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                UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                          OFFICE OF THE INSPECTOR GENERAL
                               EASTERN AUDIT DIVISION               NEW YORK OFFICE:
                          JOHN F. KENNEDY FEDERAL BUILDING          290 BROADWAY
                          BOSTON, MASSACHUSETTS 02203-0001          NEW YORK, NY 10007-1866


                                  January 20,  1998
MEMORANDUM
         ..........
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SUBJECT:   Audit Report of Region 2's Deobligation and Closeout of          £
              Construction Grants                                          j§      &
             Assignment No. E1FWF7-02-0011-8100037                     i   <$
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FROM:      Paul D. McKechr^^/J^~2^£^L               £ $ £'"?
             Divisional Inspector General                                  'fr^r.^ ••--.
             Eastern Audit Division                                      § /?:• -'-  •

TO:         Jeanne M. Fox                                            "       r
             Regional Administrator
             Region 2

Attached is our report entitled Region 2's Deobligation and Closeout of Construction
Grants.  Our overall objectives were to determine whether the Region: (1) identified and
deobligated actual and potential construction grant funds in a timely manner, (2)
implemented a successful closeout strategy to meet Agency goals, (3) issued timely draft
and final determination letters, and (4) resolved grantee disputes in a timely manner. We
appreciate the cooperation we received from your staff in conducting this audit.  The
report contains important findings and recommendations regarding the subject area.

Action Required

In accordance with EPA Order 2750, you, as the action official are required to provide
this office a written response to the audit report within 90 days of the final audit report
date. For corrective actions planned but not completed by your response date, reference
to specific milestone dates will assist this office in deciding whether to close this report.
We have no objections to the further release of this report to the public.

Should you have any questions about this report please contact me or Herbert Maletz,
Audit Manager at (212) 637-3058.

Attachment
           Rocycled/Racyclable .printed with Vegetable Oil Based Inks on 100% Recycled Paper (40% Postconsumer)

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                                                            Deobligation/CIoseout
                                                            of Construction Grants
                         EXECUTIVE SUMMARY
PURPOSE
The purpose of this audit was to determine if Region 2:

°     Identified and deobligated actual and potential
      construction grant funds in a timely manner.

°     Implemented a successful closeout strategy to meet
      Agency goals for completing all construction grants.

0     Issued timely draft and final determination letters so
      that grants could be closed out and excess funds
      deobligated.

o     Resolved grantee disputes or appeals effectively and in
      a timely manner.
BACKGROUND
EPA is responsible for overall program management of the
Construction Grants Program. The State water pollution
control agencies or the US Army Corps of Engineers (COE)
handle most day-to-day administrative duties through
delegation agreements with EPA. EPA Regional offices
retain some project-related decision authorities not legally
delegable. Eligible activities funded by construction grants
include facility plans (Step 1), plans and specifications (Step
2), and the building of a treatment plant (Step 3).

Construction grants are funded from no-year appropriations
and remain available to the program until expended. Since
1972, the Agency awarded over $50 billion in grants for
wastewater treatment projects. Regional Grants
Administration Offices manage grants awarded to
municipalities to fund construction of wastewater treatment
plants. EPA's policy is to close out such grants promptly so

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                                    Deobligation/Closeout
                                    of Construction Grants
that funds not needed on one project can be deobligated and
reallotted to finance other projects.

EPA's August 27, 1992 Financial Closeout Policy for
Assistance Agreements emphasized closing out projects and
promptly deobligating unliquidated obligations.  Closeout of
grants is an essential function of prudent grants
administration and regions should develop procedures to
address this policy.  The policy stated that closeout should
occur within six months of the last grant action (i.e. final
audit resolution, OIG screenout, administrative completion,
appeal decision).  Administrative completion was a key
milestone where administrative aspects have been completed,
final payment requested, eligible costs determined, grant
conditions satisfied and audit requested.  Excess balances
should be deobligated at this point.

Regional grants administration branches process
deobligations, and delegated State agencies assist in
managing construction grants.  States may be fully, partially,
or non-delegated. New York is fully  delegated and
responsible for processing administrative completions, audit
resolutions, and closeouts. New Jersey is partially delegated
and EPA does not make initial allowability determinations.
New Jersey submits the administrative completion package to
Region 2 which processes audit resolutions and closeouts.
Puerto Rico and Virgin Islands administrative completion
responsibilities are not delegated.

In November 1993, the Senior Leadership Council designated
completion and closeout of the construction grant program an
Agency-level weakness.  This program still involved billions
of dollars and there was a fear this was not universally
recognized and might result in loss of resources to properly
complete the program.
               11

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                                                            Deobligation/CIoseout
                                                            of Construction Grants
RESULTS-IN-BRIEF    In recent years Region 2 has initiated many steps to reduce its
                         backlog of construction grants and deobiigate a portion of the
                         unpaid funds. Although efforts were made to improve
                         controls or improve compliance with existing controls, we
                        •identified areas of repetitive problems where further
                         improvements can be made.

                         Four OIG audits of Region 2's construction grant
                         deobligation efforts during the past 15 years disclosed
                         material weaknesses. Based on the Region's promises to take
                         action to correct these weaknesses, the OIG closed out these
                         audits. However, the same conditions found in 1982
                         continued to surface in 1989,1990 and 1991. We strongly
                         believe that strong top management efforts are needed to
                         resolve this long-standing problem.  The specific findings
                         follow:

                         1.     Region 2 has not effectively reviewed construction
                               grants to determine the viability of unexpended grant
                               obligations and did not promptly deobiigate unneeded
                               funds. The Region's inadequate control system, lack
                               of priority, poor coordination, and failure to follow
                               Agency guidelines contributed to this  condition. As a
                               result, EPA accumulated idle funds  of more than $70
                               million for the projects reviewed which could have
                               been used to fund other priority projects, State
                               administration grant and special appropriation
                               projects, or could have been deposited into the State
                               Revolving Fund.

                         2.     Region 2 will not meet the Agency' s goal of
                               completing and closing out its construction grants by
                               the end of fiscal year (FY) 1997.  Also, the Region
                               may not close out certain grants by its own projected
                               date of FY 2000. In addition to the  approximately 127
                               Step 3 grants projected to miss the Agency's target
                                       iii

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                                                            Deobligation/Closeout
                                                            of Construction Grants
                               date, an additional 50 Step 1 and 2 grants will also
                               miss the date.  The Region did not give the highest
                               priority and coordination between program offices to
                               achieve more timely closeouts. As a result, millions of
                               Federal dollars of unexpended grant amounts remain
                               obligated unnecessarily, and personnel cannot be
                               reassigned to other areas.

                         3.     The Region's issuance of proposed and final
                               determination letters (FDL) to resolve audit issues was
                               untimely.  Although Agency guidance required^FDL
                               issuance within 90 or 150 days of the final audit
                               report, the average time for the cases sampled was 358
                               days. While the resolution process lingered, millions
                               of dollars of Federal funds remained  unnecessarily
                               obligated and projects could not be closed.

                         4.     The Region's resolution of grantee disputes has been
                               untimely.  Cases have remained unresolved for close
                               to 10 years, and targeted dates for actions leading to
                               the Regional Administrator's decision were
                               continuously revised. Resolution was delayed because
                               initial conferences were not always scheduled and
                               personnel did not prepare timely program memoranda.
                               As a result, cases are reassigned to new attorneys and
                               program personnel and continue to remain open and
                               excess funds can not be deobligated.
RECOMMENDATIONS We recommend that the Regional Administrator

                         1.     Require the Grants and Water Program Branches to
                               conduct a management control review to evaluate the
                               controls for reviewing unexpended obligations and
                               promptly deobligating unneeded funds. Specifically:
                                       IV

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                                    Deobligation/Closeout
                                    of Construction Grants
      a.     Review the grants cited and initiate prompt
             deobligation actions.

      b.     Determine whether additional funds could be
             deobligated from other grants.

      c.     Develop specific Regional policies and
             procedures.

      d.     Designate a specific person to coordinate
             deobligation efforts between the Branches.

      e.     Implement periodic review meetings and
             evaluations between various Branch personnel
             to increase monitoring of unexpended balances.

2.    Require the Grants and Water Program Branches to
      give a higher priority to the expeditious closeout of all
      Step 1,2, and 3 construction grants. Specifically:

      a.     Determine whether additional resources or
             other actions are needed.

      b.     Designate a specific person to coordinate
             closeout efforts between the Branches.

      c.     Initiate regular meetings between the program
             offices to discuss actions needed.

3.    Require the program offices to place a higher priority
      on the audit resolution process and eliminate the
      bottlenecks for preparation of final determination
      letters.

4.    Instruct the Office of Regional Counsel and Water
      Programs Branch to implement an action plan to
      accelerate the dispute resolution process and eliminate

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                                                          Deobligation/Closeout
                                                          of Construction Grants
                        the backlog. Timely actions and commitments must be made
                        and accomplished.
REGION 2 RESPONSE  The Region agreed with many of our recommendations, but
and OIG EVALUATION disagreed with the significance of certain conclusions mainly
                        in the area of construction grant closeouts. After evaluating
                        the Region's comments that disagreed with our report, our
                        position remains unchanged.  Their response has been
                        summarized at the end of each finding and other comments
                        were inserted in the body of the report. The complete
                        response has been included as Appendix 1. An exit
                        conference was held with representatives of Region 2 on
                        October 29, 1997.
                                      VI

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                                                   Deobligation/Closeout
                                                   of Construction Grants
                      TABLE OF CONTENTS

EXECUTIVE SUMMARY	i

CHAPTERS

1    INTRODUCTION 	1
          Purpose	1
          Background	I	1
          Scope and Methodology	.6
          Prior Audit Coverage	8

2    IMPROVEMENTS NEEDED IN TIMELY
     DEOBLIGATION OF CONSTRUCTION GRANT FUNDS	9
          Background and Criteria	10
          Unpaid Balances Remained Obligated 	11
          Examples of Untimely Deobligations	13
          Inactive Projects Should be Reviewed	15
          Internal Controls 	18
          Other Control Weaknesses	18
          Conclusion	20
          Regional Response	 21
          OIG Evaluation	22
          Recommendations	25

3    INCREASED EMPHASIS NEEDED TO MEET
     GRANTS COMPLETION/CLOSEOUT STRATEGY	27
          Background and Criteria	28
          Region 2 Must Accelerate Closeouts 	-.	 29
          Step 3 Grants	30
          Grant Untimely Closed Out	34
        .  Step 1/2 Grants	35
          Duplicate Audit Requests 	38
          Screened Out Projects Remained Open  	39
          Conditional Administrative Completions	41
          GICS Information		42
          Other Factors Affecting Closeouts	 42

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                                                      Deobligation/Closeout
                                                      of Construction Grants
           Conclusion	43
           Regional Response 	44
           OIG Evaluation	45
           Recommendations	51

4     AUDIT RESOLUTION PROCESS WAS UNTIMELY	53
           Criteria	53
           Analysis of Resolution Untimeliness 	54
           Regional Response 	56
           OIG Evaluation	57
           Recommendations	57

5     LENGTHY DISPUTE/APPEAL
      PROCESS DELAYED CLOSEOUTS  	59
           Background	60
           Current Disputes Inventory	60
           Status Reports 	63
           Untimely Program Memoranda	63
           Other Factors	63
           Regional Response 	67
           OIG Evaluation	68
           Recommendations	68

EXHIBITS

1     Schedule of Unliquidated Balances	69
2     Schedule of FDLs Issued or Unresolved 	72
3     Additional Examples of Untimely Dispute Appeal Resolution	75

APPENDICES

1     Region 2's Response to the Draft Report	  77
2     Abbreviations	:.  99
3     Distribution	 101

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                                CHAPTER 1
                             INTRODUCTION
PURPOSE
We performed an audit of Region 2 construction grant
closeout efforts and deobligation of excess funds.  Our
specific objectives were to determine whether the Region:

   o  Identified and deobligated actual and potential
      construction grant funds in a timely manner.

   o  Implemented a successful closeout strategy to meet
      Agency goals for completing all construction grants.

   o  Issued timely draft and final determination letters so
      that grants could be closed out and excess funds
      deobligated.

   o  Resolved grantee disputes or appeals effectively and in
      a timely manner.
BACKGROUND
Regional Grants Administration Offices manage grants
awarded to local municipalities to fund construction of
wastewater treatment plants. EPA's policy is to close out
construction grants promptly so that funds not needed on
projects can be deobligated and reallotted to finance other
treatment works projects.

EPA is responsible for overall program management of the
Construction Grants Program. The State water pollution
control agencies or the US Army Corps of Engineers (COE)
handle most day-to-day administrative duties through
delegation agreements with EPA. EPA Regional offices
retain some project-related decision authorities not legally

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                         delegable.  Eligible activities funded by construction grants
                         can include facility plans (Step 1), plans and specifications
                         (Step 2), and the building of a treatment plant (Step 3). No
                         new Step 1 and 2 awards were issued after December 29,
                         1981 and all such projects should have been completed by
                         September 30. 1985.

                         Construction grants are funded from no-year appropriations
                         and remain available to the program until expended. Since
                         1972, the Agency awarded over $50 billion in grants for
                         wastewater treatment projects: The EPA Administrator's
                         1988 Needs Survey Report to Congress assessed the capital
                         investment required to build or improve municipal
                         wastewater treatment facilities.  The report estimated that $68
                         billion was needed for wastewater projects nationwide.

Delegation to States      Although EPA's regional grants administration branches
                         process all deobligations, delegated State agencies assist in
                         managing construction grants.  States may be fully delegated,
                         partially delegated, or non-delegated. New York is fully
                         delegated and responsible for processing administrative
                         completions, audit resolutions, and project closeouts.
                         Although the State submits a grant amendment to the Region
                         to deobligate funds, Region 2 is not free of all deobligation
                         responsibility. The Region must process amendments and
                         reduce unliquidated obligations in EPA's financial records.
                         Also, the Region must review all unliquidated obligations
                         semiannuallv and certify whether they are still valid.

                         New Jersey is partially delegated and EPA does not make
                         initial allowability  determinations.  The State submits the
                         administrative completion package to Region 2 which
                         processes audit resolutions and closeouts. Puerto Rico and
                         Virgin Islands administrative completion responsibilities are
                         not delegated.  Region 2 is responsible for initiating all grant
                         amendments to deobligate unneeded funds.

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Criteria                 An October 15,1984 Office of Water and Inspector General
                         memorandum established policies for auditing grants with
                         unresolved claims.  If the claim was clearly separable, the
                         grantee should submit a final payment request contingent on
                         resolution of the claim.  EPA should then adjust the grant to
                         estimate Federal exposure, proceed to audit, and closeout the
                         balance of the grant. Another October 15,  1984
                         memorandum emphasized expeditious grant completion and
                         closeout. Regions should notify grantees to submit final
                         payment requests within 90 days or the last request will be
                         considered the final request, and deobligate unexpended
                         funds.

                         EPA's August 27, 1992 Financial Closeout Policy for
                         Assistance Agreements emphasized-closing out projects and
                         promptly deobligating unliquidated obligations.  Closeout is
                         an essential function of prudent grants administration and
                         regions should develop specific procedures to address this
                         policy.  The policy  stated that closeout should occur within
                         six months of the last grant action (i.e. final audit resolution,
                         OIG screenout, administrative completion, appeal decision).
                         Administrative completion was a key milestone where all
                         administrative aspects of the project have been completed,
                         final payment requested, eligible costs determined, grant
                         conditions satisfied and audit requested.  All excess balances
                         should be deobligated at this point.

                      .In November 1993, the Senior Leadership Council designated
                      .   completion and closeout of the construction grant program an
                         Agency-level weakness. This program still involved billions
                         of dollars and there was a fear that this was not universally
                         recognized and might result in a loss of resources to properly
                         complete the program. Without such resources, the closeout
                         process could slow down to an unacceptable pace and result
                         in a loss of institutional knowledge, records, and ability to
                         manage over an extended period.

                         In 1996, the Office of Management and Budget (OMB) again

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                         recommended that completion/closeout of the construction
                         grant program should be declared a material weakness citing
                         "the closeout schedule continues to slip and millions of
                         dollars in ineligible costs are not being reimbursed for reuse
                         on other high priority state clean water projects..." The
                         Agency shared OMB's concern and elevated it to an Agency
                         level material weakness in the 1996 Integrity Act report.

                         Of the more than $50 billion total EPA construction grants.
                         awarded, 1,085 grants ($12 billion) remained open at the end
                         of fiscal year (FY) 1996. The 1990 Construction Grants
                         Completion/ Closeout Strategy was developed to expedite
                         closeout so resources could be reallocated. It established
                         goals of administratively completing all projects bv FY 95
                         and closing out all grants by FY 97.
Region 2                 Prior to Region 2's recent reorganization the Grants
Progress                 Administration Branch (GAB) and Water Management
                         Division (WMD) had responsibility for construction grant
                         completion/closeout and deobligation of unneeded funds.
                         The GAB/WMD FY 95 update projected 5_8_closeouts.
                         However, WMD's tracking system only noted 32. due to (i)
                         inadequate or missing New Jersey project documentation, and
                         (ii) the prolonged New York disputes process.
                         WMD's September 21,1995 memorandum noted its FY 96
                         beginning inventory of 138 New York and New Jersey Step 3
                         grants (GAB's October 19,1995 memo stated 151 grants')
                         and 111 Puerto Rico and Virgin Islands grants. WMD
                         planned to administratively complete all New York non-
                         Modification/

                         Replacement construction grants by FY 97. The
                         memorandum provided the following  information:

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                          Closeouts
FY             Commitment       Performance
93                  79                80
94  -                74                79
95                  58            27 projected
               (reduced to 32)
96-39

Region 2's FY 94 Integrity Act Assurance Letter indicated
366 open construction grants (182 Step 1 and 2, and 184 Step
3 projects). The FY 95 Assurance Letter indicated 262 open
grants (151 New York/New Jersey, 111 Puerto Rico/Virgin
Islands) since 109 Step 1 and 2, and 32 Step 3 projects were
closed and $26 million deobligated. New Jersey and New
York  Step 3 projects were reduced from 1,600 to  134 (NJ
58, NY 76), and Step  1 and 2 universe was reduced from 700
to 75 (as of September 30, 1995).  Because of the difficult
projects, lengthy appeals process, and reduced resource
levels, the Region reflects a 2000 end date.

The FY 96 Assurance Letter noted 44 Step 3 closeouts. The
remaining 239 Step 3  projects includes 112 administratively
completed projects (47 to be completed during FY 97.  The
Region also anticipated completing the 68 Step 1 and 2
projects ready for closeout by the end of the calendar year.

On July 21, 1996 Region 2 formally implemented its
reorganization to an integrated, multi-media approach to
environmental planning, compliance and program activities.
Responsibility for New York and New Jersey grants was
assigned to the Division of Environmental Planning and
Protection (DEPP), Water Programs Branch - Construction
Grants Section.  However, the Division of Enforcement and
Compliance Assistance (DECA), Water Compliance Branch
was given responsibility for the Caribbean grants..

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SCOPE AND            We performed this audit according to the Government
METHODOLOGY      Auditing Standards (1994 Revision) issued by the
                        Comptroller General of the United States as they apply to
                        program audits.  Our review included tests of the program
                        records and other auditing procedures we considered
                        necessary. No other issues came to our attention which we
                        believe warranted expanding the scope of the audit.

                        To accomplish our objectives we reviewed payment records
                        and interviewed Region 2 officials where focus was primarily
                        on the Grants and Contracts Management Branch (GCMB),
                        Water Programs Branch (WPB - Construction Grants
                        Section), Water Compliance Branch (WCB - Caribbean
                        Section), Office  of Regional Counsel (ORC), and Financial
                        Management Division (FMD). We also reviewed records and
                        interviewed New York State Department of Environmental
                        Conservation (NYSDEC) and New Jersey Department of
                        Environmental Protection (NJDEP) officials.

                        To evaluate the timeliness and effectiveness of regional grant
                        deobligation and closeout actions, we judgmentally selected
                        open and recently closed New York, New Jersey, Puerto Rico
                        and Virgin Islands projects. Our review focused on grants
                        with the largest unliquidated balances. We reviewed EPA
                        orders, directives, regulations, policies, and procedures
                        related to construction grant closeout strategies, deobligations
                        of unneeded funds, audit resolution, dispute and appeal
                        process, information management and other tracking systems.

                        We further evaluated deobligation and closeout efforts by
                        reviewing Integrated Financial Management System (IFMS)
                        and Grants Information Control System (GICS) grant
                        payment and unpaid balance reports, unpaid obligation
                        records, NYSDEC and NJDEP records, OIG audit files, final
                        determination letters (FDL), and ORC files. We interviewed
                        appropriate FMD, ORC, GCMB, WPB and WCB personnel

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to determine their roles and responsibilities. We also
interviewed NYSDEC's Fiscal/Grants Management Unit and
NJDEP's Municipal Wastewater Assistance Unit personnel.

For the grants selected, we reviewed payment and project
files and discussed the grant status with State and regional
officials to identify any idle funds. We also identified
procedures for processing administrative completions and
grant closeouts to determine when funds are deobligated from
administratively complete grants.

To determine unliquidated balances which could be
potentially deobligated, we reviewed the January 2, 1997
IFMS Monthly Construction Grant Summary Report.
Because of incorrect obligation data, Finance provided a
revised IFMS report dated March 1, 1997. We also
considered the grantee's final payment request, grant
official's determination of allowable costs, audit results, and
any grantee appeals. The following amounts were considered
potentially eligible for deobligation:

  (a) the excess of an outstanding grant award over the
      grantee's final payment request; and

  (b) disallowed amounts not appealed by the grantee.

We conducted our survey from February 20 to May 11, 1997
and initiated an in-depth review from  May 12 to June 15,
1997. As part of our evaluation we reviewed the Region's
FY 94 to 96 Federal Managers Financial Integrity Act
(FMFIA) Assurance Letters. These reports did not identify
any material weaknesses or vulnerabilities pertaining to
construction grant deobligations or closeouts.

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PRIOR AUDIT          The OIG has issued the following five audit reports
COVERAGE            pertaining to Region 2's untimely deobligation of
                        construction grant funds. Reports E1VW2-01-0029-21443
                        (August 12, 1982) and E2FWPO-02-0041-0400001 (October
                        20, 1989) disclosed that substantial unliquidated obligations
                        in Region 2's construction grant program had not been timely
                        deobligated.

                        Report E1AME9-11-0041-0100523 issued September 1990
                        (Management of Unliquidated Obligations in
                        Administratively Complete Construction Grants) disclosed
                        that Region 2 had 38 grants with more than $40 million
                        needing deobligations. These grants had been
                        administratively completed for an average of 34 months.
                        Report E1AME9-11-0041-1100426 issued September 1991
                        (Management of Unliquidated Obligations in Construction
                        Grants that have not been Administratively Completed)
                        identified 17 grants with more that $58 million of deobligable
                        or potentially deobligable funds.

                        Also, OIG's August 29,1986 Review of Region 2's
                        Construction Grant Closeout Procedures (E1CW4-02-0144-
                        61424) disclosed (i) inaccurate construction grant
                        information recorded in GICS, (ii) grants screened out by the
                        OIG were not timely closed, (iii) grants completed for several
                        years were held open for extended periods of time, and (iv)
                        insufficient NJDEP staffing to eliminate backlog.

                        In all instances the OIG closed out these audits based on the
                        promised actions to be implemented.

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                           CHAPTER 2

IMPROVEMENT NEEDED IN TIMELY DEOBLIGATION
            OF CONSTRUCTION GRANT FUNDS
                   Region 2 needs to improve its timeliness in identifying and
                   deobligating excess construction grant funds. We identified
                   more than $63 million that was unpaid, and not timely
                   deobligated. In addition, approximately $7.5 million of
                   recently deobligated amounts could have been accomplished
                   many years earlier.  The grants with balances that could be
                   deobligated had been administratively complete an average of
                   76 months when we finished our fieldwork.  The Region's
                   failure to deobligate unneeded construction grant funds has
                   been a continuous problem since 1982.

                   These conditions were caused by Region 2 generally waiting
                   until the project was ready for final closeout before
                   deobligating unneeded funds, instead of deobligating them
                   earlier. Specific factors were (i) the Region's inadequate
                   control system, (ii) lack of priority given to deobligation
                   efforts, (iii) inadequate or reduced Regional and State
                   personnel with construction grants knowledge, (iv)
                   inadequate coordination between Water, Grants, Regional
                   Counsel (ORC) and Finance officials, (v) lack of regional
                   policies outlining specific responsibilities and methods for
                   accomplishing deobligations, and (vi) missing grant files.

                   As a result, more than $70.5 million, that could have been
                   used to fund other priority construction projects, remained
                   idle.(See Exhibit  1 for details) and needed work has been
                   delayed. Such funds could have also been recently used for
                   State administration of construction grant and Special
                   Appropriation projects, or could have been deposited into the
                   State Revolving Fund.

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Background and         EPA's policy has been that unneeded construction grant
Criteria                 funds should be taken from overfunded projects as soon as
                         possible and made available for other projects. The
                         Handbook of Procedures for Construction Grants states,
                         "Project reviewers are to be alert for legitimate opportunities
                         to reduce grants, since recovered funds, after being returned
                         to EPA, are reallocated to the State for funding other projects
                         on the State's project priority  list." Also, grant decrease
                         requests are generally initiated by the Agency, not by the
                         grantee. Moreover, the Financial Management Manual
                         requires prompt adjustment obligations upon the occurrence
                         of any event which increases or decreases such obligation.

                         After the State or COE completes the final inspection and
                         certifies that the project is functioning properly, the grantee
                         submits a final payment request. The State, COE or EPA
                         reviews the request and recommends the final payment
                         amount. The grant should now be adjusted to deobligate any
                         excess funds and forwarded to the OIG for audit. If the grant
                         is not audited (screened out) it should be closed out. If
                         audited, all issues should be resolved, any remaining excess
                         funds deobligated, and the grant closed out.

                         EPA's policies and procedures require that unneeded funds
                         be deobligated during the administrative completion step.
                         The Administrator's November 22, 1982 memorandum
                         stated:

                               We should make the most effective use of EPA
                               construction grant funds and ensure that they not lay
                               idle as invalid, unpaid obligations for projects where
                               they are no longer required...  The identification, and
                               subsequent deobligation, of funds that will not, or
                               need not, be spent is an important management
                               responsibility...  You should consider deobligating
                               funds for projects when... the final reimbursement
                               request was less than the grant amount.

                                       10

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Unpaid Balances
Remained Obligated
                         The General Accounting Office (GAO) defines deobligation
                         as an Agency's cancellation or downward adjustment of
                         previously recorded obligations. Region 2 generally followed
                         a policy of not deobligating funds until projects were closed,
                         instead of when grantees submitted final payment requests
                         and projects were administratively completed.
We analyzed IFMS reports as of March 1,1997 to
determine Region 2's open construction grants with unpaid
balances, and found 159 projects which exceeded $50,000.
Some projects have not reached the administrative
completion stage.
State
New York
New Jersey
Puerto Rico
Virgin Islands
Total
#pf Grants
52
27
75
5
^U2_
Total Unpaid
$189 million
23 million
71 million*
17 million
J300miilion_
                         *Includes projects awarded in 1992 or thereafter.

                         Besides these 159 grants, there were an additional 80 grants
                         in New York (27), New Jersey (26), Puerto Rico (26), and
                         Virgin Islands (1) with individual unpaid balances of less that
                         $50,000.  This significant amount of Federal funds remained
                         unpaid for as long as 20 years.

                         From the 159 grants with large unpaid balances, we reviewed
                         35 projects either under construction, administratively
                         complete, audited, or appealed.  Our review disclosed that 26
                         of the 35 grants reviewed had actual or potential unpaid
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Deobligation Policy
Not Consistent with
Agency Guidance
                         funds exceeding $63 million that could be deobligated (see
                         below, with more detail in Exhibit 1). Also, in four of these
                         grants more than $7.5 million were recently deobligated that
                         had been lying idle for substantial periods (See Exhibit 1).
                         Therefore, approximately 60 percent of the unpaid balances
                         reviewed ($110.9 million) were potentially deobligable.
                         Based on this sample, there are potentially millions of
                         additional dollars mat may be deobligable for grants not
                         reviewed.
                                        Reviewed	    Potential Deobligation


State
NY
NJ
PR
VI
Total


Grants
15
11
7
2
35
Unpaid
Balance
(in millions)
$ 79.2
11.2
4.2
16.3
$110.9


Grants
12
8
6
OC*)
26

Amount
(in millions)
$49.7
9.1
4.2
or*)
$63.0
(*) Does not include $10 million applicable to the Mangrove
Lagoon Facility discussed later in this chapter.

Region 2's deobligation policy was not consistent with
Agency guidance that EPA should make the most effective
use of grant funds and ensure they do not lay idle as invalid,
unpaid obligations no longer needed. EPA's Administrator
has urged regions to deobligate funds when the final
reimbursement was less than the grant amount. Although
Region 2 officials acknowledged that unneeded construction
grant funds should be timely deobligated, they indicated and
our review disclosed this was not always a high priority.

The New Jersey Department of Environmental Protection's
(NJDEP) policy was not to deobligate funds until projects
were closed out.  Its Standard Operating Procedures Manual
states that if excess grant funds remain, they will be removed
after audit resolution when all appeals have been resolved.
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                         EPA's deobligation policy is clear, and unneeded funds
                         should be promptly deobligated because funds are badly
                         needed for other projects. Unneeded funds should not be
                         confused with questioned or appealed amounts. There is no
                         uncertainty regarding the excess of an outstanding grant
                         award over the grantee's final payment request, and there is
                         no uncertainty regarding disallowed amounts not cited in the
                         grantee's final appeal. These funds are not being contested
                         and clearly not needed for the originally obligated grant.
                         Region 2 should work with New Jersey officials to ensure
                         they promptly deobligate unneeded funds.

                         In prior reviews Region 2's reason for not deobligating funds
                         until project closeout was to avoid possible grantee appeals.
                         Also, personnel concentrated on awarding and monitoring
                         new grants, rather than deobligating funds. The Region's
                         response to OIG report 0100523 (September 1990) reported
                         "it is working with its States and Territories to prepare a
                         policy during the first quarter of FY 91 to deobligate
                         unneeded grant funds upon administrative completion."
                         However, this policy has not been established or
                         implemented. The Region should have deobligated unneeded
                         funds as well as performed these other functions, and
                         management should have been alerted if resources were
                         insufficient to accomplish these tasks.

                         Although its policy is to generally wait until the project is
                         closed before deobligating funds, the Region previously got
                         requests for deobligations, particularly from NYSDEC.
                         However, the Region would generally not process grant
                         amendments to deobligate unneeded funds.
Examples of Untimely    Region 2 has not always promptly deobligated funds. These
Deobligations            four examples illustrate the need for timely review and
                         deobligation of excess funds.
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Nassau County (grant 891-09). was awarded on September
30,1980 and administratively completed on June 29,1987.
The current unpaid balance is $3.276.651.  We believe that at.
least $3.137.150 could be deobligated ($139,501 could be
set-aside to resolve a dispute). NYSDEC officials also
agreed that $3,137,150 could be deobligated. Although
NYSDEC certified a grant decrease of $3,137,150 six years
ago, Region 2 refused to process it.  Also, the September
1990 OIG audit report identified the same $3,137,150 that
could have been deobligated since June 29,1987.  We do not
believe it was prudent management to tie up these funds for
10 years because of potential contingencies.

The City of Auburn (972-01) was awarded on December 1.
1976 and administratively complete on June 30,1988. The
last payment was September 3, 1986 and the grant currently
has an unpaid balance of $1,065,865. Based on an OIG audit
a bill for collection (BFC) for $141,054 was sent to the
grantee on March 21,1991. It was appealed and the
Regional Administrator's March 21. 1995 decision reduced
the $141,054 bill by $49,385. However, it  wasn't until
February 27. 1997 (after our audit started) that $1,065,865
was deobligated (more than 10 years since  the last payment).

Cape May (661-07) was awarded on December 28,  1984 in
the amount of $26,855,648 (subsequently amended to
$28,628,685). It was administratively completed on
September 28,1990, final payment was made on March 7,
1995, and an unliquidated balance of $2,453,828 remains. In
1995 one issue involving innovative costs of $171,000 was
appealed to NJDEP.  The Region  should have set-aside the
$171,000 until the matter was resolved and deobligated the
remaining $2,282,828 in March 1995 (26 months ago).

The PRASA-Anasco Trunk Sewer (120-08) was awarded
in the amount of $2,941,870 on March 9,1987 (grant was
increased by $2,968,259 on September 30,  1988) and
administratively completed on September 29, 1992.  On
              14

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                         September 15,1992 the grant was reduced by $905,503 and a
                         final payment of $187,418 was processed on May 21, 1994.
                         As a result, $2,942,169 is potentially deobligable ($2,941,870
                         has been unpaid since March 9, 1987 - 10 years).

                         The Region's response to the draft report indicated the
                         project was closed on July 9,1997, but provided an
                         inaccurate project chronology (date of award, grant amounts,
                         etc.). On September 15,1997 we discussed this matter with
                         the Grants Specialist and inquired why IFMS showed
                         $2,941,870 outstanding while the response asserts only $299
                         remained.  The Specialist discovered a March 9.1987 grant
                         amendment (more than 10 years ago) to cancel this grant and
                         deobligate $2,941,870. However, this cancellation and
                         deobligation was not reported to Finance or action was not
                         taken in 1987 to correct this situation. For 10 years IFMS and
                         Agency records erroneously showed $2,941,870 obligated.
                         This error should have been corrected when the Region
                         submitted their required annual certification of grant
                         obligations. As a result of the draft report, on September 17,
                         1997, the Agency's records were corrected to eliminate the
                         $2,941,870.
Inactive Projects        Financial disbursement activities should be reviewed
Should be Reviewed     regularly to determine whether excess funds could be
                        released from inactive or completed projects. If the grantee
                        does not expeditiously initiate and complete the project, 40
                        CFR 30.903 through 30.905 allows grants to be terminated or
                        annulled.
                        One example of a possible inactive grant was Perth Amboy
                        (435-02). The $3,211,243 grant was awarded on September
                        26. 1985 and the only payment made ($250,310) on January
                        14. 1991 (64 months after award). Since 1991 no payment
                        activity has occurred for 76 months. OIG's September 30,
                        1991 audit report indicated three contracts would be awarded
                        by March 1991 and work  completed by October 1992.

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However, the grantee has not completed the work or
requested reimbursement. Therefore, we believe the
unliquidated balance of $2,960,933 could be potentially
deobligated. Although Water Programs Branch personnel
believe this project was active they could not provide any
reason for the lack of progress.

The Virgin Islands Mangrove Lagoon (C780013-04)
awarded September 28,1984 ($11,134,058) was another
possible inactive grant. The 100% award was to design and
construct a treatment facility, collector and inceptor sewers,
force mains and an ocean outfall.  The last payment was
February 10, 1988 and excess funds of$10.081.348
remained.

Throughout 1989 and 1990 the Region notified the grantee
about delays which violated the grant regulations and the
September 27, 1985 Consent Decree, and threatened to
terminate the grant.  These documents required completion of
plans and specifications by January 1. 1986 and facility
operations by July 1. 1988. Final plans and specifications
have not been submitted and the grantee's September 1988
report stated "the status of final plans and specifications is
uncertain at this time." A Regional engineer also stated the
Region considered terminating the grant and deobligating the
excess  $10,081,348. Another 1990 memorandum stated that
due to delays, the project's construction costs will escalate.

The Consent Decree included construction of the Mangrove
Lagoon Regional Facility. The grantee failed to construct it
and a March 1991 motion was filed to enforce the Decree.
On December 29,1994 an Amended Consent Decree
outlined specific revised construction dates. For example,
design  contract award was March 31, 1995 and complete bid
document submission was March 31,1996. The Region's
current target closeout date is September 30,2001.
               16

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                         Although we are not considering this grant as a current
                         candidate for potential deobligation, we believe this 13 year
                         old project could have been managed more effectively. It had
                         many problems since inception and could have been
                         terminated.  Regional personnel cite the Consent Decree for
                         not terminating the grant or deobligating the funds. We
                         question whether the Facility will be built or efficiently
                         operated since the Amended Consent Decree deadlines have
                         been modified twice (additional 12 months). As a result,
                         more man $10 million has been idle since 1988.  If
                         construction commences, additional Federal funds due to
                         these delays may be necessary. Meanwhile the Virgin Islands
                         residents have been deprived of adequate wastewater
                         treatment services for 13 years.

Unilateral                EPA's August 21,1990 Project Acceleration Initiatives
Deobligations            stated that when a final payment was made, with the possible
                         exception of set-aside costs involving pending claims, all
                         other monies should be immediately deobligated. The
                         grantee should be notified that set-aside monies remain for a
                         specified period, and if claims are not timely resolved, such
                         funds will be deobligated and the grant closed. Deobligation
                         of set-aside funds can be accomplished by a unilateral
                         amendment.

                         When the grantee did not take appropriate action, the Region
                         should unilaterally close out the project and deobligate excess
                         funds. This Initiative allows the deobligation of excess funds
                         when grantees do not request timely deobligation action.
                         Grantees should be given adequate notice where unilateral
                         deobligation would be considered and accomplished.  Such
                         action would be a last resort to get the grantee-to act on
                         projects with significant excess funds.  However, Region 2
                         has. been reluctant to use the unilateral deobligation option
                         when projects .with large unpaid balances have been
                         significantly delayed.  This reluctance is due to the time and
                         effort involved and potential legal ramifications. We believe
                         this is a viable option and should be used when necessary.

                                        17  .

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Internal Controls
The Federal Managers' Financial Integrity Act (FMFIA)
requires that internal control standards be followed when
establishing and maintaining internal control systems.  The
objectives of an internal control system include (1) assets are
safeguarded against waste, loss, unauthorized use, and
misappropriation, and (2) revenues and expenditures are
properly recorded and accounted so that accounts and reliable
financial reports may be prepared and accountability of assets
maintained. We reviewed internal controls and procedures
related to our objectives, but not controls associated with
inputting and processing of IFMS and GICS information.

The Region's FY 94, FY 95 and FY 96 FMFIA Assurance
Letters did not identify  any material weaknesses or
vulnerabilities.  However, we believe that the Region's
inconsistency in deobligating funds was a material weakness
in internal controls. OMB Circular A-123  defines a material
weakness as a specific instance of noncompliance with
FMFIA which would (1) impair the fulfillment of an Agency
component's mission; (2) deprive the public of needed
services; (3) violate statutory or regulatory requirements; or
(4)  significantly weaken safeguards against waste, loss,
unauthorized use or misappropriation of funds. The Region's
failure to timely deobligate unneeded construction grant
funds, deprives the public of funds that could  be recommitted
to other badly needed projects, and improved  water quality
that these projects would bring. We therefore believe that the
Region should include construction grant deobligations as a
material weakness in its FY 97 Assurance Letter.
Other Control
Weaknesses
1) Lack of Written
Procedures
Prior OIG reports and Grants and Water Branch personnel
disclosed there were no written Regional procedures
                                        18

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2) Higher Priority,
Increased Resources,
Improved Coordination
regarding (i) deobligation of funds, (ii) roles and
responsibilities of individuals involved in deobligation/
closeout activities, (iii) conditional administrative
completions, (iv) unilateral terminations, and (v)  program
office coordination with Finance.

Written procedures evidence practices followed to comply
with EPA regulation and policy.  They provide management
with tools to coordinate and control activities of subordinates
and identify and anticipate problem areas.  Procedures are
also used to evaluate management practices and ascertain the
degree in which  internal control is exerted over operations.
Lack of written procedures could have contributed to the
untimely deobligation of funds and other conditions. The
lack of written procedures has been a continuing problem.
For example, a 1982 OIG Report (21443) recommended that
Region 2 implement formal written procedures to ensure
funds were promptly deobligated.

Region 2 must accelerate its deobligation of unnecessary
funds.by giving this a higher priority and providing increased
resources.  Currently, one grant specialist is responsible for
various construction grant completion/closeout and
deobligation efforts. Although this individual is doing a
good job, she needs additional resources to more timely
complete

these tasks. We  strongly believe that another full time
employee (FTE) would provide a great benefit in accelerating
the identification and deobligation of idle funds.

The Water  Programs Branch has one person responsible for
New York  grant activities and another person for New Jersey
activities. These individuals have conflicting grant
responsibilities (including dispute resolution).  Although the
delegated States  have various responsibilities, the two EPA
individuals cannot effectively handle  all their functions and
effectively  monitor the States without additional assistance
                                         19

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                         from other individuals with construction grant knowledge.  In
                         addition, the Water Compliance Branch has only 0.4 FTE
                         assigned to direct Caribbean construction grant activities.
                         This individual can not effectively handle the Puerto Rico
                         deobligation area in addition to other activities.

                         There could be better coordination between the grants
                         specialist and Water Program Branch individuals.  The
                         specialist must receive complete and timely closeout and
                         deobligation data from Branch and State officials to timely
                         prepare data to be entered into GICS and IFMS.

                         As a result of these analyses, Region 2 must give this area a
                         higher priority, provide additional resources, and increase the
                         coordination and cooperation among the Grants and Water
                         Branches.
Conclusion              Four OIG audits of Region 2's construction grant
                         deobligation efforts during the past 15 years disclosed
                         material weaknesses. Based on the Region's promises to take
                         action to correct these weaknesses, the OIG closed out these
                         audits. However, the same conditions found  in 1982
                         continued to surface in 1986, 1990 and 1991.  We strongly
                         believe that strong top management efforts are needed to
                         resolve this long-standing problem.  It should be noted that
                         Region 2's response to OIG Report E1VW2-02-0029-21443
                         (August 12.1982) was "Please be assured that the Region
                         and the States are pursuing deobligations and
                         terminations more aggresively than ever before."  We do
                         not believe this is the case.

                         The Region's various control system weaknesses contributed
                         to the conditions noted.  Agency policies for expediting
                         deobligations were not folio wed-in the grants we reviewed.
                         If Agency policies had been followed, at least $63 million of
                         potentially unneeded construction grant funds could have

                                        20

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                         been deobligated, and an additional $7.5 million could have
                         been deobligated in a more timely manner.

Regional Response       The Region's September 11,1997 response to the draft report
                         stated that the approximately $70 million available for
                         deobligation was misleading.  For more than five years New
                         Jersey deobligations were essentially put on hold pending a
                         Headquarters decision regarding Camden and Cape May
                         appeals. This appeal related to deobligation of excess grant
                         funds based on low bid construction costs and affected a
                         number of grantees.

                         The Region believes projects not having reached
                         administrative completion should not be included in the $300
                         million unpaid balance  since "excess balances should be
                         deobligated at the administrative completion stage." The
                         response indicated that  some New York projects had been
                         recently closed and amounts deobligated.  Also, the Region
                         believes there may be as much as $40 million in "potential"
                         obligations owed to New York grantees based on current
                         disputes and other information.

                         The response stated that New York grantees may submit their
                         administrative completion package prior to fmali'zed costs
                         (i.e. construction contractor problems). Since the grantee
                         may have more costs to submit, funds are not deobligated.
                         Also, if an appeal is likely, funds are not deobligated since
                         grantees often added additional amounts almost up to
                         closeout. If claims are valid, Region 2 has paid them.

                         Region 2 does not consider any project to be inactive until all
                         construction, audit and  appeals are completed and would not
                         terminate a grant until such time. The Region also does not
                         believe unilaterial deobligations are appropriate. In addition,
                         the Region disagreed that construction grant deobligations
                         should be deemed a material weakness since construction
                         grants closeout is  already an Agency material weakness.
                                        21

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                         Regarding recommendations 2-1,2-3, and 2-5, the Region
                         agreed to conduct a review of all construction grants with
                         unliquidated obligations to determine if any deobligation
                         actions can be taken. Deobligations will be processed as
                         appropriate. Regarding recommendation 2-2 to implement
                         Region policies, the response stated that EPA Headquarters
                         has already issued a grants closeout policy addressing
                         unexpended funds, and unilateral deobligations are
                         inappropriate. The Region believes recommendation 2-4 is
                         unnecessary since meetings are held to discuss "potential
                         project closeouts," and grant dispute issues.

OIG Evaluation          Although we do not believe any statements were misleading,
                         we clarified certain matters in the report. Our review
                         disclosed approximately $63 million potentially available for
                         deobligation. We also found approximately $7.5 million (i.e.
                         Wanaque Valley) recently deobligated which could have been
                         accomplished many years earlier. Recent additional
                         deobligations might reduce the $63 million and increase the
                         $7.5 million, but the total of $70 million would remain.

                         The Region's assertion that New Jersey grant deobligations
                         were on hold pending a Headquarters decision does not deal
                         with our audit results. This issue concerned low bid
                         construction contract deobligation costs.  Our audit
                         concerned the Region not deobligating excess funds at the
                         administrative completion stage. Page 3 of the Region's
                         response correctly states that in accordance with EPA's Final
                         Closeout Policy for Assistance Agreements dated August 27,
                         1992, excess balances (unliquidated obligations) should be
                         deobligated at the administrative completion stage.

                         The comment on Page 4 of the response regarding New York
                         projects closed out after the audit commenced and $8.7
                         million deobligated strengthens the OIG position.
                         Specifically, six New York and New Jersey grants identified
                         in Exhibit 1 (Irondequoit, Auburn, Westchester, Woodstock,
                         Leroy, and Little Egg Harbor) were closed between February

                                        22

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and June 1997 and $8.7 million was deobligated. We had
identified the specific $8.7 million for these six grants that
should have been deobligated at.the administrative
completion stage or many years prior to FY 97.

To determine Region 2's construction grant's unpaid
balances, we used the IFMS monthly summary report. This
shows unpaid balances, and includes pre-administrative
completion projects. We recognize that additional
reimbursements may be forthcoming. However, we are
concerned that the Region does not consider any project to be
inactive until all construction work,  audits and appeals are
completed and therefore would not terminate a grant until
such time. The Region must constantly monitor grants
unnecessarily delayed where payment requests have not been
submitted for many years. Such projects may be candidates
for termination or scope changes and could result in
deobligation of unneeded funds. Region 2 has previously
terminated grants and two current "active" grants are in
process of being terminated prior to  administrative
completion.

Grants can be terminated or annulled if no substantial
progress is made without good cause (40 CFR 30 903
through 30.905). Also EPA's policies and procedures require
that unneeded funds be deobligated during various stages of
completion.  For example, the EPA Administrator's
November 22,1982 memorandum to the Regional
Administrators discussed deobligation of funds that will not,
or need not be spent prior to, during, or after construction
was complete. Also, OIG's September 1991 report disclosed
$60 million that could be deobligated for Region 2
construction grants not administratively completed.

Region 2's unique policy of continuously allowing grantees to
claim additional Federal funds not previously claimed
indicates a weakness in administering construction grants.
Continuously allowing grantees to submit costs many years
               23

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after administrative completion, the audit process, final
determinations, and the appeal process is not a sound
management practice and contributes to untimely closeouts.

We disagree with the Region that it is unnecessary to include
construction grant deobligations as a material weakness since
closeouts are already an Agency material weakness. We
strongly believe Region 2 should include deobligations as a
material weakness in Assurance Letters and FMFIA reports.

We are pleased that the Region will conduct an overall
review of all construction grants to determine if any
deobligation actions can be taken.  We are also pleased that at
the exit conference the Assistant Regional Administrator
agreed to carefully review the OIG identified idle funds and
deobligate unnecessary funds immediately. However,
additional actions are needed to address the OIG concerns.
Periodic reviews should be commenced to review completed
projects which have not been closed for at least six months,
and minimum obligation balances should be estimated to
release at least a portion of the unexpended obligations. It is
also imperative that specific timeframes for initiation of
reviews and determination of actions be established.

Regarding recommendation 2-2, we strongly believe that
specific Regional procedures and policies are needed
regarding unexpended grant obligations. The Region
promised to implement such procedures in response to prior
audits. Also, Headquarter's August 27,1992 Final Closeout
Policy for Assistance Agreements emphasized the importance
of closing out projects and deobligating unliquidated
obligations timely.  It requested that Regional Procedures be
developed to implement the policy requirements.

We recognize that periodic meetings may discuss project
closeout issues. However, these meetings mainly discuss the
grants in the dispute process and are not documented. We
believe those meetings should be expanded to discuss
               24

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                         unexpended grant balances and areas where funds could be
                         deobligated. These meetings should be documented and
                         distributed to all attendees
Recommendations       We recommend that the Regional Administrator require the
                         Grants and Water Program Branches to:

                         2-1   Evaluate effectiveness of its controls for reviewing
                               unexpended obligations, make necessary changes, and
                               promptly deobligate unneeded funds.  Specifically,
                               review grants cited and take necessary actions to
                               deobligate unneeded funds.

                         2-2   Develop and implement specific Regional policies and
                               procedures for reviewing and monitoring unexpended
                               obligations, and determining requirements for
                               deobligating unneeded or idle funds. Also, consider
                               using alternative procedures (i.e. unilateral
                               deobligations) when necessary. These procedures
                               should include project management control reviews to
                               determine whether, additional funds could be
                               deobligated from other projects not part of this review.

                         2-3   Consider designating a specific individual to
                               coordinate reviewing open projects and unexpended
                               balances.  Special emphasis should be given to
                               projects completed, but not closed for six months.

                         2-4   Initiate and document periodic review meetings
                               between the two Water Branches and Grants personnel
                               to increase monitoring of unexpended construction
                               grant balances. Also, evaluate construction grant fund
                               balances on completed or inactive projects on a
                               semiannual basis.

                         2-5   Estimate minimum obligation balances necessary to
                               expedite the release of unexpended obligations.  By

                                       25

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      using these estimates, future obligation balances can
      then be retained and excess funds reprogrammed.

2-6   Establish timeframes that will serve as a benchmark
      for accomplishing the above actions.
               26

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                   CHAPTERS

INCREASED EMPHASIS NEEDED TO MEET
    GRANTS COMPLETION/CLOSEOUT
                   STRATEGY
            Although Region 2 has made significant progress to reduce
            its backlog of open construction grants, increased emphasis is
            still needed. We found that approximately 127 Step 3
            projects did not meet the Agency's goal of administratively
            completing grants by the end of FY 95 or closing out  all
            grants by the end of FY 97. The Region may not close out
            certain grants by its own projected date of FY 2000. Also,
            approximately 50  Step 1 and 2 grants will neither meet the
            Agency's nor Region's targeted closeout dates.

            This condition was caused by such factors as the (i) highest
            priority not always given to project closeouts especially Step
            1 and 2 grants,  (ii) inadequate level of communication and
            coordination between program personnel, (iii) incomplete
            administrative completions which did not accurately represent
            the grantee's final claim, (iv) duplicate audit requests and
            OIG screenout process,  (v) inconsistent GICS and IFMS data,
            (vi) turnover of experienced construction  grant program
            personnel, (vii) complexity of the remaining projects, and
            (viii) lengthy dispute/appeal and final determination
            processes.

            As a result, millions of Federal dollars of unexpended grant
            amounts remained unnecessarily obligated.  These funds
            could have been used to fund other eligible projects, thereby
            creating a positive environmental impact. Also, personnel
            assigned to the closeout process could have been reassigned
            to new assignments. In addition, the Agency goal to timely
            close out this program is in jeopardy.
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Background and         The Office of Water's October 1990 Strategy for Closing Out
Criteria                 The Construction Grant Program addressed delays, review
                         and approval of plans and specifications, timely change order
                         submission, and the administrative completion process. The
                         Office of Water's January 18, 1991 Project Acceleration
                         Initiatives Work Book reissued policies for expediting grant
                         closeout with operational problems, unresolved claims, and
                         delayed final payment requests.
                             /
                         The Work Book described State actions to ensure grants were
                         administratively completed in a timely manner. One action
                         would withhold payments until administrative completion
                         progress was made; another action would identify the latest
                         date that a final payment request would be accepted. It also
                         suggested a final date be identified for jll. change orders to be
                         submitted.  The Work Book further suggested that States
                         notify grantees that all change orders must be submitted
                         within 90 days of construction completion. Any increased "
                         change order costs submitted after this date would not be
                         allowable, except those resulting from meritorious claims.

                         The recent OIG audit strategy allowed program officials to
                         close many projects without requesting an audit and
                         expedited scheduling and completing necessary audits.
                         EPA's FY 1996 Integrity Act Report stated that Regions and
                         States should develop revised projections consistent with the
                         new OIG audit strategy. The Report also expressed concern
                         about Region 2's slippage in the rate of progress and
                         problems including resolving audit findings and disputes.
                         Therefore, Assistant Administrators will work with Regional
                         counterparts "to increase priority and attention devoted to
                         administrative completions, audit and dispute resolution, and
                         closeouts."

                         A Joint November 25, 1996 Office of Administration and
                         Resources Management, Office of General Counsel, and
                         Office of Water memorandum requested the Region 2

                                       28

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                         Administrator's personal attention to completion/closeout of
                         construction grants and accelerate current closeout plans. It
                         stated that a "significant" number of Region 2 projects would
                         not meet the Agency's goals of administratively completing
                         all projects by the end of FY 95 and closing out alLgrants by
                         the end of FY 97. Region 2 estimated that 127 projects
                         would miss that goal including 51 Puerto Rico projects.

                         The memorandum indicated Region 2 had one quarter of the
                         nationwide projects which would miss the FY 97 goal.
                         Therefore, the Region "needs to devote more management
                         attention and/or resources" in the water program, grants
                         administration and regional counsel offices where audit
                         resolution, grantee dispute and other closeout work is done.
                         It advised the Region to make use of the OIG's Strategic
                         Plan and to prevent and resolve disputes.

Region 2 Must           Region 2's Annual Report on Internal Controls dated
Accelerate Closeouts     November 24, 1989 cited the closeout process as a weakness
                         requiring corrective action.  The Report stated:

                                The Agency needs to accelerate the closeout of
                                construction grants projects so that unexpended
                                balances can be redirected to improve environmental
                                protection.  Current projections of closeouts into late
                                1990's will exceed delegated state agencies' ability to
                                manage the closeout process, and opportunities to use
                                grant balances for additional wastewater treatment will
                                be lost.

                         Region 2's Assurance Letters consistently indicated that
                         particular emphasis was placed on grant closeouts since  OMB
                         proposed this material weakness. The Letters stated it
                         "places the highest priority on closing screened out or audited
                         projects so that the deobligated funds can be reallocated for
                         further use."  The Region has given construction grant
                         closeouts increased effort. However, additional attention is
                                        29

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                         required if the Agency ?s goal of timely closeout is to be
                         realized.            .       .

                         EPA's FY 96 Integrity Report disclosed that 5,860
                         construction grant projects remained to be closed at the end
                         of FY 90. The Report also noted the number of projects
                         remaining to be closed at the end of FY 94 through 96.

                         EPA's Post 1997 Construction Grants Closeout Strategy also
                         estimated the pre-92 closeouts remaining at the end of FY
                         1997 through FY 2000.  Our comparison  of Region 2's pre-
                         92 closeouts to the nationwide totals showed that from FY
                         1994 to FY 2000, the Region's percentage of open projects
                         when compared to the nationwide universe dramatically
                         increased every year from 16 to 52 percent. This
                         percentage increase was most dramatic for FYs 1997-2000 as
                         illustrated by the following schedule:

EndofFY

1997
1998
1999
2000
Projected Closeouts Remaining

All Regions
503
230
129
60
Region 2
123
8.4
60
33
Percent of Total

25%
37%
47%
52%
                         This pattern clearly shows that while other regions have
                         accelerated their grant closeouts, Region 2 has not kept pace.
                         It has to accelerate its closeout of construction grants if the
                         Agency is to attain its goal.
Step 3 Grants
New Jersey
We reviewed New York and New Jersey Step 3 closeouts
projected for FYs 96 and 97 which were still open as of
April 15, 1997.  Seven of the 18 New Jersey grants projected
for closeout in F Y 96 were still open. For two grants
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(Gamden 708-02 and Cape May 661-07), the Region revised
the projected closeout date from FY 96 to FY 98.

The Region had not taken timely action to close out the
Camden grant. The OIG issued the final audit report in July
1996 and requested the Region's proposed audit
determination by October 1996.  As of April 15, 1997 we had
not received the Region's determination. On the Cape May
project, the grantee's revised final payment request was
appealed to NJDEP; The status of the 1995 appeal remained
unchanged as of the cut-off date of our review.

For the remaining five grants, the Region's revised targeted
closeout date was FY 97. On Neptune Township (410-01) a
contributing factor to the revised projection was the delay in
issuing the final determination letter (FDL). The draft FDL
was submitted to the OIG in February 1996 but not finalized
until March 1997. The East Rutherford (296-01) closeout
was delayed because project files could not be located.
Finally, regarding three Hudson County grants (399-06, 18
and 22), the Region issued its FDL in September 1996 but the
grants remained open at the time of our audit cut-off.

For FY 97, 14 of the 19 New Jersey State Specific Strategy
grants initially projected for closeout remained open.  At the
time our field work was finished, it was unlikely that all 14
specific grants would be closed by the end of FY 97.
However, other grants projected for a subsequent year
closeout might be substituted. The Region's own projections
revised six closeout dates to FY 98 or FY 99. Camden (708-
09), Stockton (396-01) and Pine Beach (505-03) are
estimated to be closed in FY 98.  Ocean County (714-04 and
356-01), and Keansburg (583-02) are estimated to be closed
in FY 99.  It is also unlikely all remaining eight grants will be
closed by the end of FY 97. For  example, Camden (708-06)
and Middlesex (637-01) have been appealed to Headquarters
and generally such appeals are not decided expeditiously.
Our review of the Region's recent submission disclosed that
              31

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                         nine specific New Jersey grants targeted for FY 97 closeout
                         are now projected for closeout in FY 98 or FY 99.

                         We also reviewed New York closeouts projected for FYs 96
                         and 97.  For FY 96, only two of the 15 grants projected for
                         closeout were open and were projected for FY 97. The
                         Region's closeout strategy did not indicate any reason for the
                         delay. On the Alexandria grant (1265-02), the strategy
                         assumed the grantee would not appeal the FDL. Our review
                         did not disclose any appeal, therefore there appeared to be no
                         impediment to its timely  closeout.  We found a similar
                         situation with the other New York City (713-05) grant.

                         For FY 97, nine of 20 grants projected for closeout were
                         open at the time of our audit cut-off. It is unlikely that all
                         nine would be closed by the end of the fiscal year since the
                         projected date for three grants was revised to FY 98. These
                         grants (Glens Falls 1279-04, Huntington 1040-04 and Tri-
                         Municipal 948-03) were under appeal with a decision
                         expected in FY 97 (no appeal to Headquarters was
                         anticipated). For four New York City grants (392-03,07,09
                         and 10), the OIG's February 1996 audit report requested a
                         Regional response by May 1996, but had not been received
                         by May 31, 1997. The Region's strategy stated the audit
                         would be resolved in 1996. Also, closeout of Whitestown
                         (1194-02) was delayed pending the  appeal of the Region's
                         determination. The Region's recent submission indicated
                         eight specific grants open as of September 30,1997 are now
                         projected for closeout in FY 98.

Puerto Rico              During FY 96, Region 2 closed six Puerto Rico and Virgin
and Virgin Islands         Islands grants.  As of March 1, 1997, Region 2's closeout
                         universe of Puerto Rico and Virgin Island Step 3 grants
                         consisted of 70 projects awarded between 1964 and 1992 (60
                         were awarded prior to 1990).  The targeted closeout dates for
                         the 70 grants range between September 30, 1997 and
                         September 30, 2001 (53 are not expected to meet the
                         Agency's FY 97 closeout date). In fact, 32 projects are not

                                       32

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expected to be closed before FY 2001. The following five
grants were awarded more than 10 years ago and are
scheduled for closeout in 2001:

Grant #
C72121-03
C72094-13
C72 120-06
C780 13-04
C72100-10
Award
Date
6/30/76
9/30/80
9/28/84
9/30/84
9/30/85
Admin.
Complete
12/20/88
9/29/92
12/06/89
6/30/00
3/01/89
Target
Closeout
9/30/01
9/30/01
9/30/01
9/30/01
9/30/01

Status
Screened
Screened
Screened
Redesign
Screened
Certain Puerto Rico and Virgin Islands active projects have
not proceeded as timely as expected.  Currently, 17 pre-1992
projects awarded since 1979 are not administratively
complete (unpaid balances exceeding $30 million) and have
been in process for as long as 17 years.

Between FY 93 and FY 96 Region 2 awarded 39 additional
construction grants (in excess of $50 million). Targeted
completion dates range between three and five years from the
award, and targeted closeout dates between four and seven
years.  Based on prior experience it is doubtful that these
targeted dates will be met.

In fact, the Region's September 12,1997 status report
submitted to Headquarters confirmed that targeted
administrative completion and closeout dates had been
extended for 30 (77 percent) of the 39 grants from eight
months to two years. For example, grant C72122-10 (Sabana
Grande) originally planned to be closed on March 30,2000
has been extended to September 30, 2002. In another
example (grant C72086-15-, Arecibo) the original projected
closeout date was also shifted two years (from March 30,
1999 to March 30, 2001).

Problems have also surfaced on post-1992 awards which will
impede timely completion and closeout.  For example, certain
              33

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                        FY 94 and 95 awards have not started construction or
                        contracts not awarded, and bids have not been received or
                        have been cancelled. Regional management and particularly
                        the Water Compliance Branch must give a higher priority and
                        devote additional resources to significantly reduce its project
                        backlog.

Grants Untimely        Region 2 did not always close grants in a timely manner. The
Closed Out             following is one example.

                        Caguas 82-01 (82-00) was awarded on December 29, 1972 to
                        construct intercepting sewers, force main pumping stations,
                        and a secondary water pollution control plant. The last
                        payment was made on April 2, 1986 (project was 99%
                        complete) and no action had been taken until January 26.
                        1994 (8 years later). Also, certain appropriations have been
                        unpaid since 1982. Although, the Region believed the grant
                        would be administratively completed in FY 92, it was not
                        completed until September 30.1993. At this point the
                        Caribbean Municipal Programs Branch recommended a
                        decrease of $5,087,634  and a bill for collection (BFC) for
                        $ 102,289 (excess amount).

                        It wasn't until January 26.  1994 (4 months) that the Region
                        initiated Amendment 4 (decreased $5,087,634)  and sent a
                        BFC. The February 2, 1994 audit request was screened out
                        on December 11. 1995. As of April 16, 1997 (more than 16
                        months since screenout), the grant remained open and
                        $102,289 had not been deobligated. On April 18, 1997, the
                        Accounting Operations  Section Chief acknowledged that
                        $102,289 should have been deobligated when the 1994
                        payment was received.  The targeted closeout date is
                        September 30. 2000 and the status is "File Search Pending."
                        As a result^ this 1972 grant is expected to be closed 28 years
                        later (2000). In addition, OIG's September 1991 report
                        alerted the Region that these idle funds should be
                        deobligated. The response to the draft report indicated the
                        project was closed on June 25,1997.

