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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
EPA and States Should
Strengthen Oversight of
Clean Water State Revolving Fund
Recovery Act Projects
Report No. 11-R-0519
August 24, 2011
**
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Report Contributors: Janet Kasper
Khadij a Walker
Michael Petscavage
Melinda Burks
Kimberly Crilly
John Coll
Claire Me Williams
Heriberto Ibarra
Abbreviations
ARRA American Recovery and Reinvestment Act of 2009
CWA Clean Water Act
CWSRF Clean Water State Revolving Fund
EPA U.S. Environmental Protection Agency
FMFIA Federal Managers' Financial Integrity Act
FY Fiscal year
GAO U.S. Government Accountability Office
OA Operating agreement
OIG Office of Inspector General
OMB Office of Management and Budget
OW Office of Water
PER Program evaluation report
Cover photos: From left: Newly constructed chlorine contact chamber at an ARRA clean
water project site; pipe in staging area at an ARRA clean water project site.
(EPA OIG photos)
Hotline
To report fraud, waste, or abuse, contact us through one of the following methods:
e-mail: OIG Hotline@epa.gov write: EPA Inspector General Hotline
phone: 1-888-546-8740 1200 Pennsylvania Avenue NW
fax: 703-347-8330 Mailcode 8431P (Room N-4330)
online: http://www.epa.gov/oig/hotline.htm Washington, DC 20460
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j
\
U.S. Environmental Protection Agency
Office of Inspector General
11-R-0519
August 24, 2011
, At a Glance
Why We Did This Review
We conducted this audit to
determine whether the U.S.
Environmental Protection
Agency (EPA) and selected
states are sufficiently
overseeing Clean Water State
Revolving Fund (CWSRF)
projects that were funded by
the American Recovery and
Reinvestment Act of 2009
(ARRA), to ensure that project
goals and ARRA requirements
are met.
Background
The CWSRF Program
received $4 billion of ARRA
funding for states to finance
high-priority infrastructure
projects needed to ensure
clean water. EPA made
ARRA grants to states and
Puerto Rico to capitalize their
State Revolving Fund
programs to finance eligible
high-priority water
infrastructure projects.
For further information,
contact our Office of
Congressional, Public Affairs
and Management at
(202)566-2391.
The full report is at:
www.epa.qov/oiq/reports/2011/
20110824-11-R-0519.pdf
Catalyst for Improving the Environment
EPA and States Should Strengthen Oversight of Clean
Water State Revolving Fund Recovery Act Projects
What We Found
State oversight of CWSRF projects does not always ensure subrecipient
compliance with ARRA. We found that some states were not conducting adequate
oversight of subrecipient compliance with the Buy American provisions of ARRA,
and the frequency of inspections of ARRA-funded CWSRF projects varied among
states. EPA oversight guidance to the states is not detailed enough to ensure
compliance with ARRA requirements. EPA believes that it lacks statutory
authority to place requirements on states and gives states flexibility to implement
their programs. However, if states do not conduct proper oversight, projects are at
increased risk of fraud, waste, and abuse, and are also at risk for not complying
with ARRA requirements or achieving ARRA's economic recovery goals.
EPA's oversight of states does not ensure that ARRA requirements are met on
CWSRF projects. We found that the ARRA inspection checklist does not include
enough detailed questions to facilitate EPA oversight of state programs. Further,
the Office of Water is not conducting and documenting reviews of state programs
in a timely manner and does not use the resulting review reports to make national
program decisions. Office of Water management did not make completion of the
review reports a priority and did not use all of the ARRA funding Congress
allocated for oversight. As a result, the EPA oversight process cannot ensure that
states are complying with program requirements and identifying nationwide issues
to improve the CWSRF program.
