U.S. ENVIRONMENTAL PROTECTION AGENCY
        OFFICE OF INSPECTOR GENERAL

                           Catalyst for Improving the Environment
Audit Report
       EPA Region 3 Reduced
       Unliquidated Obligations Under
       Water Program Assistance
       Agreements

       Report No. 11-P-0170
       March 15,2011

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Report Contributors:                          Paul Curtis
                                              Meg Hiatt
                                              Alfred Falciani
                                              Bob Evans
                                              Carol Kwok
                                              Denise Patten
                                              Kevin Ross
                                              Phil Weihrouch
Abbreviations

DC WASA   District of Columbia Water and Sewer Authority
EPA         U.S. Environmental Protection Agency
OIG         Office of Inspector General
ORBIT       Office of the Chief Financial Officer's Reporting and Business Intelligence Tool

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LU
o
                   U.S. Environmental Protection Agency
                   Office of Inspector General

                   At   a  Glance
                                                                             11-P-0170
                                                                         March 15, 2011
                                                               Catalyst for Improving the Environment
Why We Did This Review

The U.S. Environmental
Protection Agency (EPA)
oversees water program
assistance agreements as part of
its efforts to protect human health
and the environment. Our
objectives were to determine
whether EPA has adequate
I controls in place to identify and
deobligate unneeded funds for
water program assistance
agreements, and to determine the
amount of unliquidated
obligations for selected states that
could potentially be deobligated.
Background

To achieve clean and safe water
goals, EPA provides funds
through assistance agreements to
states, local governments, and
tribes under the water program.
Timely review and deobligation
of unneeded funds allows these
funds to be used on other
environmental projects.

For further information,
contact our Office of
Congressional, Public Affairs and
Management at (202) 566-2391.

The full report is at:
www.epa.gov/oiq/reports/20117
20110315-11-P-0170.pdf
                     EPA Region 3 Reduced Unliquidated Obligations
                     Under Water Program Assistance Agreements
                     What We Found
                     We identified $6,130,166 of unneeded funds for three assistance agreements
                     awarded by EPA Region 3 to the District of Columbia, and the region
                     deobligated those funds during the course of the audit. An EPA official said
                     the unneeded funds could not be deobligated sooner because of a
                     construction dispute, nonperformance issues, technical issues, or equipment
                     problems. Further, an EPA project officer and a District of Columbia Water
                     and Sewer Authority official stated that they had not deobligated the
                     unneeded funds because they directed most of their resources to projects
                     related to the American Recovery and Reinvestment Act of 2009. As the
                     funds on these three grants were not needed, they could have been
                     deobligated earlier and awarded to the District of Columbia for other
                     environmental projects.

                     Because Region 3 deobligated funds remaining  on the assistance agreements
                     during the course of our audit, we have no recommendations.

                     During our audit, we determined that Region 3's escalation process for
                     addressing project delays should be considered  a best practice. While EPA
                     has policies for baseline monitoring of assistance agreements, Region 3
                     accelerates the award or dispute resolution process, and directly contacts the
                     recipient expressing concerns about lack of progress and requests they
                     perform specific tasks to move the project. For example, Region 3 sent a
                     letter informing the recipient of its concern regarding the lack of work
                     progress under the assistance agreement and required the recipient to take
                     specific actions. The letter also informed the recipient that EPA would
                     terminate the assistance agreement if the recipient did not take the required
                     actions. As a result, the recipient took actions to resolve the issues and the
                     project proceeded to construction.

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          z         UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
          |                       WASHINGTON, D.C. 20460
                                                                 THE INSPECTOR GENERAL
                                    March 15, 2011

MEMORANDUM

SUBJECT:   EPA Region 3 Reduced Unliquidated Obligations Under
             Water Program Assistance Agreements
             Report No. ll-P-0170
FROM:      Arthur A. Elkins, Jr.   /jUW
             Inspector General

TO:         Shawn Garvin
             Regional Administrator, Region 3
This is a report on unliquidated obligations under water program assistance agreements
conducted by the Office of Inspector General (OIG) of the U.S. Environmental Protection
Agency (EPA). This report represents the opinion of the OIG and does not necessarily represent
the final EPA position. Final determination on matters in this report will be made by EPA
managers in accordance with established audit resolution procedures.

