\ I U.S. ENVIRONMENTAL PROTECTION AGENCY S OFFICE OF INSPECTOR GENERAL Catalyst for Improving the Environment Quick Reaction Report Costs Claimed under EPA Grant XP98011401 Awarded to the City of Rupert, Idaho Report No. 09-2-0078 January 12, 2009 ------- Report Contributors: Darren Schorer Eileen Collins Michael Owen Abbreviations CADD Computer-Aided Design and Drafting CFR Code of Federal Regulations EPA U.S. Environmental Protection Agency FSR Financial Status Report Grantee City of Rupert OIG Office of Inspector General OMB Office of Management and Budget Region Environmental Protection Agency Region 10 USDA-RD U.S. Department of Agriculture-Rural Development Cover photo: City of Rupert's 1.1 million gallon water storage tank, known as "Big Blue." (Picture taken by OIG staff in June 2008.) ------- U.S. Environmental Protection Agency Office of Inspector General At a Glance 09-2-0078 January 12, 2009 Catalyst for Improving the Environment Why We Did This Review The U.S. Environmental I Protection Agency (EPA) Office of Inspector General is reviewing Special Appropriation Act Project grants to identify issues warranting further analysis. We selected the City of Rupert I (grantee) for one of these reviews. Background In 1998, the City of Rupert received an EPA Special Appropriation Act Project grant, XP98011401. The purpose of the grant was to I provide Federal assistance of $2 million to construct a water supply system. The City of Rupert was required to provide local matching funds equal to 45 percent of the EPA-awarded funds. For further information, contact our Office of Congressional, Public Affairs and Management at (202)566-2391. To view the full report, click on the following link: www.epa.qov/oiq/reports/2009/ 20090112-09-2-0078.pdf Costs Claimed under EPA Grant XP98011401 Awarded to the City of Rupert, Idaho What We Found The grantee did not meet the Title 40 Code of Federal Regulations Part 31 requirements for financial management. In particular, the grantee: • Claimed unsupported costs, • Claimed unallowable pre-award costs, • Claimed unallowable interest costs, • Claimed unallowable equipment costs, and • Reported cumulative total project costs that were not supported by accounting records. Because of the above issues, EPA needs to recover $63,256 of the $423,106 in costs questioned under the grant. What We Recommend We recommend that EPA Region 10's Regional Administrator disallow $423,106 and recover $63,256 in costs questioned under Grant XP98011401. With the exception of pre-award costs, the grantee concurred with the findings and recommendations in the discussion draft. ------- UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D.C. 20460 OFFICE OF INSPECTOR GENERAL January 12, 2009 MEMORANDUM SUBJECT: Costs Claimed under EPA Grant XP98011401 Awarded to the City of Rupert, Idaho Report No. 09-2-0078 FROM: Robert K. Adachi Director of Forensic Audits TO: Elin Miller Regional Administrator EPA Region 10 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 $101,3397. 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 findings contained in this report before any formal resolution can be completed with the recipient. Your proposed decision is due in 120 days, or on May 12, 2009. To expedite the resolution process, please e-mail an electronic version of your proposed management decision to adachi.robert@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 me at (415) 947-4537 or at the e-mail address above. ------- 09-2-0078 Purpose The Office of Inspector General is reviewing Special Appropriation Act Project grants to identify issues warranting further analysis. This includes reviewing the total project costs incurred by selected grant recipients. During our review of the Special Appropriation Act Project grant awarded to the City of Rupert, Idaho (grantee), we found that the grantee did not meet the Title 40 Code of Federal Regulations (CFR) Part 31 requirements for financial management. Background U.S. Environmental Protection Agency (EPA) Region 10 (Region) awarded grant number XP98011401 to the grantee on March 31, 1998. The purpose of the grant was to provide Federal assistance of $2 million to construct a water supply system. The construction project activities under this grant included a storage facility, new well, distribution lines, and a water treatment process. EPA was responsible for 55 percent of the eligible project costs up to $2 million and the grantee was responsible for the remaining 45 percent. Total project costs under the grant agreement were $3.67 million. The grant was amended five times, resulting in a budget and project period that started August 1, 1998, and ended June 30, 2005. Scope and Methodology We conducted this performance audit in accordance with generally accepted government auditing standards, except we did not obtain an understanding of the information systems controls. Our results were based on accounting information system output data provided by the grantee and our verification of these data to the corroborating documents, such as cancelled checks and vendor invoices. The generally accepted government auditing standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We conducted our audit from June 2, 2008, to November 4, 2008. We made a site visit to the grantee and performed the following steps: • Conducted a tour of the facilities. • Obtained and reviewed grantee support for the cumulative amounts reported for the period ended June 30, 2005, including the grantee's electronic accounting records, invoices, cancelled checks, and contracts. • Obtained and reviewed the grantee's supporting documentation for payment requests. • Conducted interviews of grantee personnel. Findings The grantee did not meet the