What We Recommend
We recommend that EPA implement a plan to supplement state inspections and
require states to use an updated checklist during their inspections. We recommend
that EPA update the checklists regions use for semiannual reviews of state
programs and establish deadlines for completing the reviews. We also recommend
that EPA analyze the reviews of state programs for nationwide trends and use the
information to assist in making future program decisions. In responding to the
draft report, EPA did not agree with all of our recommendations and provided
alternative corrective actions for some. The Agency did not provide planned
completion dates for the recommendations. For this reason, the recommendations
are unresolved. In responding to the final report, the Agency will need to provide
a corrective action plan and milestone dates for completion.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
August 24, 2011
MEMORANDUM
SUBJECT: EPA and States Should Strengthen Oversight of
Clean Water State Revolving Fund Recovery Act Projects
Report No. ll-R-0519
FROM: Arthur A. Elkins Jr.
Inspector General
TO: Nancy Stoner
Acting Assistant Administrator for Water
This is the final report on the subject audit conducted by the Office of Inspector General (OIG)
of the U.S. Environmental Protection Agency (EPA). This report contains findings that describe
the problems the OIG has identified and corrective actions the OIG recommends. This report
represents the opinion of the OIG and does not necessarily represent the final EPA position.
Final determinations 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 $499,342.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 calendar days of the report date. In responding to the draft report, the Agency
did not provide planned completion dates for the proposed recommendations. For this reason, the
recommendations are unresolved. In responding to the final report, the Agency will need to
provide a corrective action plan and milestone dates for completion. Your response will be
posted on the OIG's public website, along with our memorandum commenting on your response.
Your response should be provided as an Adobe PDF file that complies with the accessibility
requirements of Section 508 of the Rehabilitation Act of 1973, as amended. The final response
should not contain data that you do not want released to the public; if your response contains
such data, you should identify the data for redaction or removal. We have no objections to the
further release of this report to the public. We will post this report to our website at
http://www.epa.gov/oig.
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If you or your staff has any questions regarding this report, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0899 or heist.melissa@epa.gov: or
Janet Kasper, Director of Contracts and Assistance Agreement Audits, at (312) 886-3059
or kasper.janet@epa.gov.
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EPA and States Should Strengthen Oversight of 11 -R-0519
Clean Water State Revolving Fund Recovery Act Projects
Table of Contents
Chapters
1 Introduction 1
Purpose 1
Background 1
Noteworthy Achievements 3
Scope and Methodology 3
2 States Should Strengthen Oversight of CWSRF Projects 6
States Required to Oversee ARRA Projects 6
States Should Strengthen Oversight of Subrecipients 6
Conclusion 10
Recommendations 11
Agency Response and OIG Comment 11
3 EPA Should Strengthen Oversight of States 13
EPA Required to Oversee State Programs 13
EPA Should Strengthen Oversight of State Programs 13
Conclusion 18
Recommendations 18
Agency Response and OIG Comment 19
Status of Recommendations and Potential Monetary Benefits 22
Appendices
A Details on Scope and Methodology 23
B Regional Performance Evaluations of States:
Elapsed Time and Findings 25
C Agency's Response to Draft Report 27
D Distribution 36
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Chapter 1
Introduction
Purpose
The American Recovery and Reinvestment Act of 2009 (ARRA) provides that the
Office of Inspector General (OIG) should oversee ARRA funds to ensure that
they are properly expended in a transparent manner. Of all U.S. Environmental
Protection Agency (EPA) programs to receive ARRA funds, the Clean Water
State Revolving Fund (CWSRF) Program received the most funding. We sought
to determine whether EPA and states1 performed sufficient oversight of ARRA
CWSRF projects to ensure that project goals and ARRA requirements were met.
Background
ARRA
The purpose of ARRA, in part, was to create and save jobs, jumpstart the
economy, and build the foundation for long-term economic growth. ARRA
provided EPA with $7.2 billion, including $4 billion for the CWSRF Program.
ARRA required agencies to award the funding consistent with prudent
management and Office of Management and Budget (OMB) ARRA guidance.
This guidance required agencies to initiate additional oversight mechanisms to
mitigate ARRA's "unique implementation risks."
