 5 a Federally funded equipment list that did not reflect equip- ment acquisition cost in all cases. CORRECTIVE ACTION TAKEN BY MDNR The Deputy Director of MDNR stated in response to the recommenda- tions in our draft report: A. Submittal of Quarterly Progress Reports to Region V -- With the exception of one project, MDNR staff have been submitting quarterly reports in a timely manner to the EPA project officer since January of 1986. The one exception has now come into compliance with the requirement and we will continue to comply with the requirement for quarterly report submittal for all cooperative agreements in the future. Reasons for delays in quarterly report submittals for the Spiegelburg/Rasumussen cooperative agreement included extensive, critical and unanticipated activity on the site by PRP's as well as EPA and DNR. Quarterly reports, while not being ignored were considered as lower in priority and benefit to the interests of both -16- ------- FINDINGS AND RECOMMENDATIONS (Continued) the Federal and State government than other site related activities at the time. B. The theft of the steam jenny has been reported to both U.S. EPA and the police. It was an oversight that it had not been deleted from our inventory prior to the audit, but that has now been corrected. C. Two separate State inventory systems existed at the time of the audit. The inventory records reviewed by the auditors contained purchase requisition costs which sometimes differed from the acquisition cost. We have merged the two inventory systems and the State records now document acquisition costs for Federally funded equipment in accordance with 40 CFR 30.531... The proposed action is responsive to the intent of our recommen- dations and consequently, we make no further recommendation. 6. MINOR FINDINGS - CORRECTIVE ACTION TAKEN DURING AUDIT A. MDNR did not submit all Federal Cash Transactions Reports (SF-272) to Region 5 Project Officers, as specified by OMB Circular A-102. MDNR officials were aware of the filing requirements, but felt that they were exempt because MDNR's drawdowns were based on actual disbursements. This limits the ability of EPA Region 5 in monitoring the State's ef- fectiveness of handling Federal funds. OMB Circular A-102 requires the Federal Cash Transactions Report be submitted within 15 working days following the end of each quarter. MDNR officials were aware of the filing requirement; how- ever, the MDNR interpreted OMB Circular A-102 as requiring submission of the SF-272 for advance drawdowns only. Since the quarter ended September 1985, MDNR has submitted the SF-272 on a timely basis. B. MDNR erroneously claimed $11,988 of contractual service costs which were incurred prior to the cooperative agreement approved project period. MDNR paid a contractor $11,988., pursuant to contract number 1525, for contractual service costs incurred through February 23, 1985. However, the co- operative agreement project period began March 10, 1985. MDNR corrected this erroneous charge, which was due to a bookkeeping error, on the Financial Status Report (SF-269) dated September 30, 1985. Consequently, this cost was not claimed on the SF-269 dated February 28, 1986 (our audit cutoff date); however, MDNR drew down $9,506 ($11,988 x 79.3% [the effective Federal reimbursement rate]) for this ineligible contractual expenditure. -17- ------- FINDINGS AND RECOMMENDATIONS (Continued) C. Additionally, MDNR erroneously claimed $9,350 of project costs for Federal participation which were State advance match costs. The SF-269 dated February 28, 1986, properly stated these project costs as "state advance match only". MDNR gave no reason for the excess drawdown of $7,415 ($9,350 x 79.3Z [the effective Federal reimbursement rate]). MDNR officials indicated this had been corrected subsequent to our audit period. MDNR requested an amendment to its cooperative agreement to cover additional contractual services costs related to con- tract number 1525, described, in ,6.B. above. However, when MDNR amended the contract, the amendment was approximately $92,000 less than the amount approved in the cooperative agreement. At the exit conference, MDNR stated that actions were taken in June 1986, to amend the contract. -18- ------- EXHIBITS ------- EXHIBIT A w COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SUMMARY OF FOR THE COST CATEGORY Personnel Fringe Benefits Travel Equipment Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share COSTS CLAIMED. ACCEPTED, QUESTIONED AND SET- AS IDE PERIOD JULY 30, 1982 THROUGH FEBRUARY AMOUNT CLAIMED ACCEPTED QUESTIONED (Note 1) (Note 2) $ 637,943 $ 637,943 $ 177,972 177,972 64,660 64,660 50,703 50,703 48,496 48,496 2,725,046 2,451,943 63,480 69,434 69,434 136,066 136,066 $3,910,320 $3,637,217 $63,480 28, 1986 SET-ASIDE $ 209,623 $209.623 $209,020 NOTES 3, 4 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report (SF-269) through February 28, 1986. Note 2 See Exhibits B thru L for schedules of costs claimed, accepted, questioned and set-aside. Note 3 The $63,480 questioned consists of $11,332 (Exhibit B) and $52,148 (Exhibit H). Note 4 The $209,623 set-aside consists of $6,026 (Exhibit B), and $203,597 (Exhibit C). -19- ------- EXHIBIT B BERLIN AND FARRO INDUSTRIAL INCINERATOR COOPERATIVE AGREEMENT (V005784) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCH|?D"ULE OF COSTS CLAIMED. ACCEPTED. QUESTIONED AND TOR THE PERIOD JULY 30. 1982 THROUGHFEBRUARY 28. 1986 gUESTj H FEI AMOUNT COST CATEGORY CLAIMEDACCEPTEDQUESTIONEDSET-ASIDE NOTES Personnel Fringe Benefits Travel Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share (Note 1) $ 79,508 18,942 5,513 12,509 468,669 950 14,789 $ 79,508 18,942 5,513 12,509 451,311 950 14.789 $600.880 $583.522 $572.096 11,332 $11,332 $11,332 $ - 6,026 2, 3, 4 $6.026 $5^423 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. Note 2 We questioned $11,332 of contractual service costs. MDNR claimed contractual service costs for a remedial measure under the RI/FS phase. According to 40 CFR 30.510, recipients are required to maintain a financial management system that includes "An accurate, current, and complete accounting of all financial transactions for the project..." According to MDNR, this misclassi- fication was due to instructions received from EPA. Consequently, MDNR drew down $11,332 in excess of al- lowable project costs. MDNR claimed $113,318, for soil removal work performed by A-l Disposal, Incorporated, under the RI/FS phase (100Z Federal participation) of the Berlin and Farro cooperative agreement. This expenditure should have been claimed under the remedial measure phase (90% Fed- eral participation) of the cooperative agreement. MDNR personnel believed that EPA, Region 5, had approv- ed this remedial measure contract expenditure to be charged under the RI/FS activity phase. Our subsequent -20- ------- EXHIBIT B (CONTINUED) BERLIN AND FARRO INDUSTRIAL INCINERATOR COOPERATIVE AGREEMENT (V005784) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED. ACCEPTED. QUESTIONED AND SET-ASIDE FOR THE PERIOD JULY 30. 1982 THROUGH FEBRUARY 28, 198T Note 2 (Continued) follow-up with EPA, Region 5, Project Officer revealed that this remedial measure expenditure was not approved for classification under the RI/FS activity phase. Consequently, MDNR claimed $11,332 ($113,318 x 10Z) for Federal participation, in excess of allowable project cost. At the exit conference, we were told by MDNR that this had been corrected subsequent to our audit period. Note 3 We questioned $6,026 of contractual service costs for contract inactivity from October 20 through November 8, 1982. D'Appolonia Waste Isolation, Incorporated (D'Appolonia) billed*MDNR $9,601 for "shut-down" expen- ses pertaining to a period of inactivity on this RI/FS contract. MDNR disallowed $3,575 of a $4,775 line item on one of the two "shut-down" invoices. MDNR and D'Appolonia do not agree on whose fault caused the shut-down and the related charges. MDNR paid and closed the $6,026 balance ($9,601 less $3,575 disal- lowed) as an allowable expense. According to OMB Circular A-87, to be allowable a cost must be "allocable to a particular cost objective to the extent of benefits received by such objective." This contract inactivity was due to MDNR personnel not being on site because of a scheduling conflict, and D'Appolonia not having materials and equipment on site in a timely manner. Consequently, MDNR claimed $6,026 for contractual service cost which did not benefit the project. MNDR'S COMMENTS ON FINDING We recommended in the draft report that the Regional Administrator, Region 5, disallow the $6,026 contract- ual service costs claimed for "shut-down" expenses. The Deputy Director of MDNR stated in response to the recommendation in our draft report: Correction of the $6,026 is currently being submitted to EPA in the form of a "draft" SF-269. We are negotiating with EPA to close out the -21- ------- EXHIBIT B (CONTINUED) BERLIN AND FARRO INDUSTRIAL INCINERATOR COOPERATIVE AGREEMENT (V005784) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED. ACCEPTED, QUESTIONED AND SET-ASIDE FOR THE PERIOD JULY 30, 1982 THROUGH FEBRUARY 28. 198? Note 3 (Continued) Berlin-Farro Industrial Incinerator Project. When EPA makes a decision on what costs are acceptable a final SF-269 can be prepared to correct this misunderstanding. The draft SF-269 should be submitted to EPA by March 20, 1987. OUR EVALUATION OF MDNR'S RESPONSE The proposed action is responsive to the intent of our recommendation in that MDNR has indicated correction of the $6,026 in a "draft" SF-269 submitted to EPA. RECOMMENDATION We recommend that the Regional Administrator, Region 50 follow-up to ensure that the $6,026 adjustment is reflected in" the final SF-269 submitted by MNDR after completion of negotiations to close out this project. Note 4 During our evaluation, we noted that D'Appolonia sub- mitted invoices totaling $430,692 of which MDNR paid and claimed $66,867. MDNR was dissatisfied with the quality of the work performed and believed that D'Appolonia was not in compliance with contractual re- quirements. MDNR decided to withhold payments total- ing $363,825. Subsequent to our fieldwork, this con- tract dispute remained unsettled. MDNR'S COMMENTS ON FINDING The Deputy Director of MDNR stated in response to our draft report: We feel that Note 4 is inappropriate in that we are negotiating a final payment with EPA following a settlement with the contractor. No Federal funds have been claimed by the State beyond the $66,807. OUR EVALUATION OF MDNR'S RESPONSE We believe that Note 4 is appropriate for full disclosure of the events relevant to this cooperative agreement covered in this report. -22- ------- EXHIBIT C LIQUID DISPOSAL. INCORPORATED INDUSTRIAL INCINERATOR COOPERATIVE AGREEMENT (VO05785) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED, ACCEPTED AND SET-ASIDE FOR THE PERIOD MAY 1, 1983 THROUGH FEBRUARY 28, 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share CLAIMED (Note 1) $122,424 37,147 11,941 5,446 228,062 13,530 24,749 ACCEPTED $122,424 37,147 11,941 5,446 24,465 13,530 24.749 $443,299 $239,702 $443,299 $239.702 SET-ASIDE NOTE 203,597 $203,597 $203,597 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. Note 2 We set aside $203,597 of contractual service costs based upon lack of contractor performance. According to OMB Circular A-87, to be allowable a cost must be "allocable to a particular cost objective to the extent of benefits received by such objective." The contrac- tor, CMC, lacked the staff and/or technical expertise to perform the required tasks. The MDNR paid and claimed $203,597 (full contract amount) for RI/FS work that was not complete or acceptable to MDNR. The CMC project manager left CMC when the Remedial Investiga- tion was substantially incomplete. CMC did not replace the project manager with someone of equal ability. The LDI project manager stated that CMC submitted a "draft Remedial Investigation report -which left much to be desired; major revisions are needed on the report." MDNR officials indicated that EPA was fully informed, aware and in concurrence with all actions taken by MDNR regarding contractor performance on the project. Addi- tionally, MDNR officials stated: Substantial delays were incurred due to the EPA's contract laboratory program, which dir- -23- ------- EXHIBIT C (CONTINUED) LIQUID DISPOSAL, INCORPORATED_INDUSTRIAL INCINERATOR COOPERATIVE AGREEMENT (V005785) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED, ACCEPTED AND SET-ASIDE FOR THE PERIOD MAY 1, 1983 THROUGH FEBRUARY 28, 1986 Note 2 (Continued) ectly resulted in increased cost to the pro- ject as well as difficulties in completing an adequate remedial investigation report. Our department was in the process of amending CMC's contract to increase the budget and time period when the decision was made to let the contract expire and have another con- tractor finish the work. To a great extent, this decision was due to changes in contrac- tor staffing and the State's determination that they were no longer capable of complet- ing the work. We are convinced that they adequately performed the work for which they were paid, although it required a great in- vestment of our resources to oversee and en- sure that the work was done. MDNR'S COMMENTS ON FINDING We recommended in our draft report that the Regional Administrator, Region 5, review the matter to determine the amount of work performed by CMC which should be eligible for EPA participation. The Deputy Director of MDNR stated in response to our draft report: This amount of contractor costs was set aside apparently based on a lack of contractor performance. The report pointed out that the contractor lacked the staff and/or technical expertise to perform the required tasks and the draft audit report stated that the DNR paid for work that was not complete or acceptable. It must be pointed out that the contractor was only paid for acceptable work at the rates specified in the contracts. Approximately $44,000 of invoiced charges were not paid because the work was not acceptable. This primarily related to the poor quality RI report submitted by the contractor. The costs to have completed the RI/FS increased over the course of the project; however, these costs were not due to the contractor's ability but instead were primarily due to the substantial delay -24- ------- EXHIBIT C (CONTINUED) LIQUID DISPOSAL. INCORPORATED INDUSTRIAL INCINERATOR COOPERATIVE IQUII GREEJ AGREEMENT (V005785) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED, ACCEPTED AND SET-ASIDE" FOR THE PERIOD MAY 1, 1983 THROUGH FEBRUARY 28. 1986 Note 2 (Continued) in receipt and poor quality of analysis of samples through the national contract lab program. The delay amounting to 6-8 months and the poor quality of the analysis of approximately 119 samples re- sulted in the need to redo the soil sampling and monitoring well sampling program. This included the need to repeat soil borings and some well installations. OUR EVALUATION OF MDNR'S RESPONSE The response provided by MDNR is not adequate for the auditors to resolve this finding nor is the resolution within the scope of our audit. Due to the complexity of the situation, we believe that this matter would best be resolved through negotiations between MDNR and the contractor. RECOMMENDATION We recommend that the Regional Administrator, Region 5, review this matter in detail with MDNR officials to determine the amount of work performed by the con- tractor (CMC) is eligible for EPA participation. -25- ------- EXHIBIT D ROSE TOWNSHIP INDUSTRIAL WASTE DUMP COOPERATIVE AGREEMENT (V005787) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD SEPTEMBER 1, 1983 THROUGH FEBRUARY 28, 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share CLAIMED (Note 1) $ 56,644 15,652 6,301 2,741 552,929 13,084 10,948 $658,299 $658,299 ACCEPTED $ 56,644 15,652 6,301 2,741 552,929 13,084 10,948 $658.299 $658,299 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through Febru- ary 28, 1986. -26- ------- EXHIBIT E NORTHERNAIRE PLATING, INCORPORATED INDUSTRIAL WASTE DISPOSAL COOPERATIVE AGREEMENT (V005786) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD NOVEMBER 1. 1983 THROUGH FEBRUARY 28TT986 AMOUNT COST CATEGORY CLAIMED ACCEPTED NOTE (Note 1) Personnel $ 66,867 $ 66,867 Fringe Benefits 17,104 17,104 Travel 4,285 4,285 Materials and Supplies 4,737 4,737 Contractual Services 276,289 276,289 2 Other Direct Costs 305 305 Indirect Costs 13,949 13.949 Totals $383.536 $383.536 Federal Share $367.214 $367.214 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. • • . - Note 2 MDNR paid and claimed a late payment penalty amounting to $39, assessed on invoices submitted by E.G. .Jordan Company (Jordan), under the cooperative .agreement. According to OMB Circular A-87.^Attachment B, late pay- ment penaltiesareunallowableforFederal partici- pation. This cost being claimed resulted from the co- operative agreement Project Manager's lack of knowledge of Federal requirements regarding late payment pen- alties. -27- ------- EXHIBIT F CEMETERY INDUSTRIAL WASTE DUMP COOPERATIVE AGREEMENT (V005775) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURClS SCHEDULE OF COSTS CLAIMED AND_ACCEPTED FOR THE"PERIOD MAY 21, 1984 THROUGH FEBRUARY 28, 1986 COST CATEGORY Personnel Fringe Benefits Travel Equipment Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals CLAIMED (Note 1) $ 50,805 12,833 5,927 18,483 4,724 237,436 4,426 11,662 $346.296 AMOUNT ACCEPTED $ 50,805 12,833 5,927 18,483 4,724 237,436 4,426 11.662 $346,296 Federal Share $332,535 $332,535 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. -28- ------- EXHIBIT G SPRINGFIELD TOWNSHIP INDUSTRIAL WASTE DUMP COOPERATIVE AGREE- MENT (V005776) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THETERIOD MAY 21. 1984 THROUGH FEBRUARY 28. 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Equipment Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share CLAIMED (Note 1) $ 58,440 16,676 5,102 348 6,036 211,310 15,121 13,533 $326.566 $326,566 ACCEPTED $ 58,440 16,676 5,102 348 6,036 211,310 15,121 13.533 $326,566 $326,566 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. -29- ------- EXHIBIT H SPIEGELBERG/RASMUSSEN LANDFILL COOPERATIVE AGREEMENT (V005777) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED. ACCEPTED AND QUESTIONED FOR THE PERIOD MAY 21, 198A THROUGH FEBRUARY 28,"T9"86 COST CATEGORY Personnel Fringe Benefits Travel Equipment Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share AMOUNT CLAIMED (Note 1) $ 98,176 29,757 11,422 31,556 7,614 326,082 12,879 22,474 ACCEPTED $ 98,176 29,757 11,422 31,556 7,614 273,934 12,879 22.474 $539,960 $487,812 $539,960 $487.812 QUESTIONED $ - 52,148 NOTE $52,148 $52,148 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. Note 2 We questioned $52,148 of contractual service cost. MDNR erroneously claimed $52,148 of ineligible contract expenditures. According to 40 CFR 30.510, recipients are required to maintain a financial management system that includes "An accurate, current, and complete ac- counting of all financial transactions for the proj- ect..." Due to a bookkeeping error, MDNR claimed this ineligible contractual service cost by mistake. Conse- quently, ineligible contractual service costs were claimed under the cooperative agreement. During a program management assistance review in January 1986, EPA Headquarters determined that the contract with Mid-America Corporation for the building of a fence around the Spiegelberg/Rasmussen site did not contain all necessary 40 CFR Part 33 provisions. Due to the problems involved in correcting the Mid-America Corporation contract to conform to 40 CFR part 33, MDNR decided to pay for the fence construction out of State funds, instead of correcting the contract to conform with 40 CFR Part 33 requirements. Due to a bookkeeping error, the $52,148 paid pursuant to this contract was claimed on the SF-269 dated _30- ------- EXHIBIT H (CONTINUED) SPIEGELBERG/RASMUSSEN LANDFILL COOPERATIVE AGREEMENT (V005777) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED, ACCEPTED AND QUESTIONED FOR THE PERIOD MAY 21. 1984 THROUGH FEBRUARY 28. 1986 Note 2 (Continued) February 28, 1986. According to 40 CFR 30.510, reci- f pients are required to maintain a financial management f system that includes "An accurate, current, and com- plete accounting of all financial transactions for the project...." Consequently, MDNR claimed contractual service cost under the cooperative agreement which was not eligible for EPA participation. CORRECTIVE ACTION TAKEN BY MDNR The Deputy Director of MDNR stated in response to our draft report: The cost that was claimed for the fence construct- ed at Spiegelberg/Rasmussen was not done in error. These costs were charged properly according to 40 CFR 30.510. When it was learned that the fence would not be an acceptable cost, we corrected our billings and Form SF-269. All corrective actions have been taken. The corrective action taken is responsive to the intent of our recommendation and, consequently, we make no further recommendations. -31- ------- EXHIBIT I VERONA WELL FIELD COOPERATIVE AGREEMENT (V005793) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD OCTOBER 1, 1984 THROUGH FEBRUARY 28. 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Equipment Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals Federal Share CLAIMED (Note 1) $33,374 9,123 3,433 316 1,306 41,543 218 7,789 $97,102 $87,392 ACCEPTED $33,374 9,123 3,433 316 1,306 41,543 218 7,789 $97,102 $87,392 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. . -32- ------- EXHIBIT J METAMORA LANDFILL COOPERATIVE AGREEMENT (V005836) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE QF CQSTS CLAIMED AND ACCEPTED FOR THE PERIOD MARCH 10, 1985 THROUGH FEBRUARY 28, 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Contractual Services Other Direct Costs Indirect Costs Totals Federal Share Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. CLAIMED (Note 1) $ 6,476 2,061 174 382,638 8,920 -. 1,445 \ $401,714 \ $ 10,790 / ACCEPTED $ 6,476 2,061 174 382,638 8,920 1,445 $401,714 $ 10,790 -33- ------- EXHIBIT K MULTI-SITE COOPERATIVE AGREEMENT (V005843) AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE ."PERIOD APRIL 15. 1985 THROUGH FEBRUARY 28. 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Materials and Supplies Contractual Services Indirect Costs Totals CLAIMED (Note 1) $51,537 14,485 6,268 2,721 69 11.535 $86,615 ACCEPTED $51,537 14,485 6,268 2,721 69 11.535 $86.615 Federal Share $86.615 $86,615 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. -34- ------- EXHIBIT L MULTI-SITE COOPERATIVE AGREEMENT (V005851) AWARDED~TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF COSTS CLAIMED AND ACCEPTED FOR THE PERIOD JUNE 15. 1985 THROUGH FEBRUARY 28, 1986 AMOUNT COST CATEGORY Personnel Fringe Benefits Travel Materials and Supplies Contractual Services Other Direct Costs Indirect Costs Totals CLAIMED (Note 1) $13,692 A,192 4,294 662 19 1 3,193 $26,053 ACCEPTED $13,692 4,192 4,294 662 19 1 3.193 $26,053 Federal Share $26.053 $26.053 Note 1 The amounts claimed represent expenditures reported on the Financial Status Report, (SF-269) through February 28, 1986. -35- ------- EXHIBIT M COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES SCHEDULE OF MODEL SUBAGREEMENT CLAUSES OMITTED OR NOT EQUIVALENT FOR THE SUBAGREEMENTS Cooperative* Clause; Agreement Supersession NO Privity of Subagreement NO Changes NO Termination NO Remedies NO Audit; Access to Records XX Covenant Against Contingent Fees NO Gratuities NO Responsibility of Contractor NO Final Payment NO NO - Subagreement did not contain clause. XX - Clause was not equivalent to Federal requirements. All subagreements awarded under EPA cooperative agreements contained identical clauses as a result of being developed from a standard contract format. Therefore, we have iden- tified the noncompliance with 40 CFR 33.1030 (model sub- agreement clauses) in total rather than by individual sub- agreement . -36- ------- EXHIBIT N DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES Berlin and Farro Industrial Incinerator (V005784) The Berlin and Farro Industrial Incinerator site is a hazardous waste site located near the town of Swartz Creek, Gaines Town- ship, Genesee County, Michigan. This site was used as an indus- trial waste dump from 1971 until 1980, and created a threat to the public water supplies. Additionally, a landfill, operated on the site's west end, was used for the disposal of drums contain- ing waste liquids. To assist in the clean up and study of the site, EPA awarded cooperative agreement number V005784 to MDNR for remedial measures and a remedial investigation and feasibility study (RI/FS). Cooperative agreement number V005784 was awarded under CERCLA on July 30, 1982, providing 90 percent Federal participation for remedial measures and 100 percent Federal participation for RI/FS. As of February 28, 1986, EPA was participating up to a maximum of $1,033,844. The State was providing advance match funds of $114,871 to be applied toward subsequent State matches for remedial measures at the site. On March 31, 1986, the project was approximately 50 percent com- plete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Liquid Disposal, IncorporatedIndustrial Incinerator (V005785) The Liquid Disposal, Incorporated Industrial Incinerator site (LDI) is a hazardous waste site located near Utica, Shelby Town- ship, Macomb County, Michigan. LDI was closed by court order on January 13, 1982. In April 1982 LDI was forced into involuntary bankruptcy by a creditor as a result of. an industrial accident which led to the death of two workers. The site contained stor- age tanks, and over 1,000 barrels with unknown amounts of liquids and/or sludges. Because of the threat to public water supplies and the environment, EPA awarded a cooperative agreement to per- form a RI/FS and a community relations program. Cooperative agreement number V005785 was awarded to MDNR under CERCLA on April 22, 1983, providing 100 percent Federal participation with a maximum Federal share of $466,703, as of February 28, 1986. On March 31, 1986, the project was approximately 20 percent com- plete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through Febru- ary 28, 1986.) Rose Township Industrial Waste Dump V005787) The Rose Township Industrial Waste Dump is a hazardous waste site located on private property off the Demode Road in Rose Township, -37- ------- EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES Oakland County, Michigan. This 12 acre open field had been used for the disposal of drums containing both liquid and solid indus- trial wastes between 1966 and 1968 and possibly on an intermit- tent basis until 1971. During that period, an unknown number of liquid wastes were emptied and approximately 5,000 barrels were deposited at the site. Being surrounded on at least three sides by low lying marshes and ponds, the site was deemed a threat to public water supplies and the environment. Cooperative agreement number V005787 was awarded to MDNR under CERCLA on August 24, 1983, providing 100 percent Federal participation for a RI/FS, with a maximum Federal share of $756,400, as of February 28, 1986. On March 31, 1986, the project was approximately 80 per- cent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Northernaire Plating, Incorporated Industrial Waste Disposal (V005786)' Northernaire Plating, Incorporated Industrial Waste Disposal is a hazardous waste site located at 1002 Sixth Street, Cadillac, Wex- ford County, Michigan. This 12.75 acre site is situated in an area of both industrial and residential properties. Because pro- cessed waste waters leaked into the ground from 1971 to 1978, there was a threat to the public and industrial water supplies which developed from the aquifer underlying the site. Cooper- ative agreement number V005786 was awarded to MDNR under CERCLA on September 26, 1983, providing 100 percent Federal partici- pation for a RI/FS. As of February 28, 1986, EPA was participat- ing up to a maximum of $633,100. The State was providing advance match funds of $190,495 to be applied toward subsequent state matches for remedial measures at the site. As of March 31, 1986, the project was approximately 65 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Cemetery Industrial Waste Dump (V005775) Cemetery Industrial Waste Dump is a hazardous waste site located on North Milford Road, Rose Township, Oakland County, Michigan. Before being classified as rural residential, the site was a gravel pit. Approximately 300 to 600 barrels of industrial wastes were dumped into the gravel pit during the late 1960's and early 1970's. The area was then backfilled, leaving it appearing innocuous. However, a threat to the public water supply and the environment developed from the aquifer underlying the site. Co- operative agreement number V005775 was awarded to MDNR under -38- ------- EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES CERCLA on May 24, 1984, for project costs beginning May 21, 1984, providing 100 percent Federal participation for a RI/FS and a community relations program. As of February 28, 1986, EPA was participating up to a maximum of $589,584. The State was providing advance match funds of $1,538,430 to be applied toward subsequent remedial measures at the site. On March 31, 1986, the project was approximately 44 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Springfield Township Industrial Waste Dump (V005776) The Springfield Township Industrial Waste Dump is a hazardous waste site located off Schindler Road, Springfield Township, Oakland County, Michigan. This four acre parcel of land is be- lieved to have been used for the dumping of industrial wastes between 1966 and 1968. During that period, an unknown number of tank trucks of liquid wastes were emptied and approximately 1,500 drums were deposited at the site, causing a threat to the public and the environment. Cooperative agreement number V005776 was awarded to MDNR under CERCLA on May 24, 1984, for project costs beginning May 21, 1984, providing 100 percent Federal participa- tion for a RI/FS and a community relations program with a maximum Federal share of $612,450, as of February 28, 1986. As of March 31, 1986, the project was approximately 50 percent com- plete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Spiegelberg/Rasmussen Landfill (V005777) The Spiegelberg/Rasmussen Landfill is a hazardous waste site located on Spicer Road, Green Oak Township, Livingston County, Michigan. As early as 1966 and continuing until 1977, this site was being used for the disposal of solid and liquid domestic and industrial waste materials. Due to the threat to the public, the water supply, and the environment, EPA awarded a cooperative agreement to perform a RI/FS. Cooperative agreement number V005777 was awarded to MDNR under CERCLA on May 30, 1984, for project costs beginning May 21, 1984, providing 100 percent Fed- eral participation with a maximum Federal share of $1,247,024, as of February 28, 1986. As of March 31, 1986, the project was ap- proximately 60 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) -39- ------- EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED_ TO THE MICHIGAN DEPARTMENT OF NATURAL- RESOURCES Verona Well Field (V005793) The Verona Well Field is located one half mile northeast of Bat- tle Creek, Pennfield Township, Calhoun County, Michigan. Incor- porating property on both sides of the Battle Creek River, the well field provides potable water to approximately 100,000 resi- dents of the Battle Creek area, numerous major food processing industries, and a variety of other commercial and industrial establishments. Because of the threat to the,public and indus- trial water supplies which developed from - the contaminated aquifer underlying the site, EPA awarded a cooperative agreement to perform well operation and maintenance work. Cooperative agreement number V005793 was awarded to MDNR under CERCLA on September 29, 1984, providing 90 percent Federal and 10 percent State participation. As of February 28, 1986, EPA and the State were participating up to a maximum of $444,123 and $49,347, respectively. As of March 31, 1986, the project was approxi- mately 20 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Metamora Landfill (V005836) The Metamora Landfill is a hazardous waste site located on Dryden Road, Metamora Township, Lapeer County, Michigan. From 1966 un- til 1980, approximately fifty acres of the eighty acre site was used as a general refuse landfill, including areas of industrial and chemical waste disposal. In addition, illegal demolition material disposal occurred on the site. Waste disposal activ- ities at the landfill have ceased; however, gravel mining contin- ues immediately south of the study area. Because of the threat . ,. to public water supplies and the environment, ;.EPAjawarded a-co- operative agreement to perform a RI/FS and a community relations program. Cooperative agreement number V005836 was awarded to MDNR under CERCLA on April 18, 1985, for project costs beginning March 10, 1985, providing 100 percent Federal participation. As of February 28, 1986, EPA was participating up to a maximum of $899,000. The State was providing advance match funds of $488,705 to be applied toward subsequent remedial measures at the site. As of March 31, 1986, the project was approximately 10 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Multi-Site I (V005843) Cooperative agreement number V005483 was awarded to MDNR under -40- ------- EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES CERCLA on May 30, 1985, for project costs beginning April 15, 1985. This cooperative agreement provides for 100 percent Feder- al participation in technical management assistance and community relations coordinative lead activities for eight EPA-lead CERCLA sites with a maximum Federal share of $335,460. 1. Burrows Sanitation and Sludge Disposal The Burrows Sanitation and. Sludge Disposal hazardous waste site is located in Hartford Township, VanBuren County, Michigan. Because these four acres of land were operated as a disposal site from 1970 to 1977, there was a threat to public water supplies and the environment. To assist with this problem, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 35 percent complete. (All projects were evaluated by recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) 2. Charlevoix Municipal Well Field The Charlevoix Municipal Well Field is a hazardous waste site located In Charlevoix County, Charlevoix, Michigan. Local residents, tourists, and commercial industries are served by a water system from an aquifer contaminated by an unspecified source underlying the site. To assist with this problem, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 52 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) 3. Clare Municipal Well Field The Clare Municipal Well Field is a hazardous waste site located in the city of Clare, Clare County, Michigan. Be- cause of contaminated soils on properties northwest of the municipal well field, there existed a contamination in the Clare aquifer and a threat to the public and industrial wa- ter supplies. To assist with this problem, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 10 percent complete. (All proj- ects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) -41- ------- EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES 4. Forest Waste Disposal Forest Waste Disposal is a hazardous waste site located at 8359 East Farrand Road, Forest Township, Genesee County, Michigan. This 112 acre landfill and adjacent system of open and uncovered waste lagoons was operated from 1972 to 1978 for solid and liquid industrial waste disposals. Be- cause of the threat to public water supplies and the en- vironment, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 70 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) 5. G & H Landfill G & H Landfill is a hazardous waste site located at Ryan and 23 Mile Roads, Utica Township, Macomb County, Michigan. Operating as a liquid industrial waste disposal site from the late 1950's to 1966 and as a refuse landfill from 1967 to 1974, this 40 acre site was deemed a threat to the public water supplies and the environment. To assist with this problem, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 75 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) 6. Petoskey Municipal Well Field The Petoskey Municipal Well Field is a hazardous waste site located in the city of Petoskey, Emmet County, Michigan. A threat to the public and industrial water supplies developed from the aquifer underlying the site, because industrial wastes were disposed within 600 feet of Petoskey's water supply. To assist with this problem, EPA awarded a cooper- ative agreement to provide technical management and commun- ity relations assistance. As of March 31, 1986, the project was approximately six percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) 7. Tar Lake Disposal Tar Lake Disposal is a hazardous waste site located east of -42- ------- . EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES K L Avenue Landfill K L Avenue Landfill is a hazardous waste site located in Oshtemo Township, west of the City of Kalamazoo, Kalamazoo County, Michigan. Located on 87 acres, this site is a for- mer sanitary landfill used in the 1960's by the township and in 1968 by the county. In 1979, volatile organic contamina- tion was discovered in ten domestic wells, and the K L Ave- nue Landfill was closed. To assist with this water con- tamination problem, EPA awarded a cooperative agreement to provide technical management and community relations assis- tance. As*of March 31, 1986, the project was approximately five percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) Packaging Corporation of America Packaging Corporation of America is a hazardous waste site located just east of Manistee Lake, Filer City, Manistee .County, Michigan. From the 1950's until 1974, Packaging Corporation of America discharged billions of gallons of process wastes into seepage lagoons near Manistee Lake. Investigations have documented ground water contamination from the lagoons moving toward Manistee Lake. Because a threat to water supplies developed from the aquifer underly- ing the site, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 22 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28,1986.) Novaco Industries Novaco Industries is a hazardous waste site located on Summerfield Road, Bedford Township, Monroe County, Michigan. This 2.6 acre site is surrounded by mostly residential and agricultural properties. In June 1979, this metal plating company discovered a leak in a chromic acid tank. Within a few weeks, chromium contamination was detected in two ground wells. Within a year, a residential well further downgradi- ent was contaminated. All three wells were replaced by .Novaco Industries. Because a threat to water supplies de- veloped from the aquifer underlying the site, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the -45- ------- EXHIBIT N (CONTINUED) DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE AGREEMENTS AWARDED TO THE MICHIGAN DEPARTMENT OF NATURAL RESOURCES project was approximately 90 percent complete. (All pro- jects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) 7. Berlin and Farro Industrial Incinerator Berlin and Farro Industrial Incinerator is a hazardous waste site located at 8322 South Morrish .Road, Swartz Creek, Genesee County, Michigan. In 1971, this 40 acre site was permitted to operate as a liquid waste incinerator; however, liquid-filled drums were discovered in .1973 in violation of the landfill permit. In addition, unauthorized storage la- goons, ponds of liquid wastes, and thousands of drums con- taining liquid and solid wastes were found. Waste disposal continued at the site until 1979. In 1980, Berlin and Farro Industrial Incinerator filed for Chapter 11 Bankruptcy. Title to a portion of the site was deeded to the State in 1980 for nonpayment of back taxes. Title to the remainder of the site was deeded to the State in 1981 for the same reason. In addition to a previous cooperative agreement awarded to MDNR covering remedial measures and a RI/FS at the site, EPA awarded a cooperative agreement to provide technical management and community relations assistance. As of March 31, 1986, the project was approximately 20 percent complete. (All projects were evaluated by the recipient as of March 31, 1986. No such project evaluation exists through February 28, 1986.) -46- ------- - f 4 '„ *- * I £* i APPENDIX Auditors' Note: The Deputy Director of MDNR included various documents as Attachments with the response to the draft audit report. The attachments were too voluminous for inclusion in this report. The entire response, including the attachments, is available for review in the Office of Inspector General, Internal Audit Division, in Washington, D.C. ' f \ I ! I I ------- r STATE OF MICHIGAN NATURAL HESOUNCES COMMISSION X *S|*,' THOMAS j ANDERSON 1;—-y AftLENE J FlUMARTV ,f -• f- f GUYFR •»P**yl HAMMER ""•" MYEWS JAMES J. BLANCHARD. Governor DAVID o OLSON DEPARTMENT OF NATURAL RESOURCES STEVENS T MASON BUILDING BO* 30076 LANSING Ml 46909 Gordon E. Guyer, Director March 18, 1987 Mr. Kenneth D. Hockman Divisional Inspector General for Audit Office of the Inspector General United States Environmental Protection Agency Washington, D.C. 20460 Dear Mr. Hockman: Thank you for the opportunity to review the draft Superfund audit report. I also appreciate the review time extension that was given us by Ms. Karpf. I have attached our comments on the draft audit report for your information and consideration. As a result of your audit, we have taken actions to correct several deficiencies within the Superfund program area. I do have concerns regarding several of your findings, especially those involving the $203,597 in set aside costs and $52,1A8 in questioned costs contained in Exhibits C and H, respectively. For the reasons stated in the attachments, I feel strongly that neither the set aside costs nor the questioned costs are appropriate findings and ask that they be deleted from the report. Again, thank you for the opportunity to provide these comments. Sincerely, Delbert Rector Deputy Director 517-373-7917 Attachments cc: Thomas Mateer, U.S. EPA Ivars Antens, U.S. EPA Gary Guenther, MDNR Richard Johns, MDNR Timothy Trasky, MDNR Marion Hart, MDNR Robert Nowinski, MDNR Andrew Hogarth, MDNR Peter Ollila, MDNR R. Willson, MDNR ^026 -47- "86 ...;:-.., ------- . t Michigan Department of Natural Resources Comments on the Draft Report of Interim Audit of Michigan Department of Natural Resources* Administration of its Superfund Cooperative Agreements with EPA under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 Period Covered: July 30, 1982 through February 28, 1986 Findings and Recommendations 1. State Superfund Procurement System A. The auditors are correct. We have instituted a process to insure that all required EPA subagrcement clauses are contained in future contracts. B. We are revising our bid package to Include all model subagreement clauses to comply with advertising requirements contained in 40 CFR 33. 2. Lack of Fixed Fee Monitoring System We have modified the ledger sheets used to document payments to contractors to specify the fixed fee amount in the contract and the amounts paid to date. No further actions on this item are necessary. 3. Nonexpendable Personal Property Omitted from Property List All Federally funded equipment purchases, with the exception of the noted computer equipment which was in the possession of the contractor, have been recorded on State inventory records in accordance with 40 CFR 30.531. Information on the computer equipment, equivalent to 40 CFR 30.531 was maintained in the project files. Neither the State nor EPA Chicago staff were aware of the requirements to maintain Inventory records for equipment which the State does not yet have possession of. We question the appropriateness of this finding. Since the audit, the computer equipment has come into the possession of the State and the relevant information has been entered into the State inventory records. 4. Federal Cash Transaction Reports The auditors are correct. Federal Cash Transaction Reports were never submitted to EPA until September 30, 1985. We have always assumed these reports were only for advance drawdowns. Our method of billing is on a reimbursement basis only. We also received confirmation from the U.S. Department of Treasury that we didn't need to file this report. This confirmation was submitted to EPA in 1980; a response from them was never received. EPA contacted us late in 1985 explaining our non-compliance. -48- ------- r In our opinion, Che Federal Cash Transaction Reports we are submitting are accurate. When the new Letter of Credit process was initiated by EPA and the Department of Treasury, all of our balances agreed to their authorization. We have been using that as our reconciling balance. If the financial management section of EPA disagrees with our reports, please let us know. We would be more than happy to discuss the correct balances. We are currently meeting the require- ments of OMB Circular A-102. No other corrective action will be taken without written instructions from EPA. 5. Minor Findings - Requiring Corrective Action A. Submittal of Quarterly Progress Reports to Region V — With the exception of one project, MDNR staff have been submitting quarterly reports in a timely manner to the EPA project officer since January of 1986. The one exception has now come into compliance with the requirement and we will continue to comply with the requirement for quarterly report submittal for all cooperative agreements in the future. Reasons for delays in quarterly report submittals for the Spiegelberg/Rasmussen cooperative agreement included extensive, critical and unantici- pated activity on the site by PRP's as well as EPA and DNR. Quarterly reports, while not being ignored were considered as lower in priority and benefit to the interests of both the Federal and State government, than other site related activities at the time. B. The theft of the steam jenny has been reported to both U.S. EPA and the police. Attached are memos to project files regarding the theft as well as a copy of the police report. It was an oversight that it had not been deleted from our inventory prior to the audit, but that has now been corrected. C. Two separate State inventory systems existed at the time of the audit. The inventory records reviewed by the auditors contained purchase requisition costs which sometimes differed from the acquisition cost. We have merged the two inventory systems and the State records now document acquisition costs for Federally funded equipment in accordance wich 40 CFR 30.531. 6. Minor Findings - Corrective Action Taken A. No comment. B. Erroneous Claim of $11,988. We agree with the auditors. Correc- tive action was taken when the error was noted on the Financial Status Report (SF 269). C. No comment. Exhibits Exhibit B. Berlin & Farro, $6,026 Set Aside. -49- ------- c Correction of the $6,026 is currently being submitted to EPA in the form of a "draft" SF-269. We are negotiating with EPA to close out the Berlin-Farro Industrial Incinerator Project. When EPA makes a decision on what costs are acceptable a final SF-269 can be prepared to correct this misunderstand- ing. The draft SF-269 should be submitted to EPA by March 20, 1987. We feel that Note A is inappropriate in that we are negotiating a final payment with EPA following a settlement with the contractor. No Federal funds have been claimed by the State beyond the $66,807. Exhibit C. Liquid Disposal. $203,597 Set Aside. This amount of contractor costs was set aside apparently based on a lack of contractor performance. The report pointed out that the contractor lacked the staff and/or technical expertise to perform the required tasks and the draft audit report stated that the DNR paid for work that was not complete or acceptable. It must be pointed out that the contractor was only paid for acceptable work at the rates specified in the contracts. Approximately $44,000 of invoiced charges were not, paid because the work was not acceptable. This primarily related to the poor quality RI report submitted by the contractor. At the time that the work performed adequately by the contractor was done, they did have staff capable of performing the required tasks. It'was only after loss of that staff and inadequate staff replacements took place, that it was concluded that there was inadequate expertise available to complete the RI/FS. The costs to have completed the RI/FS increased over the course of the project; however, these costs were not due to the contractor's ability but instead were primarily due to the substantial delay in receipt and poor quality of analysis of samples through the national contract lab program. The delay amounting to 6-8 months and the poor quality of the analysis of approximately 119 samples resulted In the need to redo the soil sampling and monitoring well sampling program. This included the need to repeat soil borings and some well installations. The contractor involved was charged with reviewing the quality of laboratory analysis data, which was directly complicated by late receipt of such poor quality data. The cost for this task increased as a direct result of the poor performance of EPA's contract laboratories. Our Department was in the process of amending CMC's contract to Increase the budget and time period for project completion when the decision was made for reasons stated above to let the contract expire and have someone else complete the work. We are convinced that they adequately performed the work for which they were paid. As stated before, inadequate work and products to the cost of $44,000 were not paid for. Throughout the decision making regarding CMC's contract, the U.S. EPA project manager and project officer were Informed and in agreement with actions taken. Attached are copies of communications with and from them which indicate this. In addition, U.S. EPA granted the award of an amend- ment to the LOI cooperative agreement to cover cost increases to complete the work begun by CMC. This implies that they accepted the costs already paid to CMC. -50- ------- r Exhibit IK Spiegelberg/Rasmussen Landfill, $52,148, Questioned Costs. The cost that was claimed for the fence constructed at Splegelberg/Rasoussen was not done in error. These costs were charged properly according to 40 CFR 30.510. ;,When it was learned that the fence would not be an acceptable cost, we corrected our .bill-ings and,.Form SF-269. All corrective actions have been completed. *&>:,. '.-'• '- ,.; -51- , \ r-1\ /5 — ,-- «. ~ 13 ------- |