Title 40 CFR Part 31 requirements for financial management. In particular, the grantee: ------- 09-2-0078 • Claimed unsupported costs, • Claimed unallowable pre-award costs, • Claimed unallowable interest costs, • Claimed unallowable equipment costs, and • Reported cumulative total project costs that were not supported by accounting records. Because of the above issues, EPA needs to recover $63,256 of the $423,106 in costs questioned under the grant. Table 1 below is a summary of the questioned costs. Table 1: Summary of Questioned Costs Cost Category Costs Claimed Questioned Costs: Unsupported Costs Pre-award Interest Equipment Total Costs Questioned Total Allowable Claimed Costs EPA Share (55%) Payments Made Amount Owed to EPA Costs Questioned $3,944,459 (86,750) (35,231) (202,697) (98,428) $423,106 $3,521,353 $1,936,744 $2,000,000 $63,256 Note 1 2 3 4 Sources: Claimed costs are from the Financial Status Report. Costs questioned were based on OIG's analyses of the supporting documentation provided by the grantee. Note 1: See discussion under Unsupported Project Costs. Note 2: See discussion under Unallowable Pre-award Costs. Note 2: See discussion under Unallowable Interest Costs. Note 3: See discussion under Unallowable Equipment Costs. Unsupported Project Costs The grantee did not have supporting documentation for $86,750 of project costs claimed in the final payment request under the grant submitted to the Region during June 2005. Title 40 CFR 31.20 (b)(6) requires expenditures to be supported by source documentation such as invoices and cancelled checks. As a result, we questioned the $86,750 claimed under the grant. Unallowable Pre-award Costs The grantee claimed $35,231 in costs that under the grant that were unallowable because they were incurred prior to the grant's funding and project periods. Title 40 CFR 31.23(a) states that where a funding period is specified, the grantee may charge to the award only costs resulting from obligations of the funding period. The grantee's payment request submitted to the Region during 1999 included project costs incurred between May 20, 1998 and July 15, 1998. These ------- 09-2-0078 costs predated the grant budget and project period start date of August 1, 1998. Therefore, we questioned the $35,231 of pre-award costs. Unallowable Interest Costs The grantee claimed $202,697 in unallowable interest costs under the grant. The grantee incurred these costs in order to meet its 45 percent match funding requirement under the grant. The grantee's share of the funding was provided from a U.S. Department of Agriculture-Rural Development (USDA-RD) loan of $1,750,000. However, USDA-RD, as a condition of providing the loan, required the grantee to obtain interim financing from commercial credit sources to fund its share of costs during construction of the project. The grantee obtained the required financing from a commercial lender and claimed $233,091 in interest costs under the grant. However, the grantee did not offset these costs with the corresponding interest earnings from the proceeds of the interim financing. The grantee deposited the proceeds from the financing in a local government investment pool account. During the period that the interest costs claimed under grant were incurred, the grantee earned $202,697 in interest from the funds deposited in the local government investment pool. According to Office of Management and Budget (OMB) Circular A-87, Attachment B.23.b, financing costs (including interest) associated with the otherwise allowable costs of building acquisition, construction, or fabrication, reconstruction, or remodeling are allowable when four conditions are met. One of these four conditions is that the financing is by a bona fide third party external to the governmental unit. However, another of these conditions specifies that interest expense should be offset by interest earned on borrowed funds. As a result, we questioned $202,697 of the interest costs claimed under the grant. These questioned costs represent the interest earned during the period that the interest costs were incurred. Unallowable Equipment Costs The grantee claimed unallowable equipment costs totaling $98,428. OMB Circular A-87, Attachment A, Section C. 1., specifies several factors that must be met in order for costs to be allowable under Federal grant awards. These factors include that costs must be (1) necessary and reasonable for proper and efficient performance and administration of Federal awards, and (2) allocable to Federal awards. The costs itemized in Table 2 were not allowable because they were not necessary for the performance and administration of the grant's scope of work or included in the budget for the grant award. Table 2: Equipment Costs Description Backhoe CADD Station Billing Machine Computers Total Cost $66,861 8,498 10,869 12,200 $98,428 Source: EPA analysis of City of Rupert data ------- 09-2-0078 The grantee purchased a backhoe during the project period and claimed the cost under the grant. The grant award provided funding for construction of the water supply system, but did not provide funding for maintenance of the system. A July 2003 email from the Idaho Department of Environmental Quality to the grantee stated that the EPA project officer agreed that the backhoe could be purchased with grant funds. The email further said that the backhoe would be dedicated to the project during the construction phase and used for maintenance of the system once construction was completed. However, the grantee was unable to provide us with equipment records showing the extent of use for the backhoe during the construction phase. Since the claimed costs for the backhoe were not a necessary cost under the grant, we questioned the $66,861 claimed under the grant for the cost of the backhoe. The grantee claimed the cost of a computer-aided design and drafting (CADD) station under the grant. According to the grantee, the equipment was purchased during the project period to run water distribution modeling. However, the grantee could not explain how the CADD station was used for the modeling. The grantee also acknowledged that its engineering contractor generally performed the water distribution modeling during construction phase of the project. Because the grantee could not demonstrate that the CADD station was necessary and benefited the project, we questioned the $8,498 cost of this equipment claimed under the grant. The grantee claimed the cost of a billing machine and the maintenance contract for the machine under the grant. The grantee purchased this office equipment during the project period to fold water monthly billings and place them in envelopes for mailing to customers. However, this equipment and maintenance contract was not necessary for the proper and efficient performance and administration of the grant's scope of work. Therefore, we questioned the $10,869 cost of the billing machine and maintenance contract claimed under the grant. The grantee also purchased four desktop personal computers during the project period. According to the grantee, these computers were purchased for office administrative purposes, such as preparing monthly billings to water system customers. The grantee was unable to demonstrate that the computers were necessary costs for proper and efficient performance and administration of the construction of the water system. As a result, we questioned the $12,200 claimed under the grant for the cost of the office computers. Financial Status Report Was Not Supported by Accounting Records The cumulative total costs claimed in the grantee's final Financial Status Report (FSR) for the grant were not supported by accounting records as required by 40 CFR 31.20. The grantee submitted the final FSR for the grant to Region 10 in January 2006. This FSR claimed total cumulative project costs of $3,944,459 under the grant. However, expenditures recorded in the grantee's general ledger accounts as costs incurred under the grant totaled $3,856,167. Therefore, the total cumulative costs in the FSR exceeded the grant expenditures recorded in the general ledger accounts by $88,292. Under 40 CFR 31.20(b)(l), 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. Title 40 CFR 31.20(b)(2) requires that grantees also maintain records which adequately identify the source and application of funds provided for financially assisted activities. Therefore, the grantee needs to improve its ------- 09-2-0078 accounting system to ensure these Federal reporting and financial management requirements are met. Potentially Eligible Project Costs The grantee reportedly incurred additional potentially eligible project costs that EPA has not reviewed or considered for grant reimbursement. Since the grant is officially closed and these costs were never submitted to EPA, we cannot offset other costs questioned with unclaimed costs. We did not evaluate these additional costs to determine whether they were allowable under the grant because they were not included in the grantee's final FSR. Recommendation 1. We recommend that EPA Region 10's Regional Administrator disallow $423,106 and recover $63,256 in costs questioned under Grant XP98011401. Region 10's and Auditee's Comments On November 13, 2008, an exit conference was held with representatives from Region 10 and the grantee to obtain their comments regarding the factual accuracy of our discussion draft. With the exception of pre-award costs, the grantee concurred with the findings and recommendations in the discussion draft. We questioned the pre-award costs because the grantee was unable to show during field work that EPA had provided written approval for these costs. However, on November 10, 2008, the grantee provided us with a July 1998 letter from the Region 10 project officer for the grant approving eligible construction costs incurred in advance of the project start date. The Region did not provide a response to the discussion draft because it did not have sufficient time to work with the city on the findings and recommendations. OIG Response Our position remains unchanged on the $423,106 of questioned costs discussed in the report. With regard to the questioned pre-award costs, the Region's July 1998 letter does not provide an acceptable deviation from the requirement of Title 40 CFR 31.23(a). Under Title 40 CFR 31.6(c), a deviation from the requirement must be obtained from the Director for the EPA Grants Administration Division. We made minor revisions to the report to more clearly explain the basis for questioning the pre-award costs claimed under the grant. ------- 09-2-0078 Status of Recommendations and Potential Monetary Benefits POTENTIAL MONETARY RECOMMENDATIONS BENEFITS (in $OOOs) Planned Rec. Page Completion Claimed Agreed To No. No. Subject Status1 Action Official Date Amount Amount 5 Disallow $423,106 and recover $63,256 in costs U Region 10 TBD $63 $44 questioned under Grant XP98011401. Regional Administrator 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 ------- 09-2-0078 Appendix A Distribution Regional Administrator, Region 10 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 Follow-up Official (the CFO) Agency Follow-up Coordinator Associate Administrator for Congressional and Intergovernmental Relations Associate Administrator for Public Affairs Region 10 Audit Follow-up Coordinator Region 10 Public Affairs Office Region 10 Special Appropriation Act Project Coordinator Mayor, City of Rupert, Idaho Deputy Inspector General ------- |