New requirements and specific guidelines apply to grants made with ARRA
funds. For example, contractors that receive CWSRF ARRA funds are required to
pay all laborers and mechanics at or above the prevailing Davis-Bacon Act wage
rates determined by the Secretary of Labor. Additionally, and with a few
exceptions, subrecipients are required to use only American-made iron, steel, and
other manufactured goods under the Buy American provisions of ARRA.
CWSRF Program
The Clean Water Act (CWA), as amended in 1987, established a water pollution
revolving fund that has evolved into today's CWSRF Program. Through the
CWSRF, EPA provides states with annual capitalization grants to fund water
quality protection projects for wastewater treatment, nonpoint source pollution
control, and watershed and estuary management. The grants are awarded to states
to develop a conservation plan, implement a management program, and issue
loans to local communities to construct treatment works. States have the
flexibility to target resources to their particular environmental needs.
1 "States" refers to either states or U.S. territories that received CWSRF ARRA funding.
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The CWA requires EPA to provide oversight for state programs to ensure
compliance with the CWA and EPA guidance. EPA must approve annual project
funding plans, conduct reviews, and provide consultation and technical assistance,
as necessary. The CWA also requires EPA to inform states of noncompliance
issues identified in reviews and to propose corrective action.
Sfafe Oversight
The CWA allows states to use up to 4 percent of CWSRF ARRA funds
appropriated for management and oversight purposes. EPA-state operating
agreements (OAs) require states to:
Manage the CWSRF Program in accordance with the OA and terms of the
grant agreement, and in conformance with applicable state and federal
laws, regulations, and guidance
Maintain a competent organization and a staff-skill mix to assure that
projects meet acceptable technical, environmental, and financial
requirements as established or referenced in the OA
Annual capitalization grant agreements require states to maintain primary
responsibility for ensuring successful completion of EPA-approved projects.
Agreements also require states to monitor the performance of subrecipients to
ensure that they comply with all applicable regulations, statutes, and terms and
conditions for each project.
In March 2010, EPA provided ARRA-specific oversight guidance to states. The
guidance included an optional ARRA inspection checklist for states to use. This
checklist instructed states to confirm that ARRA-funded projects comply with the
Davis-Bacon Act and Buy American provisions. EPA also encouraged states to
inspect each project at least once per year.
Subrecipient Responsibilities
Subrecipients are responsible for ensuring that projects comply with federal laws
and regulations. EPA-state capitalization grant agreements stipulate that states
must require subrecipients to complete and report on projects to ensure they
comply with ARRA requirements. Subrecipients must comply with ARRA Buy
American provisions or follow the EPA waiver processes for exemptions.
Subrecipients must also maintain payroll records that comply with ARRA Davis-
Bacon provisions. Subrecipients must maintain records that adequately identify
the source and application of ARRA funds. States convey these requirements to
subrecipients through loan agreements.
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In its 2010 Report to the Nations on Occupational Fraud and Abuse, the
Association of Certified Fraud Examiners ranked the construction industry 9th out
of 22 industries for risk of occupational fraud, both in terms of frequency of fraud
cases and median loss. Notably, the construction industry had the fourth-highest
percentage of corruption cases in the fraud association study. These statistics
illustrate the importance of robust subrecipient monitoring and oversight of
CWSRF ARRA-funded construction projects.
Noteworthy Achievements
EPA took steps to assist recipients and subrecipients in complying with newly
introduced ARRA requirements. Specifically, EPA hosted webcasts for states and
subrecipients that provided guidance on monitoring compliance with Davis-Bacon
and Buy American provisions. EPA's Office of Water (OW) offered contractor
assistance to regions and states to conduct inspections and review project
documentation. Representatives from at least six EPA regions accompanied OIG
staff to give ARRA fraud, waste, and abuse briefings to states, subrecipients, and
contractors.
Four of the five states we visited (Hawaii, Oregon, Puerto Rico, and Texas)
incorporated unannounced inspections as part of their routine oversight. We view
this as a best practice, because such inspections more readily identified and
corrected instances of ARRA noncompliance. In addition, three other states
(Illinois, Minnesota, and Wisconsin) created their own review documