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OFFICE OF INSPECTOR GENERAL
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Report Contributors: Robert Adachi
Eileen Collins
Jessica Knight
Janet Kasper
Abbreviations
CFR Code of Federal Regulations
EPA U.S. Environmental Protection Agency
FSR Financial Status Report
Grant Grant No. XP98247001
Grantee Borough of Carteret, New Jersey
OIG Office of Inspector General
OMB Office of Management and Budget
Region Environmental Protection Agency Region 2
SAAP Special Appropriation Act Project
Cover photo: Stormwater holding pond at the Hill District Stormwater Pumping Station.
Picture taken by OIG staff in August 2007.
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5
U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
08-2-0084
February 20, 2008
Catalyst for Improving the Environment
Why We Did This Review
The U.S. Environmental
Protection Agency (EPA)
Office of Inspector General
(OIG) conducted a review of
earmarked grants known as
Special Appropriation Act
Projects issued to State and
tribal Governments. The
Borough of Carteret, New
Jersey, was selected for
review.
Background
In 2001, the Borough of
Carteret received an EPA
Special Appropriation Act
Project grant, XP98247001.
The purpose of the grant was
to provide Federal assistance
of $ 1,451,800 for constructing
sanitary and stormwater sewer
system improvements. The
Borough of Carteret was
required to provide local
matching funds equal to
45 percent of the EPA-
awarded funds
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2008/
20080220-08-2-0084. pdf
Borough of Carteret, New Jersey - Unallowable
Costs Claimed Under EPA Grant XP98247001
What We Found
The Borough of Carteret, New Jersey (grantee), did not meet the Title 40 Code
of Federal Regulations Part 31 requirements for financial management systems.
Based on directions from EPA, the grantee claimed $1,360,429 in costs for
reimbursement for work that was not within the scope of the original project.
The grantee also claimed up to $214,962 in unallowable pre-award costs. The
final Financial Status Report did not accurately reflect the project's cumulative
total outlays. The grantee also incurred additional project costs that EPA has not
reviewed for eligibility and could have been claimed.
What We Recommend
We recommend that the Regional Administrator, EPA Region 2:
1. Sustain the questioned costs of $1,575,391, consisting of:
a. $1,360,429 in out-of-scope project costs.
b. $214,962 in unallowable pre-award costs.
The Region can consider amending the grant period or the scope of work
during the resolution of questioned costs.
2. Request that the grantee provide a revised final Financial Status Report that
reflects the actual amount of cumulative total outlays.
3. Review unclaimed costs of $ 1,286,668 for potential eligibility.
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\ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
o WASHINGTON, D.C. 20460
\
OFFICE OF
INSPECTOR GENERAL
February 20, 2008
MEMORANDUM
SUBJECT: Borough of Carteret, New Jersey - Unallowable Costs Claimed Under
EPA Grant XP98247001
Report No. 08-2-0084
FROM: Melissa M. Heist
Assistant Inspector General for Audit
TO: Alan J. Steinberg
Regional Administrator
EPA Region 2
This report contains a time-critical issue the Office of Inspector General (OIG) identified.
This report represents the opinion of the OIG and does not necessarily represent the final
position of the U.S. Environmental Protection Agency (EPA). EPA managers will make
final determinations on matters in this report.
The estimated cost of this report - calculated by multiplying the project's staff days by
the applicable daily full cost billing rates in effect at the time - is $5 1,628.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to
provide us your proposed management decision for resolution of the finding contained in
this report before any formal resolution can be completed with the recipient. Your
proposed decision is due in 120 days, or on June 19, 2008. To expedite the resolution
process, please email an electronic version of your proposed management decision to
kasper.j anet@epa.gov.
We have no objections to the further release of this report to the public. This report will
be available at http://www.epa.gov/oig. If you have any questions, please contact Janet
Kasper, Director, Assistance Agreement Audits, at (312) 886-3059 or at the email
address above.
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Purpose
The Office of Inspector General is reviewing Special Appropriation Act Project (SAAP)
grants to identify issues warranting further analysis. This includes reviewing the total
project costs incurred by selected SAAP grant recipients. During our review of the
SAAP grant awarded to the Borough of Carteret, New Jersey (grantee), we identified the
following condition that we believe requires immediate attention. The grantee submitted
drawdown requests to the U.S. Environmental Protection Agency (EPA) for
reimbursement of pre-award and ineligible costs that are contrary to the requirements of
Office of Management and Budget (OMB) Circular A-87 and Title 40 Code of Federal
Regulations (CFR) Part 31.
Background
Grant No. XP98247001 (grant) was awarded on September 19, 2001. The purpose of the
grant was to provide Federal assistance of $1,451,800 for constructing sanitary and
stormwater sewer system improvements. The amount represents EPA's contribution of
up to 55 percent of the eligible project costs, and is limited by the amount of the
congressional appropriation. The grantee was responsible for matching, at a minimum,
45 percent of the eligible project costs. Total project costs under the grant were
$3,650,000. The grant was amended to adjust the budget, and project period for the grant
was October 1, 2001, to December 31, 2006. The grant application for the original award
and subsequent amendments listed nine sanitary and stormwater sewer projects that
would be funded under the grant. The following projects were to be completed under the
grant:
• Hill District Stormwater System Improvement Project
• Hill District Sanitary Sewer Rehabilitation Project
• Suspect Areas Sewer Separation and Improvements Project
• West Carteret Sanitary Sewer Rehabilitation Project
• Manhole Rehabilitation, Phase II Project
The grantee did not complete the following projects listed in the grant application:
• Hermann Street Sanitary Sewer Replacement
• Harrison Avenue Area Sanitary Sewer Rehabilitation
• Chrome Area Sanitary Sewer Rehabilitation
• Central Carteret Sanitary Sewer Rehabilitation
Scope and Methodology
We conducted our audit from August 6, 2007, to September 7, 2007 in accordance with
generally accepted government auditing standards, with the exception of gaining a
complete understanding of internal controls as required under Section 7.11 and
information control systems as required under Section 7.59. We did not obtain a
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complete understanding of the internal control system since the limited nature of our
review focused on the source documents that support costs claimed under the grants. We
also did not test the recipient's grant drawdown process or test the recipient's process for
entering information into its accounting system. Instead, we relied upon the grantee's
schedule of revenues and project costs. The schedule was reconciled to the grantee's
source documents but was not part of the official accounting system. We did not obtain
an understanding of information control systems since the review of general and
application controls was not relevant to the assignment objectives.
We made site visits to the grantee and performed the following steps:
• Obtained and reviewed EPA Region 2 (Region) project files.
• Conducted interviews of the grantee.
• Obtained and analyzed the grantee's source documents, bank statements,
cancelled checks, and invoices.
• Obtained and analyzed EPA grant draws and other related financial data.
Finding
The grantee did not meet the Title 40 CFR 31 requirements for financial management
systems. In particular, the grantee:
• claimed costs for projects not listed in the grant application, based upon the
advice of the Region, even though the grantee advised the Region that the project
was not complete and additional eligible project costs would be incurred;
• claimed unallowable pre-award costs; and
• submitted an inaccurate final Financial Status Report (FSR).
The grantee also incurred additional project costs that EPA has not reviewed for
eligibility and could have been claimed.
Ineligible Project Costs
Based on directions from EPA, the grantee claimed costs for work that was not within the
scope of the original project. The grantee included costs for reimbursement for work on
the Hayward Avenue Sanitary Sewer Pump Station, which is not included in the scope of
the work under the grant agreement. Grantee officials stated that the Region directed
them to submit the Hayward Avenue Pump Station invoices for reimbursement. The
grantee advised the Region that the original project was not complete and they had
planned on using the grant funds on the remaining work. The Region told the grantee
that since the project was for similar sewer related improvements, the Hayward Avenue
Sanitary Sewer Pump Station invoices should be submitted for reimbursement so the
grant could be closed out.
The costs for the Hayward Avenue Sanitary Sewer Pump Station, $1,360,429, are
ineligible for reimbursement based on the grant agreement's administrative conditions
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and Title 40 CFR 31.30. Administrative Condition #2 of the original grant award states
that the grantee must apply for and receive a formal grant amendment from the Regional
Administrator before implementing any changes to the project's scope. The Hayward
Avenue Pump Station project was not added to the grant's scope of work through
Amendment 1 or 2 of the grant. Amendment 1 added the West Carteret Sanitary Sewer
Rehabilitation project while Amendment 2 extended the grant's budget period. No other
projects were added to the nine included through Amendment 1. Title 40 CFR 31.30,
Section (d), also states that the grantee must obtain prior approval of the awarding agency
whenever any revisions of the scope or objectives of the project are made. Therefore, the
Hayward Avenue Pump Station costs of $1,360,429 are questioned.
Unallowable Pre-award Costs
The grantee claimed up to $214,962 in pre-award costs that are unallowable costs under
the grant administrative conditions and OMB Circular A-87. Administrative Condition
#1 of the grant states that ".. .any project costs incurred prior to midnight of the date
preceding grant award shall be unallowable in their entirety." All terms and conditions
included in the original grant award remained in effect and were incorporated in both
Amendments 1 and 2. OMB Circular A-87, Attachment B, Section 31, defines pre-award
costs as those costs incurred prior to the effective date of the award, which are necessary
and allowable only to the extent that they would have been allowable if incurred after the
date of the award and only with the written approval of the awarding agency. The
grantee did not obtain written approval of the EPA for the pre-award costs. The first
invoice for $78,236 was submitted to the grantee on September 17, 2001, which predates
the beginning of the grant budget and project period of October 1, 2001. The second
invoice for $136,726 was submitted on October 15, 2001, and contains costs incurred
from September 16, 2001, through October 15, 2001. The costs incurred prior to October
1, 2001, could not be determined. EPA reviewed both invoices before the grantee was
reimbursed, but did not question the pre-award costs. Therefore, the pre-award costs of
$214,962 ($78,236 and $136,726) are questioned.
Inaccurate Final Financial Status Report
The final FSR did not accurately reflect the project's cumulative total outlays, contrary to
the requirements of Title 40 CFR 31.20 (b) (1). An interim final FSR was submitted on
October 24, 2006, reporting $2,898,691 in cumulative total outlays. The interim FSR is
supported by invoices submitted under the grant's drawdown requests. On February 27,
2007, the grantee submitted a final FSR to the Region even though the project was not
complete. The final FSR was submitted because one was required 90 days after the end
of the project period, December 31, 2006. Based upon advice from the Region, the
grantee reported $3,650,000 in cumulative total project outlays. This amount is
inaccurate based on review of the grantee's project-related invoices, which totaled
$4,185,359 in project costs. Under Title 40 CFR 31.20 (b) (1), the grantee must make
accurate, current, and complete disclosure of the financial results of financially assisted
activities in accordance with the financial reporting requirements of the grant. Therefore,
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the final FSR is inaccurate and a revised FSR reflecting actual project costs should be
submitted.
Potentially Eligible Project Costs
The grantee incurred an additional $1,286,668 in potentially eligible project costs that
EPA has not reviewed or considered for grant reimbursement. As previously noted, these
costs were not included because the Region directed the grantee to submit the Hayward
Avenue Sanitary Sewer Pump Station invoices instead. These project costs are supported
by adequate source documents and were for the Hill District Sanitary Sewer
Rehabilitation Project, which was part of the grant's scope of work. Since the grant is
officially closed and the costs were never submitted to EPA, we cannot offset other costs
questioned with unclaimed costs. However, we recommend that EPA review these
additional costs during the audit resolution process.
Recommendations
We recommend that the Regional Administrator, EPA Region 2:
1. Sustain the questioned costs of $1,575,391, consisting of:
a. $1,360,429 in out-of-scope project costs.
b. $214,962 in unallowable pre-award costs.
The Region can consider amending the grant period or the scope of work
during the resolution of questioned costs.
2. Request that the grantee provide a revised final FSR that reflects the actual
cumulative total outlays.
3. Review unclaimed costs of $1,286,668 for potential eligibility
Region 2's and Auditee's Comments
On January 10, 2008, an exit conference was held with the grantee. In general, the
grantee did not concur with the findings and recommendations in the draft report. The
grantee did not think that the out-of-scope project costs should be considered ineligible
because the Region directed them to include those costs. The out-of-scope project cost
documents were approved by the Region. The grantee would like the Region to amend
the grant agreement to include these costs. The grantee did not agree that the final FSR
was unsubstantiated given the fact that it had provided invoices in excess of the reported
cumulative total outlays. The grantee relied heavily on the advice of the Region when
preparing the final FSR. In regard to pre-award costs, the grantee agreed that the first
invoice should not be allowed since it was incurred before the grant period. However,
the grantee did not agree that the entire amount of the second invoice should be
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disallowed since a portion of those costs were incurred after the grant period started. The
grantee also disagreed with some of the language used in the findings and
recommendation sections of the report.
On January 10, 2008, an exit conference was also held with the Region. The Region
agreed that the report was factually accurate. The Region is willing to work with the
grantee to amend the grant project period and/or the scope of the workplan as well as
review additional costs which were not claimed.
OIG Response
Based upon the grantee's comments, changes were made to the FSR findings and the
recommendations. In particular, the FSR section was revised to reflect that the final FSR
did not reflect actual outlays. We changed the language in the recommendations to
provide alternatives to the Region during the audit resolution process.
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Status of Recommendations and
Potential Monetary Benefits
POTENTIAL MONETARY
RECOMMENDATIONS BENEFITS (in $OOOs)
Rec. Page
No. No.
1 4
Subject
Sustain the questioned costs of $1 ,575,391 ,
consisting of
Status1
0
Planned
Completion
Action Official Date
Regional Administrator,
Region 2
Claimed
Amount
$1,575
Agreed To
Amount
a. 1,360,429 in out-of-scope project costs.
b. $214,962 in unallowable pre-award costs.
The Region can consider amending the grant
period or the scope of work during the resolution of
questioned costs.
Request that the grantee provide a revised final 0 Regional Administrator,
FSR that reflects the actual amount of cumulative Region 2
total outlays.
Review unclaimed costs of $1,286,668 for potential 0 Regional Administrator,
eligibility. Region 2
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
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Appendix A
Distribution
Regional Administrator, Region 2
Director, Office of Wastewater Management, Office of Water
Director, Office of Wastewater Management - Municipal Support Division, Office of Water
Director, Office of Grants and Debarment
Director, Grants and Interagency Agreements Management Division
Agency Followup Official (the CFO)
Agency Followup Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Region 2 Audit Followup Coordinator
Region 2 Public Affairs Office
Deputy Inspector General
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