The estimated direct labor and travel costs for this report are $88,708.

Action Required

We made no recommendations; therefore, no action is required. We will close out the report in
our tracking system upon issuance. 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 or your staff have any questions regarding this report, please contact Paul Curtis
at (202) 566-2523 or curtis.paul@epa.gov. or Meg Hiatt at (513) 487-2366 or
hiatt.margaret@epa.gov.

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EPA Region 3 Reduced Unliquidated Obligations                           11-P-0170
Underwater Program Assistance Agreements
                    Table of Contents
   Purpose	    1
   Background	    1
   Noteworthy Achievements 	    2
   Scope and Methodology	    2
   Results of Review	    3
   Agency Response and OIG Comment	    4
   Status of Recommendation and Potential Monetary Benefits	    5

Appendices
   A Details on Scope and Methodology	    6
   B Agency Response to Draft Report	    9
   C Distribution	   12

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Purpose
             The purpose of this audit was to determine whether the U.S. Environmental
             Protection Agency (EPA) has adequately monitored obligations on water program
             assistance agreements. Our objectives were to determine whether EPA has
             adequate controls in place to identify and deobligate unneeded funds, and to
             determine the amount of unliquidated obligations for selected states that could
             potentially be deobligated.
Background
             EPA established a goal to achieve clean and safe water. The goal is to ensure safe
             drinking water; restore and maintain oceans, watersheds, and their aquatic
             ecosystems to protect human health; support economic and recreational activities;
             and provide healthy habitat for fish, plants, and wildlife. EPA achieves this goal
             by providing funds through assistance agreements to states, local governments,
             and tribes under the water program. Several EPA offices are involved in the
             administration and financial management of the assistance agreements. Project
             officers within EPA program offices are responsible for:

                •   Completing programmatic baseline monitoring for all active awards and
                    assigned programmatic advanced monitoring activities
                •   Completing technical closeout of awards and certifying that all
                    programmatic terms and conditions are met
                •   Assisting and responding to the Grants Management Office, grant
                    specialists, and the finance center in requests for assistance in monitoring,
                    closeout, and overall grants management
                •   Forwarding any administrative or financial reports and requests to the
                    appropriate office and maintaining appropriate file documentation

             The following are also involved in managing assistance agreements:

                •   Grants Management Offices in headquarters and regional units are
                    principally responsible for all business management aspects associated
                    with negotiating applications and awarding and administering funded
                    projects.
                •   EPA grant specialists are responsible for completing administrative
                    baseline monitoring for all active awards. They assist and respond to the
                    project officers, program office, and finance center in requests for
                    assistance in monitoring, closing out, and overseeing overall grants
                    management.
                •   The Las Vegas Finance Center is responsible for grant payments and
                    financial closeout of these agreements.
                •   The Office of Grants and Debarment serves as the national program
                    manager for administrative grants management and is responsible for
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                    assistance regulations, policy, and guidance; and for assistance-related
                    training.
                 •   The Grants and Interagency Agreements Management Division within the
                    Office of Grants and Debarment is the Grants Management Office
                    responsible for administrative management.

             EPA's Policy on Compliance, Review, and Monitoring of Grants and Cooperative
             Agreements establishes Agency standards for the oversight, monitoring, and
             closeout of assistance agreements. The policy states that EPA officials are
             responsible for monitoring programmatic and administrative components of the
             agreements, including determining whether expended and remaining funds are
             reasonable.
Noteworthy Achievements
             As we conducted our work, we determined that Region 3's escalation process for
             addressing project delays should be considered a noteworthy achievement. While
             EPA has policies for baseline monitoring of assistance agreements, Region 3
             accelerates the award or dispute resolution process, and directly contacts the
             recipient expressing concerns about lack of progress and requests they perform
             specific tasks to move the project. For example, Region 3 sent a letter informing
             the recipient of its concern regarding the lack of work progress under the
             assistance agreement and required the recipient to take specific actions. The letter
             also informed the recipient that EPA would terminate the assistance agreement if
             the recipient did  not take the required actions. As a result, the recipient took
             actions to resolve the issues and the project proceeded to construction. The
             escalation process helped resolve the issues sooner so that the project could
             proceed to achieve environmental outputs described in workplans.
Scope and Methodology
             We conducted our audit from January 21, 2010, to February 10, 2011, in
             accordance with generally accepted government auditing. Those standards require
             that we plan and perform the audit to obtain sufficient, appropriate evidence to
             provide a reasonable basis of our findings and conclusions based on our audit
             objectives. We believe that the evidence obtained provides a reasonable basis for
             our conclusions based on our audit objectives.

             We selected three programs for review: (1) Increase System Meeting Health
             Based Requirements, (2) Reduce Keypoint Source Loadings by 28%, and
             (3) Wastewater Treatment Construction. For these three programs, the population
             of the unliquidated obligations totaled $257 million. For sample testing, we
             selected the District of Columbia and the states of Montana, New Jersey, New
             York, and West Virginia, based upon the largest unliquidated amounts prior to
             fiscal year 2005. The sample included assistance agreements with $74 million of
             unliquidated obligations as of December 7, 2009. We interviewed recipient
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             officials and EPA program officials from the water programs in Regions 2, 3, and
             8. We reviewed project files obtained from EPA program officials.

             Appendix A contains further details on our scope and methodology.

Results of Review

             We identified $6,130,166 of unneeded funds that should have been deobligated
             for three assistance agreements awarded by EPA Region 3 to the District of
             Columbia. Region 3 has since deobligated the unneeded funds. Had Region 3
             deobligated these funds timely, such funds would have been available sooner for
             the District of Columbia Water and Sewer Authority (DC WASA) for other
             environmental projects.

             We did not identify funds to be deobligated in Montana, New Jersey, New York,
             or West Virginia.

             EPA Order 5700.6A2, Policy on Compliance, Review and Monitoring, establishes
             Agency standards for the oversight, monitoring, and closeout of EPA assistance
             agreements, and implements requirements for the review of compliance with
             applicable grants management policy and regulations. The order states, "In
             programmatic baseline monitoring, areas to be reviewed may include: receipt of
             progress reports, identifying areas of concern cited in the progress reports,
             whether expended and remaining funds are reasonable...."

             Based on our review of water program assistance agreements, we determined that
             Region 3 had up to $6,130,166 of unliquidated obligations that should have been
             deobligated. That amount consisted of three assistance  agreements awarded to the
             DC WASA. Table 1 provides a summary of the three sampled agreements with
             the unneeded funds available for deobligation.

             Table 1: Sampled water program assistance agreements for DC WASA with
             unneeded funds for deobligation
Assistance
agreement number
FS99381601
0011002730
C1 1002734
Total
Obligation
amount3
$18,352,503
22,868,812
8,328,608
$49,549,923
Unliquidated
obligation amount
as of 12/07/2009"
$1,462,103
5,976,412
784,508
$8,223,023
Amounts identified
for deobligation
$341,514
5,523,348
265,304
$6,130,166
             Source: OIG analysis.
                     Each total obligation amount represents the total funds obligated on the agreement.
                     Unliquidated obligation amounts represent the unused funds on the agreement.
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             An EPA program official stated that the unneeded funds on these assistance
             agreements could not be deobligated sooner because of a construction dispute,
             nonperformance issues, technical issues, or equipment problems found following
             the completion of the projects. Further, an EPA project officer and a DC WAS A
             official stated that they had not deobligated the unneeded funds because they
             directed most of their resources to projects related to the American Recovery and
             Reinvestment Act of 2009. As the funds on these three grants were not needed,
             they could have been deobligated earlier and awarded to DC WASA for other
             environmental projects.

             Region 3 deobligated $606,818 on two assistance agreements (FS99381601 and
             Cl 1002734) in March and April 2010, and the agreements were financially
             closed. The unneeded funds of $5,523,348 on agreement  11002730 were
             deobligated, and the agreement was financially closed, in July 2010.

Agency Response and OIG  Comment

             Because Region 3 deobligated the amounts remaining on the assistance
             agreements we identified during our review, we have no recommendations.

             Region 3 agreed with our findings and the amounts to be  deobligated, and took
             timely action. Region 3 said it takes seriously its fiduciary responsibility to ensure
             timely and prudent use of funds made available by Congress for award as grants.
             Region 3 also stated that deobligated funds  are returned to DC WASA for
             additional projects. No further action is required.  Region  3's full response is in
             appendix B.
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                  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
                  No recommendations


          NOTE: Region 3 deobligated $6.1 million during                                    $6,130
          our audit.
  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
               Details on Scope and Methodology
We reviewed laws and regulations pertaining to assistance agreements, such as the Safe Drinking
Water Act and Title 40 Code of Federal Regulations Part 31, Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local Governments. We
reviewed EPA policies and guidance, such as EPA Order 5700.6A2, Policy on Compliance
Review and Monitoring,  and Policy Announcement 96-04, Review of Unliquidated Obligations.
We also reviewed assistance agreement guidance posted on the "Grants" intranet website, such
as the Project Officer Manual.

We obtained a universe of assistance agreements from the Office of the Chief Financial Officer's
Reporting and Business Intelligence Tool (ORBIT) using transaction codes CG (construction
assistance agreements) and GO (all other assistance agreements). The universe consisted of
$12,300,716,837 of unliquidated obligations and $18,712,711,433 of total obligations as of
December 7, 2009. From the universe, we excluded programs related to Alaska native villages,
Brownfields, U.S.-Mexico border protection, the American Recovery and Reinvestment Act of
2009, and State Revolving Funds/State and Tribal Assistance Grants, because of ongoing or
completed OIG audits in these areas. The remaining population consisted of $1,742,972,628 of
unliquidated obligations and $4,079,149,390 of total obligations.

From the population, we selected states and programs with the largest unliquidated amounts
outstanding for obligations made prior to fiscal year 2005 for review. As discussed earlier, we
selected three  programs for review: (1) Increase System Meeting Health Based Requirements,
(2) Reduce Keypoint Source Loadings by 28%, and (3) Wastewater Treatment Construction.
Details on our sample are in table A-l.
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Table A-1: Sampled water program assistance agreements
Program results code
Increase Systems Meeting
Health Based Requirements
Increase Systems Meeting
Health Based Requirements
Increase Systems Meeting
Health Based Requirements
Increase Systems Meeting
Health Based Requirements
Increase Systems Meeting
Health Based Requirements
Reduce Keypoint Source
Loadings by 28%
Reduce Keypoint Source
Loadings by 28%
Reduce Keypoint Source
Loadings by 28%
Reduce Keypoint Source
Loadings by 28%
Reduce Keypoint Source
Loadings by 28%
Wastewater Treatment
Construction
TOTAL
Recipient
District of
Columbia
Montana
New Jersey
New York
West Virginia
District of
Columbia
Montana
New Jersey
New York
West Virginia
New York

Number of
agreements
1
1
7
5
1
4
4
9
5
3
5
45
Unliquidated
obligations as
of 12/07/2009
$1,462,103
799,990
9,334,769
9,154,134
1,052,629
8,974,954
7,168,067
16,678,492
3,143,831
8,513,913
7,993,456
$74,276,338
Total
obligations
as of 12/07/2009
$2,924,403
1,200,700
95,795,580
22,970,100
1,437,900
38,148,400
8,949,500
223,240,480
5,465,300
11,164,727
75,727,688
$487,024,778
Source: OIG analysis.

We developed questionnaires to use in contacting EPA project officers and recipient officials.
The objectives of our questionnaires were to determine the process for monitoring the assistance
agreements, the status of obligations under the assistance agreements, and the amounts that could
potentially be deobligated and applied to other environmental projects. We conducted interviews
with the grants management officers from the Grants Management Office, and EPA program
officials from the water programs in Regions 2, 3, and 8. We reviewed project files obtained
from EPA program officials. We also interviewed officials at Brooke County Public Service
District; Berkeley County Public Service Sewer District; West Virginia Division of
Environmental Protection; DC WAS A; the U.S. Army Corps of Engineers; and other grantees in
Montana, New Jersey, and New York.
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Prior Reviews

We researched prior EPA OIG and Government Accountability Office reports related to the
assistance agreements. We noted five pertinent EPA OIG reports, as listed in Table A-2.

Table A-2: Prior EPA OIG reports related to assistance agreements
Report No.
2007-2-00003
08-2-0099
2008-08-P-0265
09-N-0150
10-P-0081
Title
Information Concerning Superfund Cooperative Agreements with
New York and New Jersey
Followup on Information Concerning Superfund Cooperative
Agreements with New York and New Jersey
EPA Should Continue Efforts to Reduce Unliquidated Obligations in
Brownfields Pilot Grants
EPA's Unliquidated Obligations for Grants
EPA Needs Procedures to Address Delayed Earmark Projects
Date
October 30, 2006
March 4, 2008
September 16, 2008
May 1 , 2009
March 22, 2010
Source: OIG analysis.
Internal Control Structure

In planning and performing our audit, we reviewed management controls related to our audit
objectives. We examined EPA's fiscal year 2009 Federal Managers' Financial Integrity Act
Annual Assurance Letters issued by the regional administrators and assistant administrators for
the various EPA program offices to identify any weaknesses pertaining to the unliquidated
obligations under assistance agreements. In addition, we examined EPA's Office of Management
and Budget Circular A-123 Appendix A reviews of internal controls to identify any weaknesses
related to unliquidated obligations under assistance agreements. EPA identified no material
weaknesses in its Circular A-123 reviews related to assistance agreements. We did not review
the internal controls over EPA's Integrated Financial Management System, Financial Data
Warehouse, or ORBIT from which we obtained information, but relied on the review conducted
during the audit of EPA's fiscal year 2009 financial statements.
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                                                                      Appendix B


                Agency Response to Draft Report


           UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                                    REGION III
                                 1650 Arch Street
                      Philadelphia, Pennsylvania  19103-2029



                                 February 18, 2011

SUBJECT:     Comments on Office of Inspector General Report
               EPA Region 3 Reduced Unliquidated Obligations Under
               Water Program Assistance Agreements
               Assignment No. OA-FY10-0080

FROM:        James W. Newsom, Assistant Regional Administrator for
               Office of Policy and Management, Region 3
               /s/ John Armstead for James W. Newsom

TO:            Melissa Heist
               Assistant Inspector General for Audits

      Recognition of the Region's grants oversight and escalation process designed to prompt
action and reduce unliquidated and unobligated balances is very much appreciated. The Region
takes seriously its fiduciary responsibility to ensure timely and prudent use of funds made
available by Congress for award as grants.

      It is accurate as stated in the draft audit report, "EPA Region 3 Reduced Unliquidated
Obligations Under Water Program Assistance Agreements, " that the referenced District of
Columbia grant projects experienced construction disputes, nonperformance issues, technical
issues or equipment problems. For each of the projects in questions, a one (1) year performance
period was required to ensure that the projects function properly prior to grant close out. Due to
the referenced problems and the required performance review period, the Region was unable to
deobligate funds sooner than was actually accomplished.  Specifically:

C-l 10027-34, District of Columbia Water and Sewer Authority
   •  This grant was awarded under authority of Clean Water Act Title II. Such grants have a
      one-year project performance period following completion of construction. After
      completion of the performance period, the recipient's architect/engineer must certify that
      the project has been completed satisfactorily and operates as intended. As a result, there
      is at least a  one-year gap between the last grant payment for construction activity and the


11-P-0170                                                                          £

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       final grant payment. The gap can be longer if technical issues are identified during the
       one-year performance period (e.g., operational and performance issues, warranty issues,
       or contractor disputes).  This project had all three.
   •   Construction was completed and the performance period began in mid-2008.  During the
       performance period (which ended in mid-2009) several equipment nonperformance
       issues were identified that required correction. The contractor also filed a construction
       claim and 12 Change Orders extended the construction project period.
   •   An additional year was required to resolve the nonperformance issues and the
       construction dispute. In March of 2010 the recipient certified operation and satisfactory
       performance.  Also, in March 2010,  the Corps of Engineers completed its oversight of the
       recipient's final claim for grant payment.  A final grant payment of over $0.5 million was
       approved on March 18, 2010.  The unpaid grant balance of $265,304 was deobligated
       March 19,  2010.

C-l 10027-30, District of Columbia Water and Sewer Authority
   •   This was a very large and complex construction project involving a major upgrade and
       expansion  of the sludge handling facilities at Blue Plains wastewater treatment plant, a
       370 million gallon per day facility.  Although EPA grant funding is $22 million, the
       entire project is close to $90 million.
   •   Similar to the above, this grant was awarded under authority of Clean Water Act Title II.
       Such grants have a one-year project  performance period following completion of
       construction.  After completion of the performance period, the recipient's
       architect/engineer must certify that the project has been completed satisfactorily and
       operates as intended. As a result there is at least a one-year gap between the last grant
       payment for construction activity and the final grant payment. The gap can be longer if
       technical issues are identified during the one-year performance period.
   •   Completion of project construction was delayed due to a series of technical issues, many
       of which were related to modifications of existing equipment. Hundreds of change orders
       were approved for work not anticipated at the beginning of the contract.
   •   Construction was completed and the Corps of Engineers conducted a final project
       inspection in September of 2008. During the performance period (which ended mid-
       2009), it was determined that additional work was needed to separate chemical drain lines
       from the acid and caustic stages to prevent a chemical reaction. This new work was
       essential for proper operation of the  funded project. The new work extended the duration
       of the project.
   •   The grant was extended to the  end of July 2010.  The recipient requested a final grant
       payment in June 2010 and the grant  was closed in July 2010

FS-99381601
   •   This was a safe drinking water grant awarded under authority of section 1452 of the Safe
       Drinking Water Act.
   •   The grant was $18 million. At an 80% federal share, the eligible cost was $22 million.
   •   The final inspection was conducted  September 2007.
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   •   There were two grant extensions due to punch list items needing completion and also one
       contract needing settlement.
   •   The first extension was to April 30, 2008 and the second to January 31, 2010.
   •   The Final Payment Recommendation was issued by the Corps of Engineers in February
       2010.
   •   The grant was decreased by $341,513.87 on April 6, 2010 and financially closed out.
   •   A closeout letter was issued June 9, 2010.

       Grant completion and fund deobligation was influenced entirely by successful completion
of the construction projects and demonstration that the facilities were functioning as intended.

       Finally, the "Results of Review" section of the draft report states that the deobligated
funds could have been available sooner for other environmental projects.  It should be clarified
that deobligated funds are returned to DC WAS A for additional projects.
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                                                                       Appendix C

                                 Distribution
Office of the Administrator
Regional Administrator, Region 3
Agency Followup Official (the CFO)
Agency Followup Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Director, Grants and Interagency Agreements Management Division,
       Office of Administration and Resources Management
Assistant Regional Administrator, Region 3
Director, Water Protection Division, Region 3
Audit Followup Coordinator, Region 3
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