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Step 1 and 2 Grants      As of April 15, 1997, GICS listed 56_Region 2 Step 1 and 2
                         construction grants (NY-16, NJ-21, PR-19) awaiting closeout
                         with a Federal share of approximately $129 million.  These
                         grants were awarded between 1974 and 1981 and
                         administratively completed between 1982 and 1994 (53
                         projects administratively completed prior to March 11, 1991).
                         Region 2 and State officials stated that Step 1 and 2 closeouts
                         were a low priority since emphasis was given to Step 3
                         grants. GICS indicated New York targeted closeout dates for
                         their 16 projects between 1991 and July 27, 1996.  Similar
                         data was not available for New Jersey and Puerto Rico. As a
                         result, a majority of these 56 projects remained open for
                         approximately seven years since administration completion.
                         In addition, more than $2.5 million was unpaid and
                         potentially available to be deobligated.

                         As of September 30, 1995, Region 2 reduced its inventory of
                         over 700 projects to 75.  Although the Region's FY 96
                         Assurance Letter had committed to closing the remaining 68
                         Step 1 and 2 projects by December 31. 1996. 56 projects
                         remain open. Many projects remained open subsequent to
                         September 30,1997 because certain project files could not be
                         found.

New Jersey Grants        As of April 15, 1997,21 New Jersey Step 1 and 2 grants
                         awarded between 1973 and 1981 and administratively
                         completed between 1978 and 1990 remained open.  Under
                         the delegation agreement NJDEP was responsible for
                         managing grants through the administrative completion stage.
                         Since all Step  1 and 2 grants have reached administrative
                         completion, Region 2 is  responsible for all remaining
                         closeout activities.

                         While Region 2 has missed it's goal of closing all Step 1 and 2
                         grants by December 31,  1996, officials have targeted all
                         remaining grants for closeout during FY 97. Based on the
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                         following status of the 21 grants, we believe it unlikely that
                         all will be closed by the end of the fiscal year.

                                                             No. of   Unpaid
                         Status                               Grants  Obligations
                         Cioseout anticipated by May 31, 1997      5     $   0
                         Status not known                        8       27,512
                         Revised outlay report not submitted        3       39,907
                         Action needed to close out                3      132,340
                         Headquarters appeal                     2      196.362
                                                  Total          21

                         Although Regional officials are trying to close out five New
                         Jersey grants by May 31, 1997, actions could have been taken
                         much earlier.  For example, Evesham (463-01) reached
                         administrative completion on September 30,1988 (no funds
                         remaining). Regional officials stated that Step 3 closeouts
                         have been their priority, although that would not preclude
                         closing out Step 1 and 2 grants.

                         Closing all the remaining 16 grants by September 30, 1997 is
                         questionable.  Two Camden grants (678-01  and 708-04) were
                         appealed to Headquarters. Three Hudson grants (399-01,
                         581-01, and 5 82-01) were delayed because the Region did
                         not impose deadlines to submit revised outlay reports. The
                         status of eight projects could not be provided (Linden-
                         Rosejle - 299-02, Patterson - 586-01, Wanaque - 390-01,
                         Wyckoff - 783-01, Hamilton - 383-03, Hudson - 399-04,
                         Rahway-681-02, and Wayne-393-05). Certain grant files
                         were missing and additional data will be needed to proceed
                         with closeout. Finally, three grants could be closed (Essex
                         Union - 686-01, Sommerset - 529-01, and Cape May - 661-
                         02).

New York                NYSDEC officials have also stated that Region 2 has given a
Grants                   low priority to closing out Step 1 and 2 projects. NYSDEC's
                         April 7, 1997 memorandum indicated 16 open projects with
                         four that could be closed by the end of FY 97. The remainder

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                         would stay open until related Step 3 disputes get resolved.
                         Also, one project (1167-01) was a PCB grant and no action
                         was required.  These grants were awarded between 1976 and
                         1981 and administratively completed by 1993. The
                         NYSDEC official had no knowledge of Region 2's goal of
                         closing all Step 1 and 2 grants by December 31, 1996 or even
                         by September 30,1997. He stated this could not be
                         accomplished since several grants were under appeal.

                         Eight of the remaining 11 grants have been appealed with no
                         indication that they will be resolved before the end of the
                         fiscal year.  Three grants also remain open because of related
                         Step 3 grants.  A NYSDEC official stated their policy was
                         not to close Step 1  and 2 grants until related Step 3 grants
                         were closed. One indication of the low priority for Step 1
                         and 2 closeouts was that during F Y 96 only three New York
                         projects (same grantee) were closed.

Puerto Rico              Region 2 had 25 open Puerto Rico Step 1 and 2 grants based
Grants                   on February 20, 1997 information given to the OIG.
                         However, on February 25, 1997 (after our audit commenced)
                         the Region closed six projects leaving 19 grants awarded
                         between 1974 and  1980 (all administratively completed prior
                         to March 1991). We recognize that these closeouts were
                         ongoing prior to our review.  These Step 1 and 2 grants were
                         given a low closeout priority.  In fact, the Region has not
                         provided target closeout dates or even listed these grants in its
                         Closeout Universe sent to Headquarters.

                         We do not believe that all 19 remaining grants will be closed
                         by the end of this fiscal year since certain  files cannot be
                         located. It should be noted that some of these grants have
                         large unpaid balances.  For example, San Sebastian (130-02)
                         awarded March 2,  1977 in the amount of $455,588 has
                         $211,970 unpaid. Also Mayaquez (120-02) awarded June 28,
                         1976 in the amount of $827,324 has $131,284 unpaid.  To
                         expedite the closeout process to get on track with the
                         Agency's goal, the Water Compliance Branch must give

                                       37 •

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                         greater priority to closing these grants and deobligating
                         unneeded funds.

                         The Region's response to the draft report stated .that the Step 1
                         and 2 inventory was reduced to 25. (Puerto Rico - 5, New
                         Jersey - 8 and New York - 12). Also, the Region will
                         develop specific procedures to address the missing files.
                         However, the October 14,1997 Step 1 and 2 GIGS listing
                         shows 30 open projects (Puerto Rico - 6, New Jersey - II,
                         New York -13). It appears that this error was due to the
                         Region double-counting five grants closed on August 21, and
                         22,1997.

                         During FY 97 the Region closed 39 Step 1 and 2 grants (33
                         after our audit was initiated).  Specifically, all 19 of the
                         PRASA Step 1 and 2 closeouts were completed after February
                         25,1997 (almost five months into the FY) and 12 were closed
                         in the last 40 days of the FY.  We strongly believe that
                         additional resources directed to closeouts would have and
                         still could expedite the process.

Duplicate                Region 2's inadequate controls over audit requests and
Audit Requests           screenouts contributed to closeout delays. The Grants
                         Administration Branch (GAB) periodically submitted
                         duplicate (in some cases triplicate) Puerto Rico audit requests
                         to the OIG. The OIG acknowledged each initial audit
                         request.

                         The following are  five  examples:

                         Grantee        Grantf    	Dates Submitted	
                         Cayey         118-08        10/28/92 & 10/17/94
                         Anasco        120-08        10/28/92 & 10/17/94
                         Bayamon      103-04          4/6/92 & 10/17/94
                         Santa Rosa    103-12         4/11/94 & 10/17/94
                         Ricon         100-12    10/28/92 & 4/11/94 & 10/17/94

                         We also found New Jersey and Puerto Rico audit requests

                                       38

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                         submitted for grants previously audited or screened out. For
                         example, a June 20,1994 OIG memorandum to the Chief,
                         GAB discussed the inability to reconcile Puerto Rico grants.
                         It mentioned the San Juan Land Outfall's (96-05) October 23,
                         1992 audit request that was audited in 1985.rReport 51473
                         issued September 12, 1985 with $350,000 questioned costs).
                         After many OIG attempts, the Regional Puerto Rico audit
                         request inventory still does not reconcile with our records.

                         Region 2's projected closeout submissions to Headquarters
                         consistently listed PRASA grant C72094-12 (Carolina) as
                         pending N8 (originally estimated for June 30,1997 with a
                         target closeout for January 31,1998). Its September 12,1997
                         submission listed this grant as "abandoned" with a target N8
                         of June 30,1998 and closeout for January 31,1999. The
                         Region previously claimed this grant was administratively
                         complete in 1992 and requested an audit on April 6,1992. It
                         is currently being audited by the OIG.

Screened Out Projects    The OIG has screened out numerous construction grants.
Remain Open            The OIG Policy requires audit requests to be screened out
                         within two years except for Mega grantees (i.e. Puerto Rico).
                         All other grantees were either screened out or assigned for
                         audit within this period.  The Region must promptly resolve
                         the audit issues and issue an FDL.  If the grantee does not
                         dispute the FDL the project should be promptly closed.

                         When the OIG screened out requests, memoranda were
                         provided to Regional and State personnel identifying specific
                         projects. However, in many instances these screen-out
                         memoranda were lost. Therefore, beginning in 1993 we gave
                         each memorandum a specific State code number so personnel
                         would know which screened out projects were missing. The
                         Region's inadequate control over screen-out memoranda and
                         their untimely submission to Water Branch personnel
                         adversely affected closeouts.
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New York,
New Jersey
Screenouts
Puerto Rico
Screenouts
After an audit request is screened put EPA's August 27,1992
"Financial Closeout Policy for Assistance Agreements" states
that grants should be closed out within six months of the last
grant action (i.e. OIG screenout). We judgmentally sampled
14 New York and New Jersey grants screened out between
1994 and 1996 to determine whether they were promptly
closed.  As illustrated by the schedule below, four of these
projects (24 percent) remained open between 25 and 39
months after the screenout dates with $2.9 million unpaid.

                       Screenout  Months Unliquidated
Grantee
Suffolk Co.
Cape May
Cape May
Rochester
Grant No.
709-02
661-02
661-07
745-03
Date
1/14/94 •
3/14/94
3/13/95
3/23/95
Open
39
37
25
25
Obligations
314,000
96,000
2,454,000
14.000
                                           S2.878.000

The last two grants (Cape May and Rochester.) have been
appealed which would preclude closeout until the issues are
resolved. However, Suffolk and Cape May (661-02) are not
under appeal and should have been closed within six months
of the screenout date rather than remaining open for at least
39 and 37 months.  For Cape May, GICS shows a
September 25, 1990 administrative completion date, but the
audit request was not made until March 13, 1994 (3Vz years
later).

Although Region 2 closed 10 of the 14 grants sampled, we
found that none were closed within the six month period
specified in the Headquarters policy.  The closeouts ranged
between 9 and 35 months from screenout date (average of 23
months). For example, Leroy, NY (735-01) was screened
May 5, 1994 and closed February 3, 1997 (35 months later).

Although many Puerto Rico audit requests were screened out
prior to December 12, 1995,41 still remain open. Water
Branch personnel stated that these projects continue to remain
                                       40

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Conditional
Administrative
Completions
open because of prior "conditional administrative
completions" and missing files. These 41 grants remained
open for more than 17 months since OIG screenout and have
unpaid funds of approximately $5 million. For example, the
OIG screened out Cayey (118-09) on April 14, 1994. As of
April  14, 1997 (36 months) the project remained open.

The Region has not complied with the Financial Closeout
Policy that grants should be closed out within six months of
the OIG screenout date.  Also, many of these screened out
projects have large unpaid balances which could be
deobligated.

Region 2 officials claimed that certain administrative
completions were "conditional" (not fully complete)
and the completion packages did not accurately represent the
grantee's final claims. The Region could not determine
which grants were conditionally completed. Program
officials also stated that no one followed up "conditional"
Puerto Rico cases in the OIG inventory.  Grants and Water
Branch officials indicated "conditional" completions have
severely hampered closeout actions. We concur, and believe
activities in this area were inconsistent with Agency policy.

Our recently completed Region 1 survey of construction
grants disclosed "conditional" administrative completions
were effectively handled. When the grantee submitted a
conditional final payment, a specific amount was set aside to
cover potential reimbursement requests (i.e. litigation).
Remaining amounts, less the set aside, were deobligated at
the conditional administration  completion date. Region 1's
"conditional" completions did not impede grant closeouts.

During FY 97, Region 1  also implemented additional
closeout/completion procedures. One individual from the
Municipal Assistance Unit (Office of Ecosystem Protection)
was assigned to coordinate the construction grant phaseout
strategy. Monthly meetings instituted with the audit
                                       41

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GICS
Information
Other Factors
Affecting Closeouts
coordinator, Office of Administration and Resources
Management, and program staff discussed all aspects of the
phaseout strategy.  Subsequent conversations and OIG
meetings identified the grant universe and audit request and
report dates.  Status reports of meetings were distributed to
the phaseout strategy team.  The Region also provided a
management position in the Grants unit, and identified grants
management as a concern in their FY 96 Assurance Letter.

We believe Region 2 should consider such an approach to
accelerate closeouts.

Although the GICS national database stores historical grant
information, the data was not always consistent, correct, and
timely updated. GICS and IFMS financial data are not
reconciled and officials acknowledge long-standing
discrepancies between the two systems. For example, on
September 15,1983, NYSDEC informed Region 2 of grant
data discrepancies. The State noted that four of the five
discrepancies occurred in EPA financial records rather than
GICS. As a result of various discrepancies over the years
users cannot rely on the data integrity.

We have constantly informed program personnel of errors in
GICS especially incorrect grant listings in the OIG inventory.
Although errors have been significantly reduced for New
York and New Jersey they still persist for Puerto Rico and the
Virgin Islands.  For example, on May 14,1997 we informed
Grants personnel of GICS errors in the Puerto Rico OIG
universe which still included December 1995 screenouts.

The Region must continue to accelerate its efforts to
complete and close out remaining construction  grants. To
accomplish this task in an effective and timely manner,
greater communication and cooperation between the various
program offices is necessary. Specifically the grants
specialist must receive complete and accurate closeout
packages which have been adequately reviewed by the two
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                         Water Branches. Also, additional personnel with
                         construction grant knowledge should be assigned at least on a
                         part-time basis to assist the people currently working in this
                         area. We recognize that some very complex projects remain
                         open in Region 2. However, complex projects are being
                         closed in a timely manner in other EPA regions.

                         The Region's untimely audit resolution and dispute resolution
                         process significantly affected closeouts. We discuss these
                         issues in Chapter 4 and 5 of this report.

Conclusion               EPA's Post 1997 Construction Grants Closeout Strategy
                         (April 23,1997) acknowledged that 84 percent of the 5,860
                         grants open at the end of FY 90 had been closed by FY 96.
                         However, estimates indicate that 498 pre-1992 projects will
                         remain open as of the September 1997 closeout goal date.
                         The number of projected open Region 2 projects (123)
                         represents 25 percent of the nationwide total of 498. Region
                         2 also estimates 84 grants will be open at the end of FY 98
                         (37 percent of the Agency universe), 60 at the end of FY 99
                         (47 percent), and 33 at the end of FY 2000 (52 percent).

                         Region 2 projected closeout of 62.Step 3 grants in FY 97.  As
                         of April 15, 1997, only 24 grants were closed as follows:

                                           NJ    NY    PR/VI      Total
                         Projected          15     17      30*         62
                         Actual              1     7      16         24

                         However, subsequent to completing our fieldwork, the
                         Region accelerated Step 3 closeouts. As of June 13,1997,44
                         grants were closed (NJ-5, NY-11, PR/VI-28). (29 of 44
                         closeouts were completed after our audit commenced.) The
                         response to the draft report indicated 54 closeouts as of
                         August 18, 1997.
                                       43

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                                            NI    NY   PR/VI      Total
                         Projected           15    17     -31*         63
                         Actual   .          10    12     32          54

                         *The response stated tlie PR/VI commitment is 32.

                         To comply with Agency directives, the Region must
                         accelerate closeout of the remaining New York, New Jersey
                         and Puerto Rico Step 1, 2 and 3 grants. Headquarters Final
                         Closeout Policy for Assistance Agreements requires grant
                         closeout within six months of the last grant action. This
                         effort must be given a higher priority, and we as well as
                         Headquarters strongly believe that additional regional
                         resources are needed to expedite the closeout process.
                         Increased cooperation and coordination between the two
                         Water Branches, Grants, and NYSDEC and NJDEP
                         personnel will be needed to meet the Agency's goals.

Regional Response       The  response indicated that Headquarters review of Region
                         2's Closeout Plan concluded that most regions would miss the
                              i     -' >       •                D
                         FY 97 closeout goal, and that Region 2's closeout plan was
                         reasonable. It cited programmatic and external
                         considerations unique to Region 2 including the OIG screen
                         out process, conflicts between allowing grantees to submit
                         additional documents versus the desire to expeditiously
                         resolve the dispute, and specialty law firms.

                         The Region believes that increases in the investory of grants
                         awaiting closeout are due to the OIG's reluctance to make a
                         determination on audit criteria.  It stated that the OIG
                         abandoned the mega-audit concept in 1995 and new criteria
                         were established (December 11,1995 memorandum to
                         Region 2).

                         The response indicated  41 Puerto Rico pre-1992 closeouts
                         remained and the OIG identified 28 of these for audits.  Also,
                         the Region noted that the draft report mentioned 14 of 19
                         New Jersey grants projected for closeout remain open, but

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                         should read "14 out of 15 per the table on page 38." As of
                         July 27, "nine of the 14 had been closed with the remaining
                         five on target for closeout by the end of FY 97."

                         The Region indicated that additional evaluations of most
                         Puerto Rico "conditional" administrative completions (N8)
                         must be conducted. It is directing resources to review change
                         orders not previously submitted and research issues involving
                         inadequate documentation. The Region is also developing a
                         report to identify conditional administrative completion
                         projects which will be issued to notify program offices of
                         projects needing further action prior to closeout.

                         The response stated that the Region is on target to meet its
                         FY 97 closeout commitments, and reduced the Step 1 and 2
                         inventory to 25 projects.  Finally, the Region believed it
                         always met/or exceeded its project closeout commitments
                         from FY 93 to FY 96.

                         Regarding the recommendations, the Region believes
                         dedicating additional resources to grant closeout is not
                         necessary. Also, there is "excellent coordination among
                         those involved in construction grant management," but will
                         develop a strategy addressing missing files. In addition, the
                         Region did not believe it should give a higher priority to
                         closing Step  1 and 2 projects.

OIG Evaluation        .  Although Region 2 generally met its original or revised
                         commitments, it is very clear that Headquarters expected
                         increased closeouts. Headquarters personnel periodically
                         visited the Region and expressed concerns regarding
                         closeouts. For example, a June 1994 Headquarters Office of
                         Water meeting with Region 2 Water Management and Grants
                         Administration discussed projects in process, administratively
                         completed stage, and resolution and dispute phase.

                         The official was concerned that the Region would not meet
                         Agency closeout goals.  He cited NYSDEC's loss of

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qualified staff, large grants under construction, and OIG
mega-grantee audits to be resolved. Also, many New Jersey
grantees were reluctant to submit final.outlay reports and
believed they were entitled to additional monies from other
grant deobligations.  Because of other priorities, excess
funds could not be deobligated timely. The official was very
concerned with the Region's plan to issue new Puerto Rico
grants while Headquarters was trying to close out the
program.

On April 15,1997, a Headquarter's Office of Water official
discussed recent Region 2 visits and additional closeout
problems. He stated that the Region prematurely entered N8
codes to meet commitments, and these "conditional"
administrative completions should have been but were not
promptly resolved. He had concerns with PRASA closeputs
because of long-standing problems, and the disputes backlog.
He did not believe the Region allocated enough personnel to
resolve issues and close out grants. He mentioned
discussions where Region 2 might detail experienced
program personnel to reduce the backlog, but it did not
materialize.  Finally, he expressed concerns that the recent
Region 2 reorganization "knocked everything back a couple
of squares" and moving

grant responsibilities into the enforcement area was not
helping to close out grants.

The National Program Director's May 27,1997
memorandum to the Deputy Regional Administrator (DRA)
outlined his March 12, 1997 review of Region 2's
construction grant program. He stated that it "appears that
the New York and New Jersey programs are making steady
progress in closing out the old Title II program but will need
about three more years to complete the job. Close out plans
are dependent on retaining staff expertise... and renewed
progress in resolving grantee disputes..." (emphasis added).
He mentioned the accelerated plan to try to close out Puerto
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Rico grants by the end of 1999, but it would require
"increased resources, management attention, and cooperation
from the OIG." Also, the current plans for closing out the
program appear reasonable, but he was concerned that
responsibility for program closeout is spread across four
Regional organizations. Therefore, the Director
recommended that the DRA's "personal attention is needed to
assure that the close out plan is achieved. In particular,
additional resources may be needed to assure that the Puerto
Rico plan is achieved."

The March 12, 1997 trip report mentioned many key
concerns:
      Whether the Region has sufficient resources and
      expertise to meet its close out plan.

•     The number of grantee disputes, particularly in New
      York, which will need to be decided.

•     The accelerated plan for Puerto Rico may be difficult
      to achieve without additional resources.

•     The need to get the Commonwealth of Puerto Rico to
      take necessary steps to meet the latest Regional plan.
      This will require close management and support.

•     The large number of Puerto Rico grant awards since
      1991 which will require Region 2's management
      attention for several years into the future.

A September 29, 1997 discussion, with the Headquarters
official noted the Region's recent commitment updates and
closeouts. He reiterated prior concerns regarding Puerto Rico
conditional completions, and the need for additional Regional
resources for closeouts. He was concerned that the recent
update showed a slippage of nine projects. He stated the
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Region expected 119 projects to miss the FY 97 closeout date,
but the update showed 128 projects.

Also, the November 25,1996 memorandum from the
Assistant Administrators for Water, Administration and
Resources Management, and General Counsel to the
Regional Administrator (RA) expressed closeout concerns.
Region 2 needed to devote more management action and
resources to construction grant completion/closeouts both to
Regional activities and dealings with the States and Corps of
Engineers.  Also, the Region needed to.use the OIG's
strategic plan for completing construction grant audits
(particularly in Puerto Rico) by the end of FY 98, and more
timely resolve disputes.  The memorandum requested the
RA's "personal attention to completion/closeout of the
construction grants program" and to "accelerate current
closeout plans."

Based on the Region's response we made appropriate
modifications and clarifications. We recognize the Region
knew that it would not meet EPA's goal for closeout of all
grants by the end of FY 97.  Headquarters April 23,1997
memorandum concluded that most regions would miss the
target date for pre-1992 construction grants but Region  2
would have 25 percent (123 grants) of the 503 grants that
would remain open (see Section- Region 2 Must Accelerate
Clpseouts). Therefore, Headquarters officials were highly
concerned about the slow pace of Region 2's closeouts.

When the Agency declared Construction Grants Close Out a
material management control weakness, the OIG
implemented a revised audit strategy that focused on the most
vulnerable grants. In December 1995, in line with the OIG
strategy, the Eastern Audit Division screened out
approximately 40 Puerto Rico projects administratively
completed many years earlier.  These mega-audit grants were
not covered by the two year audit time frame.  We do not
understand the Region's comment (page 11 of the response),
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"As a result, the Region recommended that the OIG prepare a
written Policy on the audit criteria for the construction grants
program."

Region 2 may have some unique programmatic and external
considerations, but most of their concerns are also found in
other regions. The same law firms represent grantees in other
regions, and allowing grantee submittal of additional
documentation is a nationwide problem. Also, the OIG
screen out process and mega-audit concept were used in all
regions. Despite all these factors the other Regions showed
greater success in grant closeout.

The Region originally projected 58.construction grant
closeouts for FY 95. However,  its May 1995 mid-year report
submitted to the Office of Water significantly reduced this
projection to 32. closeouts based on certain  factors (i.e. loss of
New Jersey records, New York  disputes taking longer than
anticipated). Another Regional  document showed 33
closeout commitments for FY 95.

As previously noted, the individual FY 97 closeout
commitments changed.  Also, Region 2's Water Management
Division's September 21,1995 memorandum to the Office of
Wastewater Management commited |9 New Jersey and 20
New York grants (total of 39) for closeout which is seven
more than the number mentioned in the response.  However,
the August 1996 State Specific Strategy update reduced the
previous 39 closeout commitment to 32 (New Jersey
reduction of 4, New York reduction of 3 closeouts).

Although the Region met its revised FY 97 commitment for
New Jersey and Puerto Rico, it missed it for New York by
two closeouts.  We noted that 47 of the 62 FY 97 closeouts
occurred after our audit commenced and in the last eight
months of the year.  Also, we do not agree that 41 pre-1992
Puerto Rico projects were awaiting closeout and the OIG
identified 28 for audits.  In fact,'the Region's September 12,
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1997 submission to Headquarters indicated 42j>re-1992
Puerto Rico Step 3 grants awaiting closeout and 12_additional
ones not administratively complete (total of M open grants).
In addition, the OIG has not identified 28 grants for audit.
The September 12,1997 submission also erroneously lists 14
Puerto Rico grants in the OIG inventory. Therefore, the
Region's contention that it has a "potential universe of only
13 pre-1992 grant awards to be closed out" is incorrect.

The audit report correctly states that as of April 15,1997, 14
of 19 specific New Jersey grants projected for closeout
remajn open. Prior projections to Headquarters listed 19
specific New Jersey grants it expected to close during FY 97.
As of September 30,1997, nine specific grants remained
open, but substituted grants were closed. However, a
subsequent FY 97 projection reduced the commitment to 15
closeputs.

We believe the planned development of a report to identify
"conditional" administrative completions would be useful.
However, if it had been done five years ago it would have
been beneficial in closing grants more timely. For example,
while many Puerto Rico "conditional" administrative
completions were in the OIG inventory, the Region could
have taken further action. Consequently, when screenouts
occurred, the Region could have immediately closed them,
rather than having them sit idle for additional years.

We are pleased that the Region will develop a strategy
addressing the missing files problem. However, specific
procedures to address this long standing problem could have
been previously developed. We hope that the planned
strategy will be timely developed and implemented.

The OIG and EPA Headquarters strongly believe that
additional Region 2 resources and efforts are needed to
expedite the closeout process. In fact, on September 8,1997,
the Deputy Regional Administrator told OIG Headquarters
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                         personnel that a key reason for the Region 2 backlog of
                         construction grant closeouts was a lack of Regional
                         resources.

Recommendations       We recommend that the Regional Administrator instruct the
                         Grants and Water Branch program offices to review the
                         construction grant completion/closeout strategy and:

                         3-1   Pay closer attention to expediting grant closeouts by
                               providing additional resources. Consider temporarily
                               detailing personnel with construction grant knowledge
                               to help current personnel, and assigning an individual
                               to coordinate program offices activities.

                         3-2   Conduct an evaluation of all open "conditionally"
                               administratively completed grants and determine any
                               pending issues (i.e. change orders). This evaluation
                               should be completed for New York, New Jersey, and
                               Puerto Rico projects. Also, future "conditional"
                               administrative completion issues should be identified
                               and promptly resolved.

                         3-3   Initiate and document regular program office meetings
                               to discuss (i) actions initiated or to be initiated, (ii)
                               specific  closeout problems, (iii) projects in OIG
                               inventory, (iv) missing or incomplete files, (v) State
                               activities, (vi) revised targeted dates and justifications,
                               and (vii) OIG audit results.  Regular communication
                               and coordination will be beneficial in accelerating
                               closeouts.

                         3-4   Give a higher priority to closing out the remaining
                               Step  1 and 2 grants and deobligate unneeded funds
                               during FY 98.
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                                CHAPTER 4

                    AUDIT RESOLUTION PROCESS
                             WAS UNTIMELY
                        The Region's audit resolution process was untimely.
                        Proposed and final determination letters (FDLs) were issued
                        later than required by Agency guidance. The Region did not
                        follow the required Agency guidance, and did not aggresively
                        pursue resolutions until an audit report was scheduled for the
                        overdue listing in the OIG Semi-Annual Report. The Region
                        also did not give audit resolution a high priority. As a result,
                        a total of $37,893,378 remained unliquidated longer than it
                        should have. Potentially, all or part of this money could have
                        been reallocated for use on other construction projects thus
                        having an even greater environmental impact.
Criteria                EPA Order 2750, Management of EPA Audit Reports and
                        Follow-up Actions, states in Chapter 4, Resolution of
                        External Audits (Assistance Projects), that the Action Official
                        must issue a final determination within 150 days of the final
                        audit report date for audits with questioned costs below
                        $ 100,000; or provide the Divisional Inspector General for
                        Audit a proposed determination within 90 days of the final
                        audit report date for audits with questioned costs equal to or
                        greater than $100,000. Also, the Director, Grants
                        Administration's August 27, 1992 memorandum, Final
t                        Closeout Policy for Assistance Agreements, required regional
                        offices to comply with EPA Order 2750 regarding timely
                        audit resolution.
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Analysis of Resolution   During Fiscal Years 1996 and 1997, there were 16
Untimeliness            construction grant audit reports (covering 28 grants) issued
                        by the Office of Inspector General (OIG) for which either
                        FDLs were issued or the reports remained unresolved.  FDLs
                        were issued for ten reports, only proposed determination
                        letters were sent in three, and no letters were sent in the
                        remaining three. Once proposed determination letters are
                        sent by the Region, the OIG reviews them within a few days
                        and advises the Region of its acceptance or rejection.  In most
                        cases, the letters are accepted as written and should not
                        require much time to issue final determination letters. In a
                        few instances, needed  revisions are discussed with Regional
                        staff.

                        The average time for the entire resolution process for these 16
                        reports, as of May 25,  1997, was 358 days. This amount will
                        increase once all the remaining FDLs are issued.  The
                        timeframe range for ten instances with issued FDLs was 161
                        to 636 days. The timeframe range for the six instances where
                        no FDLs had yet been issued was 104 to 1,116 days.

                        The delay in the process appeared to occur at both the
                        preparation of the proposed and final determination phases.
                        The Average time it took for a proposed letter to be sent to
                        OIG for review was 212 days. The average time between the
                        submission of a proposed letter and the issuance of a final
                        determination letter was 179 days. (See Exhibit 2)

                        The following are two representative examples of this
                        untimeliness and the magnitude of the related unliquidated
                        obligations:

                        The OIG issued a report (4300034) on May 4, 1994 for four
                        grants  given to the Ocean County Utilities Authority.  On
                        September 14, 1995, the Region sent a proposed
                        determination letter to the OIG for review (498 day  later).

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The OIG concurred with this letter on September 20, 1995.
As of May 25, 1997, 618 days passed without an FDL issued.
No explanation has been provided for this lapse of time.

There were $1,721,089 in unliquidated costs associated with
these four grants which were lying idle.

The OIG issued report 6100096 on February 5, 1996 for four
New York City Department of Environment Protection
(NYCDEP) grants for the Oakwood Beach treatment facility.
As .of May 25, 1997 (475 days), a proposed determination
was yet to be sent to the OIG. There were $15,334,737 in
unliquidated costs associated with these four grants.

There were also $5,468,448 in unliquidated costs for reports
where FDLs had been issued. For example, though an FDL
was issued on August 26,1996 to Westchester County
(Mamaroneck), there were $1,653,220 in unliquidated costs
still available  as of May 25, 1997. No explanation was
provided for not deobligating these funds.

The untimeliness issue is not restricted to the past two years.
The Region has historically taken much longer than the
timeframes cited in EPA Order 2750 to issue FDLs. For
example, OIG report 3100374 (September 14,1993)
pertained to six grants awarded to NYCDEP (North River).
The Region did not issue its FDL until September 21, 1995,
over two years later. While this resolution involved several
grants, the response did exemplify the Regional pattern of
lengthy time needed to issue an FDL.

In conclusion, the Region's audit resolution process was
untimely, both at the proposed and final determination
phases, and funds remained idle that could have been more
beneficially used for other construction projects.
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Regional Response       The Region in its response acknowledged that a number of
                         resolutions took longer than their targeted 180 days but stated
                         that its audit resolution rate compared favorably to other
                         regions. In addition, it provided various factors it believed
                         contributed to the length of the process, including:

                         •     the number, magnitude and complexity (mega audits)
                               of the audits issued;

                         •     the enormous dollar amounts reviewed and
                               questioned;

                         •     the complexities caused by diverse issues raised; and

                         •     only one State (New York) fully delegated and
                               providing proposed audit resolutions.

                         The Region also noted that two determination letters had
                         recently been issued and two or three more might be issued
                         by September 30,1997. This will leave only two pending
                         audits, one awaiting State, review, and the other for which a
                         determination will be issued in the first quarter of FY 1998.

                         The Region further stated that it is working to increase the
                         Section 205(g) Management Assistance Grant for New York
                         and New Jersey.  The additional funds will maintain a higher
                         level of staffing and assure adequate funding for managing
                         projects up to administrative completion.

                         Finally, in response to our recommendation, the Region
                         stated it had been reviewing its audit resolution process and
                         was committed to timely audit resolution. It also stated that
                         ORC does not generally participate in the audit resolution
                         process.
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OIG Evaluation          Though there is an acknowledgement by the Region that
                         untimeliness does occur, it should be reemphasized that the
                         Region uses a 180 day target. As previously noted, EPA
                         Order 2750 sets 90 or 150 day limits for determination letters.
                         Consequently, Regional resolutions are inherently untimely.

                         It also should be noted that the presented Regional audit
                         resolution rates are misleading because the data includes all
                         types of audit resolutions and our report deals only with
                         construction grants.

                         Finally, since ORC personnel only participate in the audit
                         resolution process on a case by case basis, we have modified
                         our recommendation. In addition, we want to reemphasize
                         the second part of the recommendation (which the Region did
                         not address in its response).  A higher priority needs to be
                         placed on the timely resolution of audit reports and the
                         deobligation of funds.
Recommendation        We recommend that the Regional Administrator instruct
                         Water Programs Branch and other appropriate personnel to:

                         4-1   Analyze its audit resolution process to determine the
                               bottlenecks that are slowing the process down. In
                               addition, a higher priority needs to be placed on timely
                               resolution of audit reports, and to deobligate funds of
                               $5,468,448 associated with the 10 issued FDLs.
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                 CHAPTER 5

LENGTHY DISPUTE/APPEAL PROCESS
          DELAYED CLOSEOUTS
         Region 2 has not always resolved construction grant appeals
         in a timely manner. Most disputes have lingered in the Office
         of Regional Counsel (ORC) for many years before decisions
         were rendered. Initial conferences have not always been
         scheduled to discuss disputed areas and Water Branch
         personnel have not prepared timely program memoranda.
         Also, certain grant dispute files .were incomplete and written
         chronologies of important actions (i.e. meetings and
         conversations; information requested, received or not
         received; followup actions) were not always maintained.

         This condition was caused by such factors as (i) inadequate
         resources and emphasis given to the disputes/appeals process,
         (ii) inadequate communication and coordination between
         program offices and ORC, (iii) non-compliance with
         Regional disputes procedures, (iv) manual status report data
         does not reconcile with computerized tracking system, (v)
         loss of construction grant expertise, and (vi) grantees
         represented by speciality law firms.

         Untimely resolution of disputes further delay closeout of the
         award until the action is settled.  As a result, some cases have
         been under appeal for close to 10 years and resolution is still
         pending. These projects remained open and were reassigned
         to different attorneys or program personnel. Also, excess
         funds have not been deobligated. As disputes continue to
         linger,  there may be a tendency to drop certain issues or settle
         them for amounts less than originally contemplated.
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Background                   Region 2's Assistance Disputes Procedures dated June
                               4, 1086 describe the roles and responsibilities of
                               program personnel.  ORC is responsible for
                               docketing, monitoring and reporting the status of
                               dispute appeals, and notifying the Assistant Regional
                               Administrator for Policy and Management and the
                               Water Management Division (WMD) of the dispute
                               filing. ORC must also issue bimonthly status reports
                               indicating the appeal date, summary of issues and
                               status, and anticipated date for Regional
                               Administrator's (RA) decision.

                               According to these procedures, Region 2's goal is to
                               generally resolve each appeal within 120 days of
                               receipt if no informal conference is held, or within 120
                               days after the date of the conference. The ORC
                               attorney must notify the appellant of the right to an
                               informal conference, and a deadline for receipt of
                               documentary evidence and written argument if no
                               conference is requested.  WMD and/or Grants
                               personnel must provide ORC with written comments
                               on the appeal "within 45  days after the informal
                     ;          conference or receipt of the appellant's submission
                               supporting its appeal, whichever is later." Finally,
                               based on WMD's comments, ORC will prepare the
                               recommended decision for the RA.

                               In August 1992 the Region created two positions
                               currently in the Construction Grants Section of the
                               Water Programs Branch (WPB) to facilitate more
                               timely dispute resolution.
Current Disputes         Although the Region's written procedures established a goal
Inventory                of 120 days (4 months) to resolve each appeal, this goal was

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Reconsiderations
                         rarely met. In fact, most open disputes have remained
                         unresolved for more than four years.

                         During FY 93, 50 disputes/appeals were in the Region's
                         inventory and 18 were resolved, leaving an ending balance of
                         32 projects. Between FYs 94 and 96, the Region reduced
                         their dispute/appeal inventory to the following 17 projects:

Grantee
Rockland Co
Rockland Co.
Tri-Municipal Co.
Amherst
Huntington
Moodna Basin
Rockland Co.
Glens Falls
Niagara Co.
Niagara Co.
Nassau Co.
Landis Sewerage
NYCDEP
Rockland Co.
Morristown
Nassau Co.
Wanaque Valley

Grant #
744-08
744-02/13
948-03
618-02/03
040-04
954-01
744-09
279-04
707-02
707-01
891-05/12
461-02
1100-1/3/4
744-14
376-22
1139-03
390-06
Date of
Appeal
05/13/90
07/10/90
01/12/92
08/07/92
12/09/92
01/21/93
01/23/93
03/08/93
03/19/93
10/20/93
01/04/95
07/07/95
10/19/95
10/18/95
04/17/96
06/14/96
10/28/96
Months in
Process (1)
85
83
65
58
54
53
53
51
51
44
29
23
20
20
14
12
7
(1) Date of Appeal to June 1, 1997

In addition, to these 17 active disputes, Region 2 also has to
resolve 15 Petitions for Reconsideration. These petitions
include 13 Nassau County disputes (filed between 1989 and
1992 and resolved between 1992 and 1996) and two Amherst
disputes (filed between 1989 and 1990 and resolved in  1992
and 1993).
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                        Resolution of the Nassau County Petitions has been delayed
                        and the Water Management Decision. (WMD) memoranda
                        submission dates has been continuously revised, presently
                        showing the targeted date as January 21,1997.  Both Amherst
                        Petitions have seen little Region 2 activity. Since June 1993,
                        ORC status reports for Docket No. 02-89-AD13 indicates
                        ORC is awaiting a response to the grantee and scheduling
                        preliminary discussion with Grants personnel. Regarding
                        Docket No. 02-90-AD26 the next action is Awaiting WMD.
                        Therefore, Region 2 has 32. active disputes and requests for
                        reconsiderations in its inventory. This total does not include
                        disputes resolved by the Region, but subsequently appealed
                        to Headquarters where they have lingered for many years (i.e.
                        Ocean County 372-03, Camden County 708-04).

NYSDEC Concerns      Region 2's untimely resolutions have affected delegated State
                        activities.  For example, NYSDECs Deputy Commissioner's
                        February 24, 1987 letter to Region 2's Deputy Administrator
                        stated that its Grants personnel historically presumed that
                        Regional disputes would be settled within a year and those
                        reaching Headquarters within a second year.  However, some
                        "larger issues have been under appeal since the late 1980s
                        and were to be resolved as long as five years  ago." Of the 20
                        projects with appeals pending some will be owed additional
                        funds, and others might result in substantial recoveries.
                        Continuing delays have made it almost impossible to estimate
                        project increases/decreases and closeouts.
                                           i

                        NYSDEC has committed  17 and 18 Step 3 closeouts in FYs
                        97 and 98  and another 21 over the following three years (17
                        Step 1 and 2 projects also remain). However, NYSDEC must
                        reduce Grants staff from eight persons to three. Thus,
                        closeout projections cannot be met when disputes are not
                        settled, and reduced staff cannot handle an increased
                        workload.  The Deputy Commissioner concluded "it is
                        imperative that EPA give a high priority to rendering appeals
                        decisions." Region 2 concurred that numerous appeals
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                        present a problem to EPA and NYSDEC in managing funds
                        and staffing needed to close the construction grants.
Status Reports          Program offices have not always complied with Regional
                        Assistance Dispute Procedures. Although the procedures
                        require ORC to issue bimonthly status reports indicating
                        information and target dates, reports were not always issued
                        on a bimonthly basis and were discontinued in October 1996.
                        They were replaced by a Disputes Resolution Schedule
                        prepared by Water Programs Branch (Construction Grants
                        Section). Although the Schedule provides targeted action
                        dates, it is virtually useless because most information was
                        eliminated. Also, targeted dates were constantly revised and
                        commitments were rarely met. ORC personnel advised that
                        due to untimely decision memoranda from the Construction
                        Grants Section, the planned effort for construction grant
                        appeals has accordingly been reduced by 50 percent.

                        Until recently Status Reports were periodically submitted.
                        These reports provided the date of appeal, attorney and
                        program contact persons, grant number, audit report number,
                        disputed amount, issues, current status, and targeted action
                        dates. Our review of the December 1, 1994 to October 17,
                        1996 reports and ORC files disclosed limited activity to bring
                        projects to timely closure. For example:

                        Rockland County (No. 02-90-AD13^ - The July 10,1990
                        appeal involved cost allocation issues. An informal
                        conference was held on October 11, 1991(15 months after
                        appeal was filed) and additional documentation was
                        provided.  All status reports listed the Next Action as
                        "Awaiting WMD Review." On March 15, 1993 WMD
                        issued a technical memorandum for one grant involved.  On
                        November 20, 1996 the Water Programs Branch issued
                        another memorandum for the same grant. The review of the
                        second grant was targeted for December 1996. The appeal
                        has not been resolved as of May 1, 1997 (almost seven years)

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                         and the latest targeted date of January 30, 1997 has not been
                         met.

                         Rockland County (No. 02-90-AD17^ - The appeal was filed
                         on May 13, 1990 and the December 1, 1994 status report
                         indicated that the informal meeting was held in April 1991.
                         However, the grantee's attorney's March 15,1993 letter
                         informed ORC that an informal conference had never been
                         scheduled. Also, the letter indicated it was unlikely that the
                         appeal would be resolved until the summer of 1993. The
                         issues were similar to the  above dispute and the Next Action
                         for all the status reports was "Awaiting WMP Review." The
                         appeal has not been resolved as of May 1,1997 (seven years)
                         and the latest target date of March 30, 1997 has not been met.

                         Tri-Municipal (No. 02-92-AD06) - The appeal was filed on
                         January 12, 1992. Each of the status reports stated that
                         additional information was received on March 30, 1994 and
                         ORC was awaiting WMD's determination since that date.
                         The appeal has not been resolved and is targeted for FY 98.

                         We found many other examples of untimely dispute-appeal
                         resolutions (See Exhibit 3 for details).
Untimely Program       Progress could not be made to resolve grantee disputes until
Memoranda            Water Branch (formerly WMD) personnel provided a detailed
                        program memorandum which adequately outlined all issues.
                        ORC personnel and status reports have indicated that
                        untimely memoranda have significantly contributed to
                        delayed resolutions. Water Branch personnel acknowledged
                        that due to other priorities, this area was not given enough
                        attention.

                        Although ORC has overall responsibility for resolving
                        disputes, in actuality the process is controlled by the Grants
                        and Water program offices. Since most disputes involve
                                     .•

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technical areas, construction grant program personnel must
review the disputed areas and provide ORC with a technical
memorandum of their review results.  After receiving the
memorandum, ORC can prepare the dispute decision for the
RA's approval. ORC expressed frustration with the program
personnel's failure to meet their commitments for providing
adequate technical decision memoranda.

One example where untimely and continuously revised
technical memoranda delayed resolution was Nassau County
(02-90-AD03).  On January 19, 1990 the grantee appealed
the Region's final determination and an informal conference
was held on March 14,1990. ORC could not proceed until
WMD prepared a technical memorandum. WMD did not
prepare the memorandum until June 16, 1994 (almost 4%
years since the appeal). Between June and December 1994 .
ORC messages to WMD requested additional information,
explanations, clarifications, and corrections.  For example, a
December 14, 1994 message stated "we need to maintain
consistency with the DDO decision unless we have a reason
to revise it. Let me know what the correct numbers are.
Unfortunately, these issues are delaying finalizing this
document."

On December 15, 1994 ORC wanted additional discrepancies
explained and on December 22,1994  a revised technical
memorandum was sent to ORC. Between December 1994
and April 1995 additional clarifications were necessary and
ORC's frustration was clearly evident with such statements as
"He finally provided me with a copy of his revised memo", "I
found another far reaching mathematical error in the
revision", "I have attached my millionth draft of this
decision", "Here is the trillionth draft  of 361-01", and "The
December 22nd version changes everything but
administrative costs." Finally, the RA decision was issued on
April 20, 1995 (more than five years since the appeal).
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Other Factors
No Informal Conferences  Our review of ORC files and discussions with appropriate
or Chronological Logs     personnel disclosed that informal conferences had not been
                         held for many disputes. ORC personnel believed that holding
                         informal conferences would be a waste of time if Water
                         Branch personnel did not followup with a timely and
                         complete program memorandum. We recognize that untimely
                         program memoranda was the main factor for delayed
                         resolutions, but believe timely informal conferences should
                         have been scheduled to clarify the disputed issues.

                         In many instances ORC personnel did not maintain complete
                         and organized files or chronological logs showing dates of ,
                         important actions, meetings, conversations, requests and/or
                         receipt of grantee or Water Branch information.  Although
                         this did not materially offset the delays, we believe that
                         complete and organized files are necessary to assure that
                         ORC and program personnel effectively monitored the
                         individual projects.  Also, complete files would be necessary
                         if the matter went to trial.
Status Report
Reconciliation
with Adtracs
Status report information did not always reconcile with the
ORC tracking system (Adtracs). For example, the FY 97
Disputes Resolution Schedule as of October 17, 1996 listed
16 disputes while Adtracs listed 19 disputes. Also, the date
of the appeal differed between the two systems. For example:
                         Rockjand County (02-90-AD17)
                         Tri-Municipal (02-92-AD06)
                         Rockjand County (02-93-AD02)
                         Niagara County (02-93 -AD04)
                         Rockjand County (02-95-AD05)
Adtracs
5/3/90
1/23/92
2/22/93
3/22/93
10/19/95
Status
Reports
5/13/90
1/12/92
1/23/93
3/19/93
10/18/95
                                       66

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Loss of Experienced
Personnel and Specialty
Law Firms
Regional Response
Adtracs also did not account for the 15 reconsideration cases
returned to Region 2 for resolution. When they were returned
to the Region, the attorney should have completed a form for
the revised information to be input into the system.

As resolutions linger in the dispute process they become more
difficult to resolve.  Over the years personnel with
construction grant expertise have left the Agency or been
reassigned to other areas. The current cases have been
reassigned to different attorneys or program personnel.
When a case is transferred, the new individual must review
the files and get up to speed on the specific matters. In some
cases, inadequate or incomplete case files have delayed this
process.

Another factor causing delays are the specialty law firms that
represent some grantees. These firms are very
knowledgeable of the construction grant regulations, and
Regional officials spend considerable effort in analyzing each
point under consideration.  Although these same firms
represent grantees located in other regions, those disputes
have been generally resolved in a more timely manner than in
Region 2.
The response noted numerous factors contributing to the
Region's lengthy disputes/appeals process, and grantees have
been given every opportunity to submit additional
information to support these claims.  Also, ORC and WPB
agreed that disputes were not progressing as expected and
ORC had little control over WPB production of memoranda.
Therefore, it was inefficient for ORC to maintain bi-monthly
status reports containing the required information.

The response indicated that the Adtracs system could not
accomodate disputes before the Region for reconsideration.
However, ORC will inquire whether Adtracs can be revised
to accommodate this information, and will continue to
                                       67

-------
                         include reconsideration cases in the bimonthly status report.
                         The Region believed it has made considerable progress in
                         reducing its disputes, and will review the current inventory to
                         determine whether these can be resolved more expeditiously.
OIG Evaluation
We acknowledge the factors contributing to timely resolution
of disputes/appeals and the increased number of resolutions
between 1993 and 1996. However, more needs to be done to
eliminate the backlog as well as new disputes that will arise
in the future. We are pleased that the issuance of the
bimonthly status reports will be resumed showing all cases
(including reconsiderations).  This will allow management to
monitor cases that are not moving to closure as expected.

Regarding our recommendation to implement a plan to
accelerate the dispute resolution process, review of the
current inventory to determine which can be resolved
expeditiously is a good first step.  However,  after the review
is completed, an action plan with commitment deadlines
should be initiated outlining responsibilities for both offices.
Recommendation
We recommend that the Regional Administrator instruct ORC
and Water Programs Branch personnel to:

5-1   Implement a joint plan to accelerate the dispute
      resolution process. This effort must contain a greater
      commitment by both offices to eliminate the case
      backlog. Increased Water Branch actions are clearly
      needed to provide complete and timely, program
      memoranda, and dates can not be constantly revised.
      In addition, ORC must initiate timely informal
      conferences, maintain adequate files with
      chronological logs of actions, and adequately
      document all meetings and conversations.
                                       68

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            NEW YORK
SCHEDULE OF UNLIQUIDATED BALANCES
EXHIBITI
PAGE 1/3


Grantee

NYCDEP (Oakwood)
NYCDEP (North River)
NYCDEP (North River)
IronDeQuit Bay
Rochester PWD
Rochester PWD
Nassau Co
Auburn (Step 2)
Suffolk Co
Town of Amherst
Westchester Co
Clinton Co
Glens Falls
Woodstock
Leroy

(Totals


Grant*

C360392-07
C361 100-03
C361 100-04
C360500-01
C360715-02
C360745-03
C360891-09
C360972-01
C360 1036-03
C360618-03
C360908-06
C361 171-02
C361279-04
C360799-04
C360735-01


| Average months delayed

Award
Date

09/30/87
09/28/79
09/30/80
12/10/69
07/29/77
06/30/81
09/30/80
12/21/76
09/30/77
06/30/75
09/30/88
09/08/83
09/30/84
09/30/81
05/16/75




Adm, Compl
(N8)Date

09/27/95
07/26/94
06/30/93
09/30/96
12/09/93
03/31/93
06/29/87
06/30/88
02/09/96
06/09/89
09/12/96
N/A
02/23/90
12/31/92
07/31/92




Last Payment
Date

05/26/94
08/31/94
12/26/91
01/06/97
09/23/93
02/07/97
04/14/94
09/03/86
07/10/96
09/29/89
09/19/94
10/15/96
11/20/91
10/16/96
05/21/93





Grant Amt

$80,247,971
$227,821,362
$272,598,442
$40,388,685
$23,851,289
$139,893,635
. $7,582,258
$1,154,161
$20,556,460
$7,761,719
$66,958,888
$23,526,782
$15,286,854
$10,136,774
$959,196

$938,724,476


Cumulative
Payments

$65,554,320
$206,739,260
$250,226,309
$35,583,622
$21,313,674
$139,879,364
$4,305,607
$88,296
$16,596,278
$5,831,092
$65,305,668
$22,883,768
$14,830,839
$9,688,431
$674,244

$859,500,772

Unliquidated
Balance
Per IFMS

$14,693,651
$21,082,102
$22,372,133
$4,805,063
$2,537,615
$14,271
$3,276,651
$1,065,865
$3,960,182
$1,930,627
$1,653,220
$643,014
$456,015
$448,343
$284,952

$79,223,704


Potential
Deobligation

$13,224,286
$13,295,704
$5,381,646
$4,805,063
$2,400,257
$14,271
$3,137,150
$1,065,865
$3,960,182
N/A
$1,653,220
N/A
N/A
$448,343
; $284,952

$49,670,939

N8 Date To
May 1, 1997
(MONTHS)

19
33
46
7
40
49
118
106
14
94
7

86
52
57


52
               69

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           NEWJERSEY
SCHEDULE OF UNLIQUIDATED BALANCES
EXHIBIT 1
PACE 2/3


Grantee

Bernards S.A,
Parsippany
Middlesex County
Cape May County
Ocean County
Little Egg Harbor
Pine Beach
Keansburg MUA
Bridgewater TWP
Perth Amboy
Wanaque

TOTALS
Average months
delayed


Grant*

C340382-01
C340587-02
C340637-01
C340661-07
C340372-03
C340579-02
C340505-03
C340583-02
C340638-02
C340435r02
C340434-01





Award Date

09/30/81
05/07/76
.08/30/76
12/28/84
05/27/76
06/30/81
09/30/82
09/30/82
09/30/80
09/26/85
09/30/80




Admin
Compl
Date (N8)

08/18/87
09/28/88
07/19/89
09/28/90
10/09/90
" -03/31/97
12/31/86
12/19/88
.N/A
N/A
12/84




Last Pymt
Date

03/18/88
08/17/88
06/13/94
03/07/95
12/05/91
04/21/88
10/01/84
01/01/89
,10/18/96
01/10/91
12/10/84



-

Grant Amt

$13,577,213
$9,108,502
.$77,232,210
$28,628,685
$48,086,604
"$li263,894
$2,203,388
$5,965,394
.$9,294,644
$3,211,243
$3,663,600

$202,235,377


Cumulative
Outlays

$12,575,718
$8,302,210
,$76,738,248
$26,174,857
$46,804,856
'$949,725
$1,605,660
$5,573,670
.$8,424,125
$250,310
$3,663,600

$191,062,979

Unliquidated
Balance
PerlFMS

$1,001,495
$806,292
$493,962
$2,453,828
$1,281,748
$314,169
$597,728
$391,724
.$870,519
-$2;960,933
$0

$11,172,398


Potential
Deobligatio
n

$729,620
$806,292
$0
$2,282,828
$968,349
$314,169
$597,728
$391,724
.$0
$2,960,933
$0

$9,051,643


Delayed
Deobligatio
n

$0
$0
.$0
$0
$0
$0
$0
$0
-$0
$0
$656,392

$656,392

N8 Date To
May 1,
1997
(MONTHS)

116
103
93
78
79
108
151
100


112


104
               70

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           PUERTO RICO
SCHEDULE OF UNLIQVIDA TED BALANCES
EXHIBIT 1
PAGE 3/3


Grantee

Puerto Nuevo
San Antonio Comm.
Anasco Trunk Sewer
Camuy Hatillo
Botijas
Caguas
Carolina

SUBTOTAL


Dept. of Public Works
Gov't of Virgin Islands

SUBTOTAL

TOTALS
Average months
delayed


Grants

C720096-06-02
C720102-1M
C720 120-08
C720126-08-02
C720200-02-1
C720082-01/00
C720094-12




C780013-04
C780025-01







Award
Date

06/30/80
09/29/88
03/09/87
09/07/83
09/30/80
12/29/72
09/29/79




09/28/84
09/29/89






Admin Compl
Date (N8)

09/21/84
12/29/92
09/29/92
09/29/92
05/07/96
09/30/93
06/30/97












Last Pymt
Date

05/05/91
10/23/91
05/21/94
03/24/94
07/13/93
04/02/86
06/01/83


VIRGIN

02/10/88
07/15/96







Grant Amt

$14,514,864
$1,400,860
$5,004,626
$1,374,987
$100,448
$5,100,280
$4,968,332

$32,464,397
ISLANDS

$11,134,058
$7,933,657

$19,067,715

$51,532,112


Cumulative
Outlays .

$14,078,813
$1,145,144
$2,062,457
$1,151,923
$100,448
$4,997,991
$4,722,159

$28,258,935


$1,052,710
$1,764,325

$2,817,035

$31,075,970

Unliquidated
Balance
Per IFMS

$436,051
$255,716
$2,942,169
$223,064
$0
$102,289
$246,173

$4,205,462


$10,081,348
$6,169,332

$16,250,680

$20,456,142


Potential
Deobligatio
n

$436,051
$255,716
$2,942,169
$223,064
$0
$102,289
$246,173

$4,205,462


*




$4,205,462


Delayed
Deobligatio
n

$0
$0
$0
$0
$1,714,017
$5,087,634
$0

$6,801,65!


*




$6,801,651

N8 Date To
May 1, 1997
(MONTHS)

151,
52
55
55
42
132
133


.







89
               71

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(a)



Grantee

Ocean County UA




Neptune SA

Rochester PWD

New York City -
Oakwood Beach



PRASA - Bayamon

Camden County MUA






(b)



Report No.

4300034




5100407

7100010

6100096




6100102

6100255


ALL CONSTRUCTION GRANTS EITHER with FDLs
ISSUED IN FYs 96 and 97 or STILL UNRESOLVED
(AS OF MAY 25, 1997)

(c)



Grant Number

C340372-03
C340372-08
C340356-01
C340371-01

C340410-01

C360715-02

C360392-03
C360392-07
C360392-09
C360392-10

C720103-03

C340708-02
C340708-09


(d)


Final Report
Date

.5/4/94




7/10/95

10/15/96

2/5/96




2/5/96

7/25/96



(e)

Proposed
Determination
Date

9/14/95




1 1/30/95 .

2/20/97

not issued




5/20/97

not issued




(f)


Days to
Issue (e-d)

498




143

128

475*




470

304*






(g)

Final
Determination
Date

.not issued




3/28/97

3/25/97

not issued




not issued

not issued






(h)


Days to
Issue (g-e)

618*



•
493

33

475*




5*

304*


Page 1/3



(i)


Total Days
to Issue

,1.116*




636

' 161

475*




475*

304*


72

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(a)



Grantee

New York City -
Owls Head

Suffolk County

Hudson County UA




Westchester County •
Mamaroneck

Wanaque Valley RSA

Monroe Township
MUA





(b)



Report No.

7100111


7100091

5100231




6100076


6100127

5300032

ALL CONSTRUCTION GRANTS EITHER with FDLs
ISSUED IN FYs 96 and 97 or STILL UNRESOLVED
(AS OF MAY 25, 1997)

(c)



Grant Number

C360402-03
C360402-04

C361036-02

C340399-05
C340399-06
C340399-18
C340399-22

C360908-06


C340390-06

C340423-01
C340423-02

(d)


Final Report
Date

2/10/97


1/9/97

3/28/95




12/6/95


3/11/96

9/18/95


(e)

Proposed
Determination
Date

not issued


5/20/97

9/25/95




3/12/96


9/19/96

2/29/96



(0


Days to
Issue (e-d)

104*


131

181




97


192

164


(g)

Final
Determination
Date

not issued


not issued

9/4/96




8/27/96


9/30/96
'
6/28/96



(h)


Days to
Issue (g-e)

104*


5*

345




168


10

120

Page 2/3



(0


Total Days
to Issue

104*


136*

. 526




265


203

284

73

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(a)



Grantee

Gibbsboro

Morristown

Johnstown/Gloversville

Liverpool Pump Station

* As of 5/25/97




(b)



Report No.

5100404

5100410

5200020

5100270


ALL CONSTRUCTION GRANTS EITHER with FDLs
ISSUED IN FYs 96 and 97 or STILL UNRESOLVED
(AS OF MAY 25, 1997)

(c)



Grant Number

C340871-01

C340376-02

C360878-03

C361200-05



(d)


Final Report
Date

7/10/95

7/10/95

6/15/95

4/10/95



(e)

Proposed
Determination
Date

10/31/95

1 1/13/95

'10/16/95

8/31/95




(f)


Days to
Issue (e-d)

113

126

123

143



(g)

Final
Determination
Date

.3/29/96

2/20/96

2/12/96

2/12/96




(h)


Days to
Issue (g-e)

150

99

119

165


Page 3/3



(0


Total Days
to Issue

-263

225

242

308


74

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                                                                Exhibit 3
                  ADDITIONAL EXAMPLES OF UNTIMELY
                      DISPUTE/APPEAL RESOLUTIONS

1.     AmherstfNo. Q2-92-AD13') - The August 7, 1992 appeal regarded execution of
      change orders and other issues.  The grantee requested and received an extension
      to the early December 1992 to submit its request for review of the July 17,1992
      determination. On December 9, 1992 the grantee's attorney submitted a detailed
      Request for Review and a prompt informal conference. Our review of ORC's
      files and discussions with the attorney in charge did not disclose any actions since
      December 1992, not even an informal conference. All status reports noted ORC
      was awaiting WMD's memorandum. Action dates were revised from FY 95 to 96
      to 97 to 98. The appeal has not been resolved and the revised target date is FY 98.

2.     Town of Huntington (No. 02-92-AD 19^ - The appeal was filed on December 9,
      1992. An informal conference was held on March 16, 1993 and documentation
      submitted. Status reports from December 1, 1994 to the present indicated revised
      dates for WMD's memorandum. On December 1, 1994 WMD revised its
      submission date to no later than (NLT) July 30. 1995 and the RA decision during
      FY96. On January 3,1994, ORC informed the grantee that it was "currently
      handling a large backlog of disputes."  Therefore, "we are unable to properly
      review and evaluate the information submitted", but will handle the appeal
      expeditiously. On December 23, 1994, ORC again informed the grantee that its
      decision will  "be issued no later than September 30, 1996, but we will make every
      effort to issue it late in 1995 or early in 1996. In early 1995 EPA's letter assured
      the grantee that the decision will be issued ASAP. Subsequent reports continued
      to revise WMD's submission to August 30, 1995, June 30, 1996, August 30,
      1996, and finally August 15, 1997. The RA decision date was also revised. No
      memoranda has been received to date.

3.     Moodna Basin (No. 02-93-ADO 1) - The appeal was filed on January 21,1993,
      and an initial  conference was not held. However, a recent Water Branch schedule
      lists an April  15, 1993 informal conference.  WMD's schedule for document
      submission was constantly revised from NLT May 30, 1995, August 30, 1995,
      May 30, 1996, FY 97 and currently FY 98.  The RA determination was revised to
      FY98.
                                      75

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4.    Glen Fails (No. 02-93-AD03^ - The appeal was filed on March 8, 1993 and on
      April 5, 1993 ORC acknowledged receipt. Status reports from 1994 to October
      1996 state an informal entrance conference will be held during FY 95. As of
      January 1997 no informal, conference has. been held. The WMD submission of its
      technical memorandum' and the RA decision has been continually revised from
      May 1995 to September J998.    '      '
                            ••                       '
                                    i
5.    Niagara (No. 02-93-AD04^ - The appeal was filed on March 19,1993 and
      documentation was received in May 1993. WMD constantly revised dates for
      submitting their memorandum from FY 96 to 98. The RA decision was also
      revised from FY 96 to 98. There has not been an informal conference to date.

6.    Niagara (No. 02-93-AD09') - The- appeal was filed on October 20,1993 and
      documentation was submitted. The last action was a January 24, 1994 grantee
      letter requesting a meeting to clarify issues.  WMD's dates for memorandum
      submission were revised from September 30,1995, to FY 97 and finally FY 98.
      The RA decision was similarly revised from FY 96 to FY 98.  There has not been
      an informal conference to date.
                                      76

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                          UPJII tU til Alt£> tlMVIKUIMMtlMIAL HKUIbCllON AGENCY
                                                REGION II
   DATE:     SEP  1 1 W7  •

SUBJECT: Draft Audit of Region II 's
         Deobligation and Closeout of Construction Grants
         Draft Audit No.  E1FWF7-02-001

  FROM: Herbert'Barrack
         Assistant Regional AdnXmistrator for Policy and Management

     TO: Paul D. McKechnie
         Divisional Inspector General for Audit
         Eastern Division
         Region II's detailed response to the above-referenced Office of Inspector General (OIG) draft
         audit dated July 3, 1997 is provided in the attachment to this memorandum. This is a significant
         audit and our response reflects our careful review and consideration of all of the comments and
         recommendations made by your office.  In general, we believe the report fails to recognize the
         unique circumstances in Region II that have impacted the construction grants closeout program.
         In particular, the report ignores the number and complexity of the grants awarded in this region,
         the huge dollar value of these grants, and the fact that grants continued to be awarded in Puerto
         Rico after 1992 thus continuing to add to the inventory of grants heeding closeout.  Additionally,
         the report fails to discuss the delay in closeouts caused by the OIG holding projects in its audit
         inventory beyond its own policy for a two-year timeframe for screening out projects.

         As was made clear during the course of the audit,  but was not reflected in the report, Region II
         has a closeout strategy in place that has  been approved by EPA's Office of Water, and we have
         consistently met or exceeded our annual closeout commitments for each of the past four years.
         We are continuing to implement this strategy and to effectively monitor the status of all grants
         awaiting closeout.  The Agency has acknowledged that its initial FY 1997 goal (which is cited in
         this report) for closeout of all grants could not be met.  Our strategy is consistent with the overall
         Agency approach, but by failing to acknowledge this, the report lacks a critical context for its
         discussion of Region II's  closeout program.

         With respect to the OIG's comments on the lack of timely deobligations of funds, we have
         identified a number of factual and interpretive areas where we disagree with the statements made
         in the report.  We plan, however, in partnership with our delegated states, to conduct a review of
         all construction grants with unliquidated balances to determine if any deobligation actions can be
        taken.  Additionally, we have identified progress made in the audit resolution process and in
         reducing the inventory of audits under appeal.  We will look at these two components of the
         overall closeout program  to see if further progress can be made.
                                            77

-------
I would like to thank your office for accommodating our request to extend the response date for
this draft audit.  If you have any questions, please jet me know or have your staff contact Scott
Opis, Policy, Planning and Evaluation Branch, at (212) 637-3699.

Attachments

cc: Herb Maletz, OIG          '       ;
                                   78

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                                                                            Attachment


                           Region II Response (o Draft Audit of
                                                               \

               Region II's Deobltgation and Closeout of Construction Grants



                                 Chapter 1  - Introduction

Background Section (page 1)

•      The description of how the construction grants program works does not include
       information on the range of activities carried out by EPA.  Additionally, statements in the
       report imply that the States manage most of the day-to-day administrative duties in Puerto
       Rico and the Virgin Islands. This should be modified to .reflect the fact that the
       construction grants programs in Puerto Rico and the Virgin Islands are not fully delegated.
                                                            'i                      -
•      The report notes on page 2 that EPA's closeout policy calls for excess balances to be
       deobligated at administrative completion.  In New Jersey however, deobligation of excess
       balances upon administrative completion has been precluded by. a provision in the New
       Jersey State Priority System since fiscal year (FY) 1982, which calls for a one-time
       adjustment of the grant amount, up or down, as soon as bids are received based on the
      ' low bid  construction cost.

       This policy of certifying only one grant amendment after the initial award eliminated
       increases for construction cost overruns, i.e., change orders, which occur in all projects.
       Thus, the "excess balances" referred  to by OIG represent the only contingent funds
       available for change orders unless underruns in other line items (e.g., engineering, legal,
       administrative) result in unexpended  dollars. In the event an EPA audit disallowed any
       previously reimbursed costs, eligible  change orders could then be claimed, where needed,
       to substitute for the ineligible amounts.

       As the results of an audit are unknown until a final determination letter is issued, the
       Region can never know at the time of administrative completion how much the grantee's
       final claim may need to be increased. Grantee appeals of State or EPA audits also extend
       these uncertainties. It is only after the final audit and appeal processes are complete that
       unliquidated obligations can be positively identified.

*       The second paragraph on  page 4 should be modified to reflect the fact that the 1,086
       grants and $2 billion identified as remaining open at the end of FY 1996 are national
       numbers. Further, the report should  provide the specific value of grants awarded in
       Region II and the current correct amount of unliquidated balances that are not associated
                                       79

-------
       with active, ongoing projects.
Scope and Methodology Section  (page 6)

•      Although the OIG characterized the Puerto Rico and Virgin Islands grants as problematic,
       it failed to contact representatives of U.S. Army Corps of Engineers (USACE) during the
       course of the audit. We believe that such consultation with USACE would have added
       balance to the review since the USACE is a major participant in the administration of the
       construction grants program in the Caribbean.

•      The OIG describes on page 6 that its review focused on grants with the largest
       unliquidated balances. However, the OIG does not use a consistent nor clear definition of
       unliquidated balances. For example, the OIG defines balances on both active construction
       projects and administratively complete projects as "unliquidated."  We believe that
       balances for active projects should not be classified as unliquidated because they are not
       available for deobligation. Their inclusion by the OIG gives an inaccurate view of the
     .  status of deobligation activity in Region II.

•      In its December 11, 1995 screen-out memorandum (regarding Puerto  Rico construction
       grants), the OIG asked EPA Region II to ensure that all outstanding issues were resolved
       before proceeding with grant closeout.  We are working to meet the OIG's request, and
       we believe that this report should be modified to reflect that the Region must now conduct
       additional evaluations of most, if not all, previously rendered conditional administrative
       completions (N8) of Puerto Rico Aqueduct and Sewer Authority (PRASA) grants.  To
       accomplish this, we are directing resources to review change orders that may not have
       been submitted at the time of the N8, and  to research issues involving  inadequate
       documentation to ensure that PRASA can be reimbursed for eligible costs.

       On the last line of page 6, WPD should read WPB.
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  Chapter 2 - Improvements Needed in Timely Deobligation of Construction Grant Funds
On page 9 of the report, the OIG states "We identified more than $63 million that was unpaid,
and not timely deobligated.  In addition, approximately $7.5 million of recently deobligated
amounts could have been accomplished many years earlier." These statements are misleading
since they imply that approximately $70 million was available for deobligation. Our information
indicates that this is not the case (see discussion on unpaid balances below)..

The OIG also states on page 9 that "such funds ($70.5 million) could have been used for State
administration of construction grant and special appropriation projects." Legislation for the use
of Title II deobligations for State administration of construction grants has not been continuously
in place. Specific language permitting the use of deobligated funds for State administration of
special appropriation grants was not provided until passage of the FY 1997 Appropriations Act.
Therefore this statement is misleading.

AJso on page 9, the OIG states "The Region's failure to deobligate unneeded construction grant
funds has been a continuous problem since 1982." For more than five years, deobligations of
New Jersey construction grants were essentially put on hold pending a final EPA  Headquarters
decision on appeals by the Camden and Cape May County Municipal Utilities Authorities.  These
Authorities objected to the provisions in the New Jersey Department of Environmental
Protection's (NJDEP) priority system which required deobligation of excess grant funds based on
the low bid construction cost.  This practice affected a number of grantees with a combined total
of nearly $25 million in deobligations proposed by NJDEP.

Region II concurred with NJDEP on this matter in a March 23, 1988 decision.  However, the
Region was obliged to suspend all such grant decrease actions until EPA Headquarters completed
its review (see memorandum dated September 25, 1991).  This proved to be the proper course of
action because the final decision on May 29,  1992 declared that grant funds representing the
federal share of allowable costs incurred within the scope of a  project may not be deobligated.
Unpaid Balances Remained Unobligated Section (pages 11-12)

•      It is not clear what data sources were used for the OIG's analysis of "Region 2's open
       construction grants with unpaid balances," nor is it clear which grants comprise the 159
       projects reviewed by the OIG. We believe that the information in the report misrepresents
       the status of unpaid obligations in the Region. For example, projects which have not yet
       reached the administrative completion stage should not be included in the $300 million
       total indicated in the chart on page 11  of the report.  In accordance with EPA's Final
       Closeout Policy for Assistance Agreements dated August 27, 1992, excess balances
       (unliquidated obligations) should be deobligated at the administrative completion stage.

       Prior to administrative completion the project is still active, meaning construction is still
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 taking place and therefore costs are still being incurred. Furthermore, one year after
 initiation of operation of the treatment facility, the grantee must certify to EPA that the
 facility is meeting project performance standards.  Only then can EPA take any action to
 deobligate funds and refer the grant to the OIG for audit.

 $57 million characterized by the OIG as unpaid balances is being used for active ongoing
 projects in the Caribbean.  The chart on page 11 distorts this situation. For example, the
 chart identifies 75 projects in Puerto Rico and 5 projects in the Virgin Islands that have
 unpaid balances. Although all of the monies awarded under the grants may not have been
 paid out, 38 of the identified projects were awarded in 1992 or thereafter.  These 38
 Puerto Rico projects, which are under construction, account for over $41 million in
 unliquidated balances;  Further, two of the five Virgin Islands projects are also under
 construction and those two active projects account for an  additional S16 million in
 unliquidated balances.  Of the three remaining Virgin Islands' projects, one was
 administratively completed on September 30, 1996 with no outstanding balance, one is
 due to complete construction during FY 1997, and the third was recently let for bid.

 The OIG stated "We also found that in four of these grants more than $7.5 million were
 recently deobligated that had been lying idle for substantial periods....  Therefore,
 approximately 60 percent of the unpaid balances reviewed were potentially deobligable."
 We believe that the OIG should provide information on the methodology used to calculate
 the 60 percent potentially deobligable figure because the numbers used in the report are
 misleading and confusing.

 The OIG identifies $63 million of potential de-obligations  for 26 of 35 grants it reviewed.
 However, the OIG lists the Virgin Islands grants as being both included and excluded from
 that figure. The OIG should clarify this statement to avoid confusion.

 Although the OIG cites severaj projects which may be potentially deobligated, Region II
 staff had previously reported that some  of the New York projects identified had already
 been closed out and therefore should not have been included in the analysis (please see
 attached list).  These eight projects, which were administratively complete and had no
 outstanding appeals, provided a total of $8,712,882 in deobligated funds.

 It should be emphasized that New York State is a fully delegated State program and that
EPA Headquarters has accepted the Region/State Specific Strategy for grant closeout.
Most of the projects appearing on the OlG's list have already been scheduled for closeout
by the New York State Department of Environmental  Conservation (NYSDEC).

Moreover, a review of New York State (NYS) projects, which constitute $49 million of
the $63 million the OIG found not timely deobligated, indicated that there are $40 million
in potential obligations.  Thus, the $63 million should be reduced by $40 million due to the
potential obligations in NYS!  A breakdown of the $49 million identified by the OIG is as
follows:
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              $13 million could be deobligated by the end of FY 1997
               23 million is associated with grants which are under appeal
               13 million is awaiting audit resolution
              S49 million total

However, associated with the above are $40 million in potential deobligations:

       *      Associated with the $23 million awaiting appeal resolution, should the grantees
              win all of their disputed costs, the total obligations would be $30 million; and

       »      Associated with the $13 million awaiting audit resolution, based on information
              from, the NYSDEC and should there be no appeal of these audit resolutions, only
              $2.4 million will be available for deobligation. Consequently, the remaining
              obligated funds would be $10 million.

•      The following description of the administrative completion, audit and appeal processes,
       provides an understanding of the impact of deobligation issues for grants in New York
       State that the draft audit report fails to include:

       *'•     Administrative completion process:  NYSDEC has grantees submit their
              administrative completion package prior to finalized costs if there are construction
              contractor related problems. This is consistent with the memorandum dated
              October 15, 1984 from the EPA Office of Water.  Projects are then placed in the
              audit inventory while any outstanding issues are being resolved.  In these cases, the
              grantee may have more costs to submit and,  therefore, NYSDEC and EPA do hot
              deobligate funds.

       *      Audit and appeal process. Once the audit is issued, NYSDEC and EPA are often
              aware whether an appeal by the grantee is likely and, if so, funds are not
              deobligated.  Grantees' comments on draft audit reports, usually contained in the
              final audit reports, often indicate whether the grantee will file an appeal.
              Uncertainty regarding the excess of the grant amount over the final payment
           •  request continues throughout the audit and appeal processes. Grantees have often
              added previously uncited amounts to their final claim'almost up until closeout, and
              where these claims are found to be valid, Region II has paid them.  For example,
              years after filing its initial appeals, Nassau County, New York is adding some $4
              million to its claim for Y-fittings.

*       Most of the New Jersey projects listed in Exhibit 1, attached to the draft report, have .
       already been scheduled and accepted by EPA Headquarters for closeout in FY 1997 or FY
       1998.  We also question why the Wanaque Valley Regional Sewer Authority (WVRSA)
       project appears on the list because there is no unliquidated balance for this grant. As
       background, Headquarters had negotiated a payment settlement on USEPA Bill for
       Collection (BFC) which allowed WVRSA to repay its BFC within 10 years from the issue
       date.  The  BFC expires in 1998.  Until such time as the BFC has been satisfied, EPA
       cannot begin to process  the closeout. It should also be noted that all of the unliquidated

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       obligations were deobligated, resulting in a zero unliquidated balance.  As stated in
       Amendment No. 3 to this project (i.e., C340434-01-3; attached), "Since a negotiated
       settlement was reached to collect a debt owed to EPA on this project, the amount being
       deobligated reflects all of the unliquidated obligations which appear in. the grant.
       Therefore, once the debt is collected by EPA, the project will then be closed out."

       For Puerto Rico, the Region previously reported projects identified in this report as having
       been closed out. The remaining projects listed are identified in the Grants Information
       Control System (GICS) as active grants (i.e., projects that are still under construction or
       have not reached administrative completion). To date, the Region has closed out 10
       Puerto Rico construction grant projects on the OIG's list.  A total of $3,073,711 in
       unliquidated obligations associated with these projects was deobligated.

       The OIG Report states that the grant specialist must receive complete and timely closeout
       and deobligation data from Branch officials. For the program in NY, closeout and
       deobligation data are provided by the NYSDEC, not the Water Programs Branch.
Examples of Untimely Deobligation Section  (page 14)

*      Citv of Auburn 972-01: The OIG implies that the Region failed to deobligate funds from
       this grant in a timely manner after the |ast payment was made to the grantee in 1986.
       Quoting the OIG's report, "However, it wasn't until February 27. 1997 (after our audit
       started) that $1,065,865 was deobligated (more than  10 years since the last payment)."
       Deobligation of funds from this grant was not based upon the "last payment" because the
       last payment was not the final payment. In addition, the fact that the grant was closed out
       on February 10, 1997, had been reported to the OIG prior to the issuance of the draft
       audit report.  It should also be noted that the Region received NYSDEC's certification for
       the grant decrease on December  16, 1996. The Region initiated the deobligation/closeout
       action on January 3,  1997, and it was signed by the Regional Administrator on February
       .10, 1997.                                   :

•      PRASA - Anasco Trunk Sewer 72-120-08:  This project was closed out on July 9,  1997;
       which had been reported to the OIG prior to the issuance of the draft report. The
       information provided by the OIG on this project is confusing.  Further, the OIG statement
       that the project has been unpaid for ten years i? misleading.  For example, it is should be
       noted that the OIG held this project in its audit inventory from September 1992 to
       December 1995.

       The report should be revised to present a accurate chronology and evaluation of this
       project.  We recommend the following substitution: (I) the grant was awarded in March
       1982 for $2,941,870; (2) a grant  decrease of $905.503 was  processed in September 1992
       after the project was administratively complete (this brought the project amount down to
       $2,062,457); and (3) an audit was timely requested and the project was screened out by
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       the OIG on December 11,  1995.  When the grant was closed out on July 10, 1997, only
       $299 in unliquidated balances remained to be deobligated
Inactive Projects Section (page 151

•      The OIG seems to determine inactive status based on payment activity, which is not a
       good indicator of activity for a grant.  For example, in some instances we have withheld
       payment from a grantee due to some noncompliance issues.  In other cases, there are
       special programmatic conditions which may limit the amount of funds released dependent
       upon achievement of certain milestones. Jn addition, IFMS and GICS do not reflect the
       details of noncompliance issues that often affect payments to the grantees. Region II does
       not consider any project to be inactive until all construction work, audits and appeals are
       completed and therefore would not terminate a grant until such time.

•      With respect to unilateral deobligations, in most cases funds are held in a grant pending
       audit resolution or appeal.  Therefore, Region II does not believe that unilateral
       deobligations in advance of final agency action are appropriate.

•      The OIG points to a Federal Highway Administration Directive as an example to EPA for
       taking action on "inactive projects."  We do not believe that this analogy is appropriate
       because it is EPA policies and directives that are pertinent to the Region's activities.

•      Mangrove Lagoon Project: The OIG characterizes the Mangrove Lagoon project grant as
       being inactive.  Although the OIG attempts to explain the complex history of the project,
       the chronology does not recognize that the Region requested an investigation of the
       Virgin Islands Department of Public Works (VIDPW) and the consultant selected for the
       planning and design of the project.  Further, the  report does  not provide information on
       how the length of the investigation contributed to the overall delay nor does it specify how
       the review assured the protection of federal grant funds (i.e., the investigation identified
       problems that ultimately resulted in the consultant being debarred). Nor does the report
       portray an accurate and complete picture of EPA-initiated enforcement  actions.  We
     -  believe that the Mangrove Lagoon  project should not be considered as a candidate for
       potential deobligation since this project has been under Consent Order and the Region
       continues to monitor its status. Therefore, the Mangrove Lagoon project should not be
       considered in the comparison analysis of potential deobligations and  unpaid balances
       shown on page 12.

       In the last paragraph on page 16, the OIG states that "We believe this 13 year old project
       could have been managed more effectively.  It had many problems since inception and
       should have been terminated." We disagree with the OIG's conclusion  since termination
       of this grant would have deprived Virgin Island residents of adequate wastewater
       treatment services. Even if the grant were to be terminated,  the recovered monies would
       revert back to the Virgin Islands for use in the development of other wastewater projects.

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       The OIG also fails to recognize that the Virgin Islands experienced several major
       hurricanes during the 1980's and 1990's which resulted in construction delays. Although
       we realize that the delays are not all attributable to hurricanes and that VIDPW is
       ultimately responsible for completion of the projects, the report should be modified to
       distinguish when EPA is required to deobligate unused monies and when such actions may
       not be appropriate.
Internal Controls Section (page 18)

•      The Region disagrees.that there are no written procedures regarding deobligation and/or
       closeout of construction grants. On August 21, 1992, the agency published its Final
       •Closeout Policy for Assistance Agreements, which includes guidance for construction
       grants closeouts. With respect to the statement that Region II should include construction
      .grants as a material weakness, the Region feels that it is unnecessary since the
       construction grants closeout is already identified as an agency material weakness. Based
       on this, the Region reports progress in  this area in the annual assurance letter and other
       FMFIA reports.

       In addition, the Region follows the Handbook of Procedures for the Construction Grant
       Program and the Delegations Agreements for the States of New Jersey and New York
       Copies of these documents were available to the OIG during the audit.
Resources. Coordination and Priorities Section  (page 19)
                              ;   •>         ;      •'«• '

•      Although current resources dedicated to the closeout of the construction grants program
       are an issue, the Region has and will continue to effectively implement its strategy to
       complete and close out the program expeditiously.  The Region has submitted to EPA
       Headquarters its completion/closeout strategy which has been accepted by the Office of
       Wastewater Management, and we are on target to meet our fiscal year commitments
       under this strategy.

       The following are actual closeouts completed as of August 18, i 997:
       Committed
       Completed
       The OIG states on page 19 that "This grants specialist also must have better cooperation
       and coordination with the two Water Program Branch individuals.  She must receive
       complete and timely closeout and deobtigalion data from Branch officials to timely prepare

New Jersey
15
10

New York
17
12
Puerto Rico/
Virgin Islands
31
32
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       documents and date to be entered into G1CS and IFMS." We believe this statement has
       no place in the report and should be deleted.

       The OIG states "...the Water Compliance Branch has only 0.4 FTE assigned to all
       Caribbean construction grant activities.  This part-time individual can not effectively
       handle the Puerto Rico deobligation area."  This statement should be clarified since the
       person working on the closeout initiative is not part-time. A more accurate
       characterization would be a notation that indicates that approximately 0.4 FTEs are being
       used to support direct construction grants activities. In addition, the report fails to
       acknowledge that there are activities other than closeout that are funded under the
       construction grants management program element.

       In this section, the OIG stresses the need for the Region to increase staff resources
       dedicated to construction grants program.  However, the 1998 resource model shows the
       Region taking a net decrease in FTEs  for that  program element.
OIG Recommendations (pages 20-21)
            !
       "We recommend that the Regional Administrator require the Grants and Water Program
       Branches to:

       2-1     Evaluate the effectiveness of its controls for reviewing unexpended obligations,
              make necessary changes, and promptly deobligate unneeded funds: Specifically,
              review grants cited and take necessary actions to deobligate unneeded funds.

       2-2     Develop and implement specific Regional policies and procedures for reviewing
              and monitoring unexpended grant obligations, and determining requirements for
              deobligating or reprogramming unneeded or idle funds.  Also, consider using
              alternative procedures such as  unilateral deobligations. These procedures should
              include project management control reviews similar to the one we completed to
              determine whether additional funds could be deobligated from other projects not
              part of this review.

       2-3     Consider designating a specific individual to coordinate reviewing open projects
              and unexpended balances. Special emphasis should be given to projects
              completed, but not closed for six months.

       2-4     Initiate periodic review meetings between the two Water Branches and Grants
              personnel to increase monitoring of unexpended construction grant balances.
              AJso, evaluate construction grant fund balances on completed or inactive projects
              on a semiannual basis.  These meetings or evaluations should be documented.
                                          "87 '

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       2-5    Estimate minimum obligation balances necessary to expedite the release of
              unexpended obligations.  By using these estimates, future obligation balances can
              then be retained and excess funds reprogrammed."
Region II Response to Recommendations

2-1    The Region will conduct a review of all construction grants with unliquidated obligations
       to determine if any deobligation actions can be taken.

2-2    EPA has already issued a grants closeout policy addressing unexpended funds. As
       discussed above, the Region's position is that unilateral deobligations are inappropriate
       given the complex nature of the program.

2-3    As stated above for 2-1, the Region will  conduct a review of all grants with unliquidated
       obligations.

2-4    Program office and Grants and Contracts Management Branch (GCMB) staff meet
       periodically (i.e., quarterly) to discuss potential project closeouts. This effort includes a
       review of the status of the various grants in the inventory. In addition, meetings are held
       to review issues related to grants that are in the appeals and disputes process.

2-5    As stated above for 2-1, this will be covered in the review of grants with unliquidated
       obligations. Deobiigations will be processed as appropriate.
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   Chapter 3 - Increased Emphasis Needed to Meet Grants Completion/Qoseout Strategy

In FY 1991, EPA's strategy for completing the construction grants program was issued. It
established the goals of administrative completion by the end of FY 1995 and closeout of all
grants by the end of FY 1997.  When Region II developed its initial strategy, the Region was
aware that it would not meet the FY 1997 goal, and the strategy clearly acknowledged this fact.

The OIG suggests that increased emphasis is needed to meet the grant completion/closeout
strategy. However, EPA Headquarters review of Region II's Closeout Plan concluded that
most Regions would miss the FY 1997 closeout goal, and that given the number of grants
remaining open in Region II, the closeout plan was reasonable.

The OIG does not comment on various programmatic and other external considerations, some of
which are unique to Region II, that contribute to the long time period from administrative
completion to project closeout. Among these are:

       •     OIG's screen out  process: The increases in the inventory of grants awaiting
             closeout are due to the OIG's reluctance to make a determination on audit criteria.
             For years, the OIG had a "mega-audit" concept in mind, which involved handling
             several grant audits under a single report.  The mega-audit approach was finally
             implemented in  some States, such as New York and New Jersey, in  1993. The
             OIG later abandoned the mega-audit approach in 1995 and established new criteria
             in a memorandum to Region II dated December 11,  1995.  In that same
             memorandum, the OIG screened out approximately 40 Puerto Rico  Step 3
             projects, which  fell under the" mega-audit" concept. These same projects
             remained in the  OIG's inventory well over the two-year time frame stated in its
             audit criteria. As a result, the Region recommended that the OIG prepare a
             written Policy on the audit criteria for the construction grants program.

       •     There is an inherent conflict between allowing the grantee to submit additional
             and/or new documents to support its claim versus the desire to expeditiously
             resolve the dispute.

       •      The use of specialty taw firms by large grantees for appeals and reconsiderations.
             These firms often  present new arguments on old issues, and raise arguments on
             issues which were not previously appealed.

             For example,  the audit resolutions for 19 Nassau County, New York grants
             disallowed about 4% of the total $469 million claimed.  Based on Nassau County's
             appeals and the  resultant Regional Administrator Determinations, the difference
             was reduced to  about 1.5%.  However, when Nassau County's specialty law firm
             filed for reconsideration, the disputed amount rose to between 9% and 13% of the
             total amount claimed.  Clearly, responses to these specialty law firms' arguments
             are resource intensive.
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The report fails to acknowledge (as noted elsewhere in this response) that the Region is on target
to meet its FY 1997 closeout commitments. We have also reduced the inventory of Step 1  and
Step 2 projects to a minimum.  This inventory now includes five projects remaining for Puerto
Rico, eight projects remaining for New Jersey and twelve New York projects, all of which will be
closed out once audit issues associated with related  Step 3 projects are resolved
Region 2 Must Accelerate Closeouts Section (page 24)

•      The OIG states that "EPA's FY 1996 Integrity Report provided construction grant
       information and disclosed that 5860 projects remained to be closed at the end of FY
       1990." The report should be changed or clarified to give the specific number of projects
       awaiting closeout in Region II

•      In addition, we believe the report should be modified to differentiate between the universe
       of pre-1992 grants awaiting closeout and projects awarded after 1992.  For Puerto Rico,
       there are 41 pre-1992 projects awaiting closeout. Of these 28 have been identified by the
       OIG as projects that will be audited thus, leaving a potential universe of only 13 pre-1992
       grant awards to be closed out.  Should the OIG timely complete audits or screen out
       additional  projects, the unjverse of 13 "readyv could increase. Further, the report fails to
       provide information on how the OlG's lack of timely audit/screen out decisions hampered
       the Region's ability to expeditiously dose out grants. Nor does it indicate that delays in
       OIG audit decision-making caused the Region to continuously revise its list of target
       grants for  closeout to meet commitments.
Step 3 Grants Section (page 25)

The following should be considered:

•      New Jersey: Projects are closely monitored by the Region to identify projects which are
       ready for closeout. Projects identified as "ready for closeout" are included in the Region's
       annual commitment for closebuts.  In the event problems arise relating to projects that
       were originally slated for closeout, those projects are replaced with other projects.

•      New York: New York has a fully delegated .program.  Therefore, the Region's
       commitments for New York State construction grant closeouts are based on NYSDEC's
       recommendations and knowledge of which projects are actually ready for closeout.

•      Puerto Rico:  The FY 1997 commitment of 32 projects will be exceeded by one project.

•      On page 25, the OIG states ". .the Region's percentage of open projects when compared
       to the nationwide universe dramatically increased every year from 16 to 52 percent  This
       percentage increase was most dramatic for FYs 1997-2000:"  This information is
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       misleading because the report does not recognize that 38 grants were awarded to Puerto
       Rico during the period from 1994 to 1996.  In light of this, the chart presenting
       information on "Projected Closeouts Remaining" should be changed.

       On Page 26, the three Hudson County grants mentioned had no funds remaining to
       deobligate.  Full grant amounts were paid out before audit.

       On page 26,  middle paragraph, the OIG states that for FY  1997, 14 of 19 New Jersey
       grants projected for doseout remain open. We presume this should have read 14 out of
       IS, as per the table on page 38. The OIG further predicts that it is unlikely that 14 more
       would be closed out by the end of FY 1997, attributing this conclusion to "prior
       experience" (page 38). We disagree with these conclusions.  As of July 27, nine of the 14
       had been closed out with the remaining five on target for closeout by the end of FY 1997.
       To achieve this, grants whose closeouts were postponed were replaced with others whose
       closeouts were advanced.
Puerto Rico and Virgin Islands Section (page 27)

•      Although we understand the need for the OIG to take a snapshot of the regional closeout
       inventory, we believe that a March 1, 1997 cutoff date was premature. For example, the
       OIG provides a table which identifies eight grants awarded over ten years ago. Of the
       eight grants, all but one have been administratively completed.  Three of the grants
       identified on that table were  closed out in June 1997. in addition, all of these grants, with
       the exception  of the Mangrove Lagoon grant, were held open by the OIG awaiting screen
       out. It should also be noted  that the seven PRASA grants listed accounted for only
       $322,655 in unliquidated balances. We recommend that the OIG change the table to
       present an accurate picture of all the relevant facts.

•      The OIG statement that "Based on prior experience we do not believe these targeted dates
       will be accomplished" should be removed from the report since this statement is based on
       the OIG's conjecture (see above comments as  well). The OIG fails to note that the
       Region is closely monitoring the status'of these projects and has received satisfactory
       justification for project delays by PRASA.  Although this information was previously
       provided to the OIG, it is not incorporated into this report.
Grant Untimely Closed Out Section fpaee 28)

•      PRASA-Caeuas 72-82-01: This project was closed out on June 25, 1997. Region II was
       not able to close out the grant until the Bill for Collection (BFC) for $102,289 had been
       paid by the grantee. A total of $5,087,634 was deobligated from this grant on January 19,
       1994.

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Step  1 and 2 Grants Section (page 29)

•      The amount of $129 million cited for grants awaiting closeout is misleading because this
       amount does not represent unliquidated obligations nor unpaid balances appearing in any
       of the outstanding Step 1 and Step 2 project inventories  If this amount is cited, the
       Region believes it should be clearly defined as the total project amount (Federal share).
       As discussed above, Region II has a firm handle on the Step 1 and Step 2 projects for all
       States.  The one issue remaining is the closeout of projects with missing files.  The Region
       will develop specific procedures to address the missing file problem, and is aware of
       previous OIG decisions on this issue.

*      On page 31, the OIG states "Region 2 had 25 open Puerto Rico Step 1 and 2 grants based
       on information given to the OIG on February 20, 1997.  However, on February 25, 1997
       (after our audit commenced) the Region closed six projects leaving 19 grants remaining
       awarded between 1974 and 1980 (all administratively completed prior to March 1991)."
       It appears that the OIG is implying that the Region only closed out these 6 projects after
       learning of the OIG's decision to review closeouts/deobligations.  We take exception to
       this statement These closeouts were ongoing prior to the notification of the OIG review.
       Rather than being overly critical of the Region's efforts, the OIG should report that
       Region II is addressing Step  1 and Step 2  projects concurrently with the closeout of Step
       3 projects.
Duplicate Audit Requests Section (page 32)

•      The Region believes that this issue is inappropriate to include in this audit, especially in
       light of the fact that the Region has worked closely with OIG staff to reconcile audit
       request inventories. This issue has been satisfactorily addressed in the past.
Screened Out Projects Remain Open Section (pages 32-33)

•      Region II has closed out most of its inventory of projects that have been screened out and
       did not have any pending appeals or other outstanding audit-related issues. The remaining
       projects have some unique problems which need to be resolved prior to closeout.
Conditional Administrative Completion (page 34)

•      The Region is currently developing a report thai will identify projects having conditional
       administrative completion (N8) codes and will issue this report on a periodic basis to
       notify the program office of projects needing further action prior to grant closeout.
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GIGS and IFMS Section (pages 35-36)

•      We suggest that this section be deleted  Although there are some deficiencies in GICS,
       the information is updated in GICS as grants are awarded

•      With respect to the differences in closeout dates found in GICS and IFMS, please note
       •that IFMS does not contain closeout dates. For example, based on a review of the IFMS
       records for grant number 399-05, Hudson County, it is apparent that the date the OIG is
       using as the "closeout date" in IFMS is actually the date the last deobligation was posted
       in the system (i.e.,  February 28, 1997). The deobligation action was actually signed by the
       Regional Administrator on February 4, 1997, which is the date reflected in GICS.

•      With respect to WVRSA, grant number 434-01, the final deobligation action was
       completed on May 13, 1994 and posted in IFMS on May 18, 1994. As discussed under
       Chapter 2, EPA Headquarters had negotiated a payment settlement on a BFG which
       allowed WVRSA to pay it within 10 years from the issue date.  The BFC expires in 1998.
       Until such  time as the BFC has been satisfied, EPA cannot begin to process the closeout
       for this grant. It should also be noted that all of the unliquidated obligations were
       deobligated, resulting in a zero unliquidated balance.  As stated in Amendment No. 3 (i.e.,
       C340434-01-3, attached), "Since a negotiated settlement was reached to collect a debt
       owed to EPA on this project, the amount being deobligated reflects all of the unliquidated
       obligations which appear in the grant. Therefore, once the debt is collected by EPA, the
       project will then  be closed out."

«      On Page 37, the OIG states that "Specifically, the grant specialist must receive complete
       and accurate closeout packages from the two Water Branches." Closeout packages are
       not forwarded from the two Water Branches. For New York State, NYSDEC prepares
       the closeout packages, for New Jersey, the grants specialist does the complete
       preparation.

•      Again, as noted elsewhere in these comments, the Region has historically either met or
       exceeded its annual commitment for project closeouts as follows.

             Fiscal Year                 Target                     Actual

              1993                        79                        80
              1994                        74                        79
              1995                        32       '                 32
              1996                        38                        42

       The report should acknowledge this fact.
                                         93

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OIG Recommendation (page 3 9)

       "We recommend that the Regional Administrator instruct the Grants and Water Branch
       programs offices to review the construction grant completion/closeout strategy and:

       3-1    Determine the additional resources or actions needed to expedite the process.
              Consider temporarily detailing personnel with construction grant knowledge to
              help current personnel and assigning an individual to coordinate program offices
              activities.

       3-2    Initiate regular program meetings to discuss (i) actions initiated or to be initiated,
              (ii) specific closeout problems, (Hi) projects in OIG inventory, (iv) missing or
              incomplete files, (v) State activities, (vi) revised targeted dates and justifications,
              and (vii) OIG audit results. Regular, communications and coordination will be
              beneficial in accelerating closeouts.

       3-3    Give a higher priority to more timely closing out the remaining Step i and 2 grants
              and deobligate unneeded funds."

Region II Response to Recommendations

3-1    Since the Region is on target to meet its FY 1997 closeout commitments, the dedication
       of additional resources to our grant completion/closeout strategy is not necessary.

3-2    The Region feels that there is already excellent coordination among those involved in
       construction grant management. As discussed above,  the Region will develop a strategy
       addressing missing files.

3-3    We have reduced the inventory of Step I  and Step 2 projects to a minimum. This
       inventory now includes five projects remaining for Puerto Rico, eight projects remaining
     «for New Jersey and twelve New York, projects, all of which will be closed out once audit
       issues associated with related Step 3 projects are resolved.
                                            9A

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                    Chapter 4 - Audit Resolution Process was Untimely
The OIG report concludes that Region II's audit resolution process is untimely. While we
acknowledge that a number of resolutions have taken longer than the targeted 180 days, our audit
resolution rate compares favorably to that of other Regions, as reported semiannually to the
Congress. Attachment I shows the total number of audit resolutions outstanding for more than
180-days for each EPA Region and the entire Agency for the past five years. The figures
reported for Region II for each period in the semi-annual reports from 1992-1997 represent the
following percentages of the Agency-wide total of outstanding audit resolutions:

              Fiscal
              Year         Spring       Fall
              1992         3%          7%
              1993         5%          4%
              1994         3%          6%
              1995         2%          2%
              1996         3%          4%
              1997         4%          6% projected

In addition, the following factors, which contribute to the length of the audit resolution process in
Region II, should be recognized in the report:

*       the number, magnitude and complexity (mega audits) of the audits issued to Region II;
•       the enormous dollar amounts reviewed and questioned in Region II audits;
•       the complexities caused by the diverse issues raised in each audit; and
*       only one State (New York) is fillly delegated and provides proposed audit resolutions.

The above notwithstanding, the report should be updated to reflect that the backlog of audits has
been reduced with the issuance of determination letters for Oakwood Beach and PRASA-
Bayamon, and the anticipated resolution of two (possibly three) additional audits by
September 30, 1997.  This will leave only two pending audits,  one of which (NYC-Coney Island)
is awaiting NYSDEC review, and the other for which a determination will be issued in the first   .
quarter of FY 1998.

The OIG also should note that Region  11 is working with NYSDEC to increase the State's
Section 205(g) Management Assistance Grant from its original request of $800,000 to $1.1
million. The additional funds  are needed to enable the NYSDEC to maintain a higher level of
staffing than originally requested  because of the additional work created  by specialty law firms.
The State's formal request, dated April 23, 1997, was submitted during the survey phase of OIG's
evaluation.  New Jersey has also  requested an increase of $ 1.68 million for its 205(g) grant.
These additional funds will assure adequate funding of its delegated role  of managing projects up
to administrative  completion through FY 2000.
                                        95

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QIG Recommendation  (page 42)

       "We recommend that the Regional Administrator instruct ORC and Water Programs
       Branch personnel to analyze its audit resolution process to determine the bottlenecks that
       are slowing the process down. In addition, a higher priority needs to be placed on timely
       resolution of audit reports, and to deobligate funds of $5,468,448 associated with the 10.
       issued FDLs."

Region II Response

.Region II has been reviewing its audit resolution process and is committed to timely resolution of
audits. It is for this reason that we have reduced our backlog, as discussed above. The OIG
includes the Office of Regional Counsel (ORC) in its recommendation regarding analysis of the
audit resolution process. In general, ORC does not participate in the audit resolution process.
                                       96

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       Chapter 5 - Lengthy Disputes/Appeal Process Delayed Closeouts
 The report fails to acknowledge that in August 1992 the Region created two disputes
 positions in the program division to facilitate more timely resolution (currently these
 positions are in the Construction Grants Section in the Water Programs Branch). Since
 that date, 51 disputes have been resolved, 17 remain to be resolved.

 There are numerous factors that contribute to the lengthy disputes/appeal process.
 Among these is EPA's policy to ensure that all grantees have been given every
 opportunity to submit additional information to support their claims.  On page 46, the
 OIG lists the "months in process" to resolve appeals.  This list does not take into account
 grantee requests to submit additional information. For example, at a meeting held in
 December 1993, Rockland County asked that all of its projects currently under review, be
 put on hold while the County determined the applicability to each grant of its proposed
 alternate system for direct and indirect costs.  It was not until a May 1996 meeting (even
 though their study was submitted to the Region a year earlier) that the County confirmed
 the grants to which the direct and indirect cost issues applied.  Additional information on
 some of the grants was also submitted at that time.

 On page 45, the OIG states "ORC must also issue bimonthly status reports indicating the
 appeal date, summary of issues and status and anticipated date for Regional
 Administrator's (RA) decision." On  page 47, the report  continues "Although the
 procedures require ORC issue bimonthly status reports indicating information and target
 dates, reports were not always issued on a bimonthly basis and were discontinued in
 October 1996." ORC and WPB had agreed that, because the status of the disputes was
 not progressing as expected, and because ORC. had little control  over the production of
 WPB memoranda upon which the dispute resolution schedule ultimately depended, it was
 an inefficient use of ORC's time to maintain this status report. However, to the extent
 that the recommendation on page 52 advises ORC to resume issuance of these status
 reports, Region II agrees that ORC will resume issuance of the bimonthly status reports
 containing the required information.

 On page 51, the report provides: "Adtracs also did not account for the 15 reconsideration
 cases returned to Region 2 for resolution.  When they were returned to the Region, the
 attorney should have completed a form for revised information to be inputted in to the
 system." The Region had been informed by EPA Headquarters that Adtracs can not
accommodate information on grants disputes that are before the Region for
 reconsideration.  To the extent that the cited recommendation suggests that this
information be included in Adtracs, ORC will inquire as to whether Adtracs can be revised
to accommodate the additional list. In the interim, ORG  will continue to include in its
bimonthly status report a  list of cases for which there has been a Request for
Reconsideration.
                                   97

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No Informal Conferences or Chronological Logs Section (page 50V

It is unclear as to what impact the auditors are claiming that ORC's failure to maintain complete
logs of actions and documentation of meetings and conversations has had in delaying the dispute
resolution process.
OIG Recommendation (page 52)

       "We recommend that the Regional Administrator instruct ORC and Water Programs
       Branch personnel to implement a joint plan to accelerate the dispute resolution process.
       This effort must certain {sic} a greater commitment by both offices to eliminate the case
       backlog. Increased Water Branch actions are clearly needed to provide complete and
       timely program memoranda, and dates can not be constantly revised.  In addition, ORC
       must initiate timely informal conferences, maintain adequate files with chronological logs
       of actions, .and adequately document all meetings and conversations."

Region II Response

Region n has made considerable progress in reducing the inventory of appeals under dispute with
51 resolved and 17 remaining to be resolved. In response to the QIC's comments, we will review
our current inventory to determine the extent to which these can be resolved more expeditiously.
                                               •••A'.
                                         98

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                                                         APPENDIX!
COE
DECA
DEPP
EPA
FDL
FMD
FMFIA
FTA
FTE
FY
GAB
GCMB
GIGS
IFMS
NYCDEP
NJDEP
NYSDEC
OIG
OMB
ORC
WCB
WMD
WPB
ABBREVIATIONS

U.S. Army Corps of Engineers
Division of Enforcement and Compliance Assistance
Division of Environmental Planning and Protection
Environmental Protection Agency
Final Determination Letter
Financial Management Division
Federal Managers' Financial Integrity Act
Federal Transit Administration
Full Time Employee
Fiscal Year
Grants Administration Branch
Grants and Contracts Management Branch
Grants Information Control System
Integrated Financial Management System
New York City Department of Environmental Protection
New Jersey Department of Environmental Protection
New York State Department of Environmental Conservation
Office of Inspector General
Office of Management and Budget
Office of Regional Counsel
Water Compliance Branch - Caribbean Section
Water Management Division
Water Programs Branch - Construction Grants Section
                                   99

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                                                            APPENDIX 3

                        REPORT DISTRIBUTION

Office of Inspector General

Acting Inspector General (2441)
Assistant Inspector General for Audit (2421)
Deputy Assistant Inspector General for
  Acquisition and Assistance Audits (2421)
Divisional Inspector Generals

Regional Office

Regional Administrator
Assistant Regional Administrator for Policy and Management
Director, Division of Enforcement and Compliance Activities
Director, Division of Environmental Planning and Protection
Office of Regional Counsel
Audit Coordinator

EPA Headquarters Office

Comptroller (3301)
Agency Follow-up Official (3304)
Associate Administrator for Regional Operations
  and State/Local Relations (1501)
Director, Grants Administration Division (3903R)
Director, Office of Wastewater Management (4201)
Headquarters Library (3404)
                                      ioi

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