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                           Catalyst for Improving the Environment
Congressional Testimony
        Stimulus Status: Two Years
        and Counting
        Statement of Arthur A. Elkins, Jr.
        Inspector General

        Before the Committee on
        Transportation and Infrastructure
        U.S. House of Representatives

        May 4, 2011

       Good morning Chairman Mica, Ranking Member Rahall, and Members of the
Committee. I am Arthur Elkins, Jr., Inspector General at the U.S. Environmental
Protection Agency (EPA) Office of Inspector General (OIG). I also serve as the Inspector
General of the U.S. Chemical Safety and Hazard Investigation Board. I am pleased to
appear before you today for the first time since becoming Inspector General in June 2010
to discuss the OIG's American Recovery and Reinvestment Act (Recovery Act) activities.
While EPA has successfully awarded and obligated its Recovery Act funds, OIG work
has shown that improvement is needed in monitoring and assessing projects to ensure
they meet stated environmental goals and are not subject to fraud, waste and abuse.

                           EPA Recovery Act Funding

       The Recovery Act was signed into law on February 17, 2009. The Recovery Act
provided funding for a wide range of federal programs intended  to create jobs, stimulate
economic recovery as quickly as possible, and invest in infrastructure. The Recovery
Act's purpose as it applies to EPA is to promote economic recovery by creating jobs
while also promoting a healthier environment. Toward that end,  the Recovery Act
provided EPA with $7.2 billion, roughly equal to its fiscal  year 2009 appropriation, for
the following six EPA programs:

       •   $4 billion for the Clean Water State Revolving Fund  (CWSRF) to provide
          funds to upgrade wastewater treatment systems.
       •   $2 billion for the Drinking Water State Revolving Fund (DWSRF) to provide
          funds to upgrade drinking water infrastructure.
          $600 million for the  Superfund Program to initiate and  accelerate clean-up at
          National Priorities List sites.
       •   $300 million for the Diesel Emissions Reduction Act Program to accelerate
          emission reductions from diesel engines.
       •   $200 million for the Leaking Underground Storage Tank Program to clean up
          contamination from underground storage tank petroleum leaks.
       •   $100 million for the Brownfields Program to carry out revitalization projects
          at brownfields sites.

A percentage of these funds were allocated to oversee Recovery Act activities. In total,
EPA retained $71.5 million for management and oversight activities.

                    OIG Recovery Act Funding and Activities

       The Recovery Act also created a vital oversight role for Inspectors General within
those agencies or departments that received Recovery Act funds to ensure that those
funds were properly expended. The EPA OIG received $20 million for oversight
activities, which are available through September 2012. As of April 26, 2011, the OIG
has spent over $10.8 million of its oversight funds, and is on track  to expend all
remaining funds by September 2012.

       The OIG developed an oversight plan soon after the Recovery Act's enactment.
The initial focus was on whether EPA used its funds in accordance with applicable
requirements and met the accountability objectives defined by the Office of Management
and Budget (OMB). The OIG also implemented a three-pronged approach—education,
outreach, and investigations—to spread the word about the requirements of the Recovery
Act and to deter and detect fraud schemes. As of April 2011, the OIG has:

       •  Issued 32 audits, evaluations and other special reports.
       •  Opened 65 cases and closed 26.
       •  Identified $5.21 million in questioned costs, cost efficiencies, settlements,
          fines, penalties, and recoveries.
       •  Received 61 complaints of potential fraud, waste or abuse.
       •  Conducted 143 fraud awareness/outreach briefings and training sessions for
          over 4000 individuals at the federal, state and local levels.

       OIG briefings, outreach and training have produced tangible results. For example,
a City of Sacramento engineer who attended an OIG fraud training session contacted the
OIG when allegations of fraud related to a water meter retrofit project came to the
engineer's attention. Upon further investigation, the city terminated the contract and
avoided expending approximately $3.4 million in Recovery Act funds. A federal grand
jury returned a 13 count indictment against the company owner and his nephew in July
2010, representing one of the first indictments for a Recovery Act case. The company  and
two employees were debarred from government contracting, thereby avoiding any
additional participation in Recovery Act-funded projects. Additionally, an EPA employee,
who also attended an OIG training session, contacted the OIG to report information about
potential fraud involving the awarding of Recovery Act grants in Saipan, Commonwealth
of the Northern Mariana Islands. The commonwealth is  in political union with the United
States. While the allegations pertaining to the fraudulent award were unsubstantiated, we
discovered during the course of our investigation that the company owner had previously
been convicted for bankruptcy fraud. We notified and submitted documentation to EPA.
As  a result, the principal and his company  were debarred from government contracting
for four years.

                         Noteworthy EPA Achievements

       EPA's senior leadership has demonstrated a strong commitment to meeting the
requirements of the Recovery Act. As of April 2011, EPA reported that it has obligated
over 99 percent of its Recovery Act funds. For the State Revolving Fund (SRF) programs,
which account for $6 billion of its $7.2 billion Recovery Act funds, EPA stated that all of
its SRF funds awarded to states were under contract or construction by the February 17,
2010, statutory deadline. We expressed concerns about EPA being able to meet this
deadline, and to their credit, they accomplished this task. Additionally, EPA reported that
all of its funds for Superfund projects have been obligated.

       Related to the CWSRF program, EPA Region 6 identified over $1 million in
unallowable grant costs charged by seven subrecipients that will be reprogrammed by  the

Texas Water Development Board (TWDB) for other eligible state water projects.
According to EPA Region 6, OIG involvement in this matter based on a hotline
complaint, helped to ensure that these funds are put to better use. Region 6 believes the
OIG's involvement helped to expedite the TWDB's recognition that bond counsel and
financial advisory fees are not allowable costs.

       Despite the billions EPA received under the Recovery Act, the OIG has detected
limited fraud of EPA funds expended so far. The OIG has received fewer Recovery Act-
related hotline complaints than anticipated. Recipient reporting requirements and greater
transparency seem to have made a positive impact. In addition, EPA regional staff
conducted training for recipients,  contractors,  and vendors on Recovery Act requirements
and preventing fraud, waste, and abuse that supplement OIG efforts. Moreover, the
Recovery Act's emphasis on awarding funds to "shovel ready" projects may have
influenced the low incidents of fraud in this effort because "shovel ready" recipients tend
to be better organized. However, experience shows that complex fraud schemes take time
to surface, so sustained vigilance is necessary.

                         Recovery Act Issues Facing EPA

       OIG work assessing EPA's progress in implementing and monitoring Recovery
Act projects has raised several issues, including: targeting of Recovery Act funds; Buy
American and Davis-Bacon provisions; Brownfields assessment grants; contractor
performance evaluations; and grants and contracts workforce and workload.

Targeting of Recovery Act Funds

       The Recovery Act was expected to achieve results not traditionally tracked by
EPA. Anticipated results were to include creating and retaining jobs, promoting
economic recovery, and assisting  those most impacted by the recession. Moreover, EPA
sought to address location-specific, community-based public health and environmental
needs of its own volition, and it cited environmental justice as a factor in Recovery Act

       Despite obligating over $7 billion, EPA is unable, both on a programmatic and
national basis, to assess the overall impact of its Recovery Act funds on disadvantaged or
environmental justice communities. EPA considered but could not execute an effort to
track the distribution of its Recovery  Act funds to economically disadvantaged
communities. The effort was hindered by the absence of definitions, data, and measures.
Rather, EPA collected success stories that some Recovery Act projects reached
economically disadvantaged communities, which provide only anecdotal evidence. EPA
needs to include and use targeting data in allocating funds so that it can effectively
describe the impact its funds had on economically disadvantaged communities and
explain how it helped achieve the purposes of the Recovery Act.

       Multiple constraints limited EPA's ability to target funds to preserve and create
jobs, as well as reach those most impacted by the recession. Of note was  the "shovel

ready" requirement and the short timeframes to allocate funds. EPA programs require all
applicants to meet program criteria. For Superfund eligibility, the community must have
already been on the National Priorities List. For water and wastewater projects, applicants
had to demonstrate some preparedness, including completion of design plans and
permitting processes. However, communities most in need often lacked the financial
resources to develop the necessary design plans or to prepare applications. The pressure
to meet the short timeframes to allocate funds under the Recovery Act meant that
communities who did not have the necessary materials prepared in advance were unable
to compete for Recovery Act funds. In addition, among the Recovery Act-funded
programs at EPA, states made the funding decisions for 86 percent of the funds. Whether
and how socioeconomic conditions influenced project selection was at their discretion.
The result was that EPA's ability to target economically disadvantaged areas that have
environmental needs was adversely impacted.

Buy American and Davis-Bacon Provisions

       The Recovery Act includes Buy American and Davis-Bacon provisions.
Specifically, section 1605 prohibits the use of Recovery Act funds  for a project unless all
of the iron, steel, and manufactured goods used in the project are produced in the United
States. The regulation requires that this prohibition be consistent with U.S. obligations
under international agreements, and provides for a waiver under certain circumstances. A
manufactured good that consists in whole or in part of materials from another country
may be considered domestic if it meets the substantial transformation test. Section 1606
of the Recovery Act requires all laborers and mechanics employed on projects that are
funded in whole or in part by the Recovery Act be paid Davis-Bacon Act rates. These are
rates not less than those prevailing on projects of a character similar in the locality as
determined by the Secretary of Labor.

