< ™ ™ i USB; UNITED STATES ENVIRONMENTAL PROTECTION AGENCY OFFICE OF INSPECTOR GENERAL SOUTHERN DIVISION, SUITE 278 1375 PEACHTREE STREET, N.E. ATLANTA, GEORGIA 30309 (404) 347-3623 AUDIT (404) 347-2398 INVESTIGATIONS REGIONAL. OFFICE: 144S ROSS AVENUE, SUITE 1200 DALLAS, TEXAS 75202-2733 (214) 6S54C21 AUDIT (214) 655-W10 INVESTIGATIONS March 13, 1989 MEMORANDUM Subject: From: To: Audit Report No. E5cGN8-04-0329-9300028, Costs Claimed Under Cooperative Agreement VO04477-02 by the Department of Health and Environmental Control, Columbia, South Carolina D. Michael Bea Acting Divisional Inspector General fozf Audit Greer C. Tidwell Regional Administrator Region IV SCOPE AND OBJECTIVES We have performed an audit of Cooperative Agreement No. V004477-02 between the EPA and the South Carolina Department of Health and Environmental Control (DHEC). Our objective was to determine if costs claimed were reasonable, allowable, and allocable under the terms of the agreement and applicable EPA regulations. The cost principles contained in OMB Circular A-87 were used to determine the acceptability of the cost claimed. To accomplish our objective, we examined the project files for fiscal years 1986 and 1987, files generated during our previous audit (see Audit Report No. E5cG4-04-0100-70767, February 19, 1987), and DHEC's Finance and Accounting Records. Our examination was made in accordance with the Standards for Audit of Governmental Organizations, Programs. Activities and Functions, issued by the Comptroller General of the United States, and accordingly included such tests of the accounting records and other auditing procedures as we considered necessary in the circum- stances. We did not specifically review the DHEC's system of internal controls; however, nothing came to our attention that indicated noncompliance with respect to the items not reviewed. Field work was accomplished during the week of November 14, 1988 and covered the period of performance from June 28, 1982 through December 31, 1987. WASHINGTON. U. 2MB ------- SUMMARY OF FINDINGS In our opinion, subject to the effects of EPA's ultimate resolution of the questionable expenditures summarized below and presented in Exhibit A, the costs claimed fairly present the financial informa- tion in accordance with the financial provisions of the cooperative agreement and applicable EPA regulations. The results of audit are: CLAIMED Total Cost SI.259.735 ACCEPTED $889.101 QUESTIONED $370.634 FINDINGS AND RECOMMENDATION Our review disclosed the DHEC claimed excessive and unsupported costs totaling $370,634 as discussed in the following paragraphst 1• Contractor Change Order. a. Finding. The DHEC claimed $249,367 more for change order costs than Region IV had authorized in the final determination letter. Region IV limited the Federal portion of the contractor's proposed change orders to $54,000 based on EPA's technical evaluation of the contractor's claim. The Region amended the Cooperative Agreement adding $60,000, of which EPA would fund 90 percent. However, the DHEC claimed $309,367. Under EPA's general grant regulations 40 CFR 31.70(c), EPA'8 notice of decision is final after 30 days unless the grantee requested a review. The DHEC did not appeal the final determination letter, therefore, the amount in excess of the $54,000 EPA agreed to pay represents an overpayment and should be recovered (see Site History for further details}. b. Grantee'a Comments. The Commissioner, South Carolina Department of Health and Environmental Control, provided the following comments (the Commissioner's complete comments are attached to this report): "The contractor submitted a request for change orders in the amount of $542,302 which were dismissed by the State. The contractor then appealed to the State Procurement Officer, who rendered no decision. The State was then forced to negotiate a settlement or face a lengthy court battle with the contractor. The decision was made to negotiate a settlement and $309,367 in change order cost was approved. Concurrence was sought and obtained from the U.S. EPA Region IV Regional Administrator in the settlement. It was agreed that although EPA would only ------- fund an additional $54,000 of the $209,367 Federal portion of the payment, DHEC had additional unclaimed costs of approximately $150,000 to make up the dif- ference. The State has now claimed $140,006 in addition- al costs, all of which has been disallowed by the auditors [see following finding]. "Interim Audit No. E5CM4-04-0283-50360 was subsequently conducted and $275,018 of the amount negotiated by the parties was accepted, subject to technical review by EPA. EPA agreed to support only $54,000 of the payment as stated above. "The State did not appeal the decision at the time because it was felt an appeal would jeopardize it's position in the court proceedings against the generators which was in process." c. Additional Audit Comments. On September 27, 1985, the Region amended the Cooperative Agreement increasing the Federal portion by $54,000 (90% of $60,000). The State disregarded this- amendment and withdrew from their letter-of-credit an additional sum of $209,367 to complete payment of the negotiated settlement with the contractor. The $150,000 of unclaimed cost the State indicates would offset the over-withdrawal is not supported. The State has recorded .an additional $9,500 of incurred cost since the interim audit of this cooperative agreement. The disallowed costs of $140,006 the state refers to are discussed in the following findings. 2. Labor Coats. a. Finding. The DHEC claimed $121,267 as State matching costs for salary, fringe benefits, and indirect coats. However, the costs were not properly supported by the State's method of labor coat accounting. To arrive at the $121,267, the DHEC subtracted budgeted Federal funding for Bluff Road labor costs in the State'a Financial Management System (FMS) from labor costs charged to Bluff Road as recorded in the State's Personnel Coat and Accountability System (PCAS). However, the budgeted FMS and the actual PCAS are not reconciled by the State. Therefore, the $121,267 merely represents labor costs incurred on Bluff Road in excess of what was originally budgeted for Federal funding. Since PCAS is not reconciled to FMS, the State cannot establish the $121,267 was not already paid by some other Federal grant. Federal funding may have already occurred because the State uses the FMS as its official accounting record for preparing the Financial Status Report. Thus, Federal grants are charged coat baaed on budgeted figures rather than actual. Without reconciling the two accounting systems, the State cannot determine the actual labor costs paid with State funds. ------- b. Grantee's Comments. The Commissioner, South Carolina Department of Health and Environmental Control, provided the following comments: "The State utilizes the Personnel Cost Accounting System PCAS to account for all direct labor costs incurred in its Environmental Programs. The Financial Management System is a budgeting tool used for distributing the various State and Federal funds to cost centers for accounting purposes. The budget limits the amount of Federal funds which can be spent to the amount specified in the Cooperative Agreement; however, State and Federal funds are not distinguished by line item. "The State agrees to provide a certain number of full time equivalent man years in the Cooperative Agreements. The State is not required to identify each individual by FTE, so it is possible that one FTE in the Agreement may be made up by several individuals. The PCAS is used to accumulate FTE's as well as labor costs in each program. "The PCAS system is directly related to actual payroll. Actual labor costs are distributed based on each in- dividual's time sheet. Therefore, actual distributed cost cannot exceed budgeted cost. It is possible for budgeted costs to exceed actual costs, if, for instance, the Cooperative Agreement contain no State Matching Funds. But the State would not be able to claim the excess costs on the Financial Status Report, resulting in the lapse of the Federal funds. "The Auditors question the State's process of reconcil- ing budgeted FMS payroll costs and actual PCAS costs. The State's process of reconciliation determines that the level of effort is sufficient to meet requirements of the Cooperative Agreement. We can find no requirement in circular A-87 which requires each individual to be reconciled to this budgeted cost. "Further, our Cooperative Agreements contain the fol- lowing special condition: This Award and resulting ration of funding la based on estimated cost requested in the application. Final allowable cost for EPA participation shall not exceed 60% (appropri- ate statutory limitation) of total eligible cost or total funds awarded. "We feel the State has met the requirements of circular A-87 4 ------- and EPA in accounting for actual labor costs. The total cost identified by PCAS balances to the total budgeted FMS costs. The reconciliation process has been further descri bed in our response to EPA audit, Report No. E3BW8-04-0333. We feel these controls are adequate to meet established requirements and provide controls to protect both State and Federal interests. "Disallowing State Matching Funds under these conditions is not justified." c. Additional Audit Comments. The State cannot provided documentation to support the questioned $121,267. Without recon- ciling the two accounting systems, the State can neither establish that the $121,267 was not already paid under some other Federal grant, nor determine that actual labor costs were paid using State funds. The State's concern over budgeted full-time equivalents is not at issue. 3. Security Costs. In our draft report, we questioned $18,739 for certain security costs for which the State could not support. In responding to the draft, the State located the appropriate documentation. RECOMMENDATION We recommend that Region IV not participate in the dollar amounts questioned. In addition, Region IV should recover funds due EPA in accordance with established guidelines. ACTION REQUIRED In accordance with EPA Directive 2750, the action official is required to provide this office with a copy of the proposed determination on the findings within 90 days of the audit report date. BACKGROUND Section 104(c)(3) of the Federal Comprehensive Emergency Response Compensation and Liability Act of 1980 commonly referred to as Superfund, provides that no remedial action can be taken unless the State in which the hazardous release occurs first enters into a contract or cooperative agreement with EPA, ensuring that the State will, (1) assume the operation and maintenance responsibil- ity* (2) provide a facility for off-site disposal, and (3) share in the cost of the remedial action taken. On June 28, 1982, the EPA awarded Cooperative Agreement Number V004477-02 to the South Carolina DHEC to clean up the South Carolina Recycling and Disposal site commonly known as the Bluff Road site. This cleanup was necessary to help control surface and ------- ground water pollution and eliminate an environmental hazard resulting front improper disposal of hazardous wastes. The planned remedial action used a two-phased approach. The first phase was to remove and dispose of the remaining surface drums and other contaminated waste chemicals stored on site that remained after the original removal action was completed. The second phase was to conduct a field investigation to determine remaining problems and to determine the most cost effective remedial action to be taken. SITE HISTORY The DHEC's attention to the Bluff Road site was drawn by an incident in October 1977. Following a rain, water seeped into and reacted with the contents of several 55-gallon drums on site. The reaction formed a dense corrosive vapor cloud over State Highway 48. The cloud prompted about 50 persons, including motorists, police, and fire department personnel to seek medical attention. The DHEC requested South Carolina Recycling and Disposal to compile an inventory of the materials stored on site. After a review of the inventory, State officials began negotiating with the company to remedy site problems. After failing to negotiate any positive actions, DHEC filed suit against South Carolina Recycling and Disposal in May 1979. The State's suit was not successful. In March 1980, the EPA performed an environmental study of the area surrounding the site. Samples were taken from soil, surface water, sediments in nearby drainage ditches, several water supply wells, and Myers creek. Samples taken from Myers creek and the water wells were considered inconclusive. However, levels of contamin- ants in the drainage ditches were significant and corresponded to the contaminants found on site. This study concluded that contam- inated runoff was probably leaving the site during rainfall periods and contaminating shallow groundwater near the site. As a result of this study, EPA filed suit in July 1980 to: (1) halt further acceptance of waste at the Bluff Road site, (2) abate the environ- mental problems caused by the existing waste, and (3) properly dispose of all waste at the site. This suit was successful. In early 1981, the Bluff Road site was evaluated for inclusion on EPA's National Priority List (NPL) of hazardous waste sites. The site, identified by the State as its number one priority, was later included on the NPL as the 83rd ranked site in the Nation. In late 1981, the State, in conjunction with EPA Region IV, applied for CERCLA Trust Fund monies to cleanup the site. On December 24, 1981 the funds were approved and plans got underway to begin the cleanup. However, a number of companies, which had generated some of the wastes stored at the site, expressed interest in funding cleanup of the area. The companies negotiated a settlement to fund the removal of 75 percent of the waste on the site at a cost of $1,865,360. The EPA intents to recover the remaining cost from ------- responsible parties that did not agree to participate in the cleanup. Following the foregoing cleanup, the EPA and the State began the remainder of the surface cleanup under Cooperative Agreement No. V004477.02. In January 1983, bids were received. The successful bidder was Defender Vactor Systems, Inc. (Defender), with a bid $519,586. On July 1, 1983 Defender submitted a letter of substantial com- pletion and a notice of intent to request change orders. The request for change orders was submitted in August 1983. These change orders were first dismissed as being submitted in an untimely manner. After a request for reevaluation, the State declared 20 of the change orders as submitted untimely and the remaining five as lacking merit. Defender then filed a complaint with the State's procurement officer and an evidentiary hearing was held in Columbia. The hearing officer ordered the parties to negotiate a settlement. The original change order requests totaled $542,302. Defender and the State negotiated a settlement of $309,367. The EPA, through a technical evaluation of the change. orders, agreed that $60,000 was eligible and issued a grant modification for an increase in funding of $54,000 for the 90 percent Federal portion of the change order costs. However, the State paid $100,000 of the settlement from State funds and the balance by withdrawing $209,367 from its letter of credit with the EPA. In the interim audit of this Cooperative Agreement (see Audit Report No. E5cG4-04-0100-70767, February 19, 1987), we reported that the Contractor and the State had agreed to settle for $309,367, that the State paid Defender $100,000 from state funds and paid the remaining $209,367 using funds from the EPA letter of credit. The EPA, in a final determination notice dated December 20, 1985, agreed to fund only $54,000 of the settlement. Since the State did not appeal the final determination, we questioned the excess of $155,367 over the $54,000 as an overpayment in accordance with 40 CFR 30.1200(c). Region IV concurred with the audit finding that EPA's participation was limited to $54,000 and the difference of $155,367 was unallow- able. However, since this was an interim audit, and the DHEC had informed the Regional Administrator that it had incurred some $150,000 of personnel, fringe benefits, and operational costs which it had not yet claimed, the Region did not require repayment. DHEC recorded only $9,500 in additional costs since the interim audit. ------- EXHIBIT A SUMMARY OF COSTS CLAIMED, ACCEPTED, AND QUESTIONED COOPERATIVE AGREEMENT NO. VO04477-02 June 28, 1982 to December 31, 1987 Classification Salaries $ Fringe Benefits Travel Indirect Cost Contractual Services: Task I Task II Other Cost Claimed Accepted Questioned Total 143,026 24,496 6,149 18,359 837,436 210,106 20.163 $ 50,002 $ 93,024 8,606 15,890 6,149 6,006 12,353 588,069 210,106 20.163 Federal Sharet Task II** at 100% Remainder at 90% Less EPA Payments Amount Due EPA $210,106 611.096 $821,202 998.102 $176.900 249,367 Ref Note 1 Note 2 Note 2 Note 3 $1.259.735 $889.101 $37 Per the cooperative agreement, Task II costs were 100 percent funded by the EPA. Note 1: Cost questioned represents salary costs of individuals assigned to other Federal or State programs. The costs for these individuals have already been claimed on other programs; therefore, to allow DHEC to claim these costs as part of its state matching costs would result in a double payment. The State has not adjusted or removed the salary costs from the programs in which these individuals are assigned. The accepted amount is that cost actually recorded in DHEC's official accounting records. Note 2i Cost questioned represents fringe benefits and indirect cost applicable to the salary cost questioned in Note 1. 8 ------- Note 3: Cost questioned represents the difference between what DHEC agreed to pay the cleanup contractor for change order costs and the change order costs the EPA agreed to participate in. After a technical evaluation of the change orders submitted by Defender Vactor, the EPA agreed, to participate in $60,000 of the added charges. However, the State's negotiated a settlement with Defen- der for $309,367 and claimed the full amount under the cooperative agreement. However, the EPA had issued a letter of decision on December 20, 1985, indicating the amount eligible would be $60,000 and gave the State 30 days to appeal. The State did not appeal. Therefore, according to 40 CFR 31.79(c), EPA's notice of decision is final. ------- South Carolina Department of Health and Environmental Control f m ' MAR 2 1989 2600 Bull Street Columbia, S.C. 29201 Commissioner Michael D. Jarrctt February 23, 1989 OFFICE OP INSPECTOR AUDIT CSKZRAL Board Toney Graham, Jr., M.D., Chairman Henry S. Jordan, M.D., Vice-Chairman John B. Pate. M.D., Secretary William E. Applegate Oren L. Brady. Jr. John Hay Bumss Euta M. Colvin, M.D. 0. Michael Beard Acting Divisional Inspector General for Audit United States Environmental Protection Agency Office of Inspector General, Southern Division 1375 Peachtree Street, N.E. Atlanta, Georgia 30309 RE: Draft Audit Report E5cGN8-04-0329 Dear Mr. Beard: Enclosed you will find a response prepared by our Environmental Quality Control staff to the above referenced draft audit report. We believe that this draft audit basically deals with two main issues. The first and most important issue deals with documentation of our labor costs through our Personnel Cost Accounting System (PCAS). By letter of January 10, 1989, to Michael D. Simmons, then Acting Divisional Inspector General for Audit, we feel that we have adequately responded to this matter and corrective action has been implemented (Draft Audit Report E3bW8-04-0333). The second issue contained in this draft audit report deals with circumstances surrounding the necessary clean-up of the Superfund site located on Bluff Road in Columbia. Our Environmental Quality Control staff felt that it would be beneficial to list a chronolo- gy of the events surrounding this clean-up from our perspective, because of the length of time this issue has been outstanding. We are interested in resolving these matters as quickly as possi- ble. We believe that the end result will be a recognition of the fact that EPA has received full benefit for the dollars that it has invested in this agency. Please let me know if further information is desired. Sincerely, Michael D. Commission «DJ/br Appendix I Page 1 of 8 ------- RESPONSE TO EPA AUDIT ESCGN8-04-0329 A. Change Orders The Bluff Road disposal site of the South Carolina Recycling and Disposal Company (SCRDC) has been a concern of the Department for almost twelve years. From the time that DHEC's attention was first drawn to the site, much effort has been expended by State DHEC and Federal EPA to ensure that the most thorough clean-up possible was attained at the lowest possible cost. Although this effort was expended in good faith, the ditors have disallowed certain claims as frivolous on purely technical "grounds and have not considered all the circumstances involved in the decisions that had to be made by the State and EPA. After initial efforts to get SCRDC to clean up the site failed, other avenues were explored. An evaluation of the site under CERCLA (Superfund) criteria resulted in the site being designated as the State's number 1 priority and also being placed on the EPA's National Priority List. EPA Region IV urged the State in 1981 to apply to EPA in Washington, D.C., for Superfund monies to clean-up the site. The funds were approved in December 1981. At about the same time, approximately three-fourths of the Ferators responsible for the waste at the site initiated a voluntary Appendix I Page 2 of 8 ------- action to clean-up their portion of the waste. The contributions amounted to $1,579,760 for the surface clean-up and $91,140 for groundwater remediation. The S.C. D.H.E.C. contributed an additional $6,000.00. One of the generators, RAD Services, Inc., provided the clean-up services in lieu of payment. The majority of the funds were received by March 19, 1982, and the clean-up was begun. On March 23, 1982, a partial consent decree was entered in the United States District Court for the District of South Carolina, Columbia Division, between the United states of America and the State of South rolina, plaintiffs, and the responsible parties agreeing to contribute to the clean-up. The consent decree absolved those responsible parties from liability under C.E.R.C.L.A., and provided for the timely disposition of their portion of the waste. Those generators not a party to the decree, also called the Settlement Agreement, remained liable for treble damages under the Act. The U.S. Justice Department, representing EPA, brought action under the Act to require the remaining responsible parties to pay for the remainder of the clean-up. The State, represented by the Legal Department of S.C. D.H.E.C., also joined in the suit to recover any costs incurred by the State. The clean-up proceeded rapidly from this point and the action covered by the Settlement Agreement was substantially completed by the end Appendix I Page 3 of 8 ------- the year. RAD Services did an excellent job and carried out their responsibility as agreed without incident. On May 6, 1982, the State applied for a Cooperative Agreement for action at the site to clean-up the remaining 25% of the waste. The application was approved, and Cooperative Agreement number V004477-02 was awarded on June 28, 1982. This document was unprecedented in its complexity, containing 33 special conditions. The usual agreement contains an average of three special conditions. The State was in favor of allowing Rad Services to complete the clean-up, because they were on site and could complete the work at the est cost and in the shortest period of time. However, the State was required to competitively bid the job. Because of the complexity of the Law and the Cooperative Agreement, neither the State nor EPA was competent to develop a request for proposals. A private contractor was engaged for this purpose. The bidders were not successful in understanding the resulting bid document, having their initial bids thrown out by the State at the request of EPA. The job was re-bid in January 1983. The State was of the opinion that the successful bidder. Defender Vactor Systems, was not qualified, and that their bid of $519,506 was too low. However, the State was forced to accept the bid in the interest of completing the work. Payments to [fender were $828,953 after change orders. Rad Services original bid was $685,908. Appendix I Page 4 of 8 ------- Defender's progress at the site was closely monitored by the State. Although the relationship between the state and the contractor was somewhat strained, resulting from a lack of experience on both sides, the surface clean-up was substantially completed by July 1, 1983. The contractor submitted a request for change orders in the amount of $542,302 which were dismissed by the State. The contractor then appealed to the State Procurement Officer, who rendered no decision. The State was then forced to negotiate a settlement or face a lengthy court battle with the contractor. The decision was made to negotiate a settlement and $309,367 in change orders were approved. Concurrence was sought and obtained from the U.S. EPA Region IV Regional Administrator in the settlement. It was agreed that although EPA would only fund an additional ^4,000 of the $209,367 Federal portion of the payment, DHEC had additional unclaimed costs of approximately $150,000 to make up the difference. The State has now claimed $140,006 in additional costs, all of which has been disallowed by the auditors (See Section B and C). Interim Audit No. ESCM4-04-0283-50360 was subsequently conducted and $275,018 of the amount negotiated by the parties was accepted, subject to technical review by EPA. EPA agreed to support only $54,000 of the payment as stated above. The State did not appeal this decision at the time because it was felt an appeal would jeopardize it's position in the court proceedings against the generators which was in process. aoai Appendix I Page 5 of 8 ------- B. State Matching Cost The State utilizes the Personnel Cost Accounting System to account for all direct labor costs incurred in its Environmental Programs. The Financial Management System is a budgeting tool used for distributing the various State and Federal funds to cost centers for accounting purposes. The budget limits the amount of Federal funds which can be spent to the amount specified in the Cooperative Agreement. The budget is based on each line item in the Cooperative Agreement; however, State and Federal funds are not distinguished by line item. The State agrees to provide a certain number of full time Jfejuivalent man years in the Cooperative Agreements. The State is not required to identify each individual by FTE, so it is possible that one FTE in the Agreement may be made up by several individuals. The PCAS system is used to accumulate FTE's as well as labor costs in each program. The PCAS system is directly related to actual payroll. Actual labor costs are distributed based on each individual's time sheet.. Therefore/ actual distributed cost cannot exceed budgeted cost. It is possible for budgeted costs to exceed actual costs, if, for instance, the Cooperative Agreement contained no State Matching Funds. But the State would not be able to claim the excess costs on the Financial Status Report, resulting in the lapse of the Federal funds. The Auditors question the State's process of reconciling budgeted FMS payroll costs and actual PCAS costs. The State's process of reconciliation Appendix I ------- 'determines that the level of effort is sufficient to meet the requirements of the Cooperative Agreement. We can find no requirement in circular A-87 which requires each individual to be reconciled to this budgeted cost. Further, our Cooperative Agreements contain the following special condition: This Award and resulting ration of funding is based on estimated cost requested in the application. Final allowable cost for EPA participation shall not exceed 60% (appropriate statutory limitation) of total eligible program cost or total funds awarded. This condition indicates EPA bases its determination of Federal participation on total effort and actual cost. An after the fact determination of Federal participation by percentage of cost does not support methods which would reconcile budgeted costs at the beginning of the grant. We feel the State has met the requirements of circular A-87 and EPA in accounting for actual labor costs. The total cost identified by PCAS balances to the total budgeted FMS costs. The reconciliation process has been further described in our response to EPA audit E3BW8-04-0333. We feel these controls are adequate to meet established requirements and provide controls to protect both State and Federal interests. Disallowing State Hatching Funds under these conditions is not ' *r justified. Appendix I 7 of 8 ------- C. Questioned cost represent funds expended for security services by a private contractor at the Bluff Road site. The State has documentation to substantiate these costs. Appendix I Page 8 of 8 ------- Appendix II DISTRIBUTION Chief, Financial, Management Branch Chief, Grants & Contracts Administration Unit Chief, Facilities Construction Section ------- |