       The OIG has been conducting unannounced site visits as part of our responsibility
under the Recovery Act. The purpose of these site visits is to determine project
compliance with selected requirements of the Recovery Act, including Buy American and
Davis-Bacon provisions. We have issued 10 reports to date with others ongoing or
planned. While we found no compliance issues at most of these sites, OIG auditors have
found potential violations at other sites that warranted referrals to our investigators.
Those cases are ongoing. The  lack of Buy American violations at the sites we visited may
be attributed to the fact that the projects were less complex, such as the installation of
pipes. As we visit sites with more extensive projects, such as plant rehabilitation, the
likelihood of violations occurring increases. We did  find during a site visit that a CWSRF
project in Long Beach, California, was not fully complying with Davis-Bacon
requirements and recommended that EPA Region 9 verify that the city implement
controls to ensure compliance  with wage requirements. Region 9 and the California State
Water Resources Control Board have since verified that the city has implemented the
controls necessary to comply with the Davis-Bacon Act.

       From an investigative perspective, Buy American cases make up the majority of
the OIG's Recovery Act caseload.  Of the 65 cases opened since the Recovery Act was

enacted, 39 relate to Buy American. In one case, a foreign based manufacturer and its
U.S. subsidiary were awarded numerous Recovery Act-funded contracts to provide
equipment used in wastewater treatment facilities across the country. The company
received these contracts after falsely certifying that their equipment met the Buy
American provision through substantial transformation at their U.S. facility. The
investigation to date, including the execution of a search warrant, has determined that the
equipment did not meet the substantial transformation requirements. Equipment valued in
excess of $1.1 million has been seized and additional seizures are expected. Additionally,
OIG auditors observed and photographed during a site visit foreign-made steel piping in a
Recovery Act-funded project at a Superfund site. OIG investigators confirmed that
foreign pipe was used in the project and as a result, a stop work order was issued by EPA.
Additional administrative actions have occurred. Both investigations are ongoing.

Brownfields Assessment Grants

      EPA's Brownfields Program awards grants for the assessment and cleanup of
potentially contaminated properties that are being considered for reuse or redevelopment.
Assessment grants provide funding to inventory, characterize, assess, and conduct
planning and community involvement activities related to brownfields properties. All
appropriate inquiries (AAI), also called "environmental  due diligence," is the process of
evaluating a property for potential environmental contamination. Grantees must ensure
that AAIs are conducted by environmental professionals in accordance with federal law
and regulations, and that reports are issued on their findings. The Recovery Act provided
$25.8 million for assessment grants.

      EPA does not review AAI reports submitted by grantees to assure that they
comply with federal requirements. Rather, EPA has relied on the environmental
professional conducting the AAI to self-certify that requirements are met. Of the 35 AAI
reports we reviewed from three EPA regions, none contained all the required
documentation elements. This occurred because EPA does not have management controls
requiring project officers to conduct oversight of AAI reports. These shortcomings also
can be applied to Recovery Act-funded Brownfields  grants. EPA has issued guidance and
implemented management controls for Recovery Act grant funds. However, it lacks
guidance and controls to assure that deliverables from Recovery Act-funded Brownfields
grants, such as AAI reports, adhere to federal requirements.

      Due to EPA's lack of oversight and reliance on self-certifications by
environmental professionals, AAI investigations not meeting federal requirements may
go undetected by EPA staff. The OIG found instances of noncompliance that were not
detected. Improper AAI investigations introduce risk that the environmental conditions of
a property have not been properly or adequately assessed, which may lead to improper
decisions about appropriate uses of brownfields properties. Ultimately, threats to human
health and the environment could go unrecognized.

Contractor Performance Evaluations

       In 2009, EPA decided to obligate approximately $211 million in Recovery Act
funds to Superfund contractors. Considering contractor performance evaluations for prior
contracts reduces the risk that EPA will award Recovery Act funds to contractors with a
history of poor performance.

       Contracting officers (COs) are required to complete and document performance
evaluations for contractors awarded Recovery Act funds within 95 business days after
each 12 months of contract performance. EPA had not completed in a timely manner 83
percent of the required contractor performance evaluations for contractors awarded
Recovery Act funds. On  average,  EPA completed the evaluations 109 business days late,
generally because there was no system in place to monitor evaluation timeliness.
Consequently, contractor past performance evaluation information was not available to
EPA when it awarded a new Recovery Act contract totaling $5.4 million.

       Further,  COs did  not consider all available sources of information when preparing
performance evaluations for contractors to which they awarded Recovery Act funding.
For example, EPA's process did not consider Financial Monitoring Reviews, Defense
Contract Audit Agency or OIG reports, which may contain performance issues that COs
should be aware of. When EPA awarded funding to contractors and did not consider all
sources of information, it increased the risk of fraud, waste, abuse, and mismanagement
of Recovery Act funds. EPA awarded $109 million in Recovery Act funds to contractors
with cost control and other performance issues.

EPA Grants and Contracts Workforce and Workload

       OMB's Recovery Act implementation guidance  stated that agencies are
responsible for initiating risk mitigation actions.  This included evaluating their current
workforce needs and identifying any future  skill  gaps created by implementing Recovery
Act requirements. Heightened attention to acquisition planning was needed to ensure
agencies had the necessary contracting officers and other program managers with the
skills and qualifications needed to award and monitor complex Recovery Act contracts.

       EPA made the Recovery Act a top priority by shifting its existing contract and
grant administration staff to Recovery Act activities. However, EPA's process for
distributing the  $71.5 million in management and oversight funds to regional offices was
not always based on workforce analyses of the actual staffing levels needed to
accomplish Recovery Act activities or of the impact those activities would have on staff
workloads. Such analyses would have identified regions and divisions that were over- or
understaffed. In addition, EPA lacks agency-wide performance measures for contract
functions that could provide valuable information to help EPA effectively and efficiently
manage its workforce and workload, and quickly address emerging issues such as
impacts from Recovery Act work. Non-Recovery Act resources were devoted to
Recovery Act activities, leaving less time for staff to focus on non-Recovery Act

administration, monitoring, and oversight. Diminished monitoring and oversight of
contract and grants leaves EPA susceptible to undetected errors.

                                Lessons Learned

       The goals of the Recovery Act are to create and retain jobs, promote economic
recovery, and assist those most impacted by the recession. However, these goals are
outside of EPA's mission to protect human health and the environment and their intended
results are not traditionally tracked by EPA. As a result, OIG work shows that EPA has
had difficulty in identifying and targeting economically disadvantaged communities. In
addition, the Recovery Act's emphasis on "shovel ready" projects in EPA's case posed an
unintended barrier to funding that many of these needy communities could  not overcome.
In the future, there  should be better alignment between legislative goals and the mission
and capabilities of those who will be tasked to implement it.

       The Recovery Act emphasized the need for clear, comprehensive and timely
guidance for recipients. EPA did not always develop such guidance. Without it, EPA
cannot provide a reasonable assurance that projects are in compliance or will meet their
intended goals. For example, EPA did not provide clear and comprehensive guidance to
States for how to determine the eligibility of green reserve projects. EPA was promoting
a green approach to wastewater and drinking water programs for at least a year prior to
the Recovery Act's enactment. Despite that experience, EPA did not develop and issue
comprehensive guidance in time to meet many of the States' needs. Specifically, EPA did
not provide guidance on how to solicit and select green projects until after many States
had finished doing  so, and some  States felt the need to re-solicit for green projects while
others did not. Moreover, EPA's guidance and subsequent updates have not addressed
important aspects of project selection. As a result, EPA could not provide a reasonable
assurance that its green reserve projects will meet Congress' objectives.

       The Recovery Act emphasized that funds be awarded quickly to help spur
economic recovery. However, this increases the likelihood of fraud, waste and abuse of
funds. Congress recognized the need for oversight when it established the Recovery
Accountability and Transparency Board and provided additional funding for selected
Inspectors General, including the EPA OIG. Yet the OIG's funding for Recovery Act
oversight is less than one-third of one percent of the $7.2 billion EPA received under the
Recovery Act. While I believe this small investment in oversight has made  a positive
difference  at EPA, with more funding for Inspectors General, the impact within our
respective agencies could have been even greater.


      Now that Recovery Act funds have been awarded, effective oversight by EPA is
crucial. The OIG remains concerned that there may be insufficient EPA oversight to
ensure that projects are completed timely and environmental objectives are  achieved. As
of April 25, 2011, EPA had only obligated about 73 percent of its management and
oversight funds. While EPA must obligate its oversight funds before the end of fiscal

year 2011, many Recovery Act projects will not be completed by that date. Given the
number and scope of projects funded by the Recovery Act, effective oversight will be a
challenge for EPA and its state partners. The OIG will continue to monitor and assess
EPA's Recovery Act activities in these and other areas.

       Thank you for the opportunity to testify before you today. I would be pleased to
answer any questions the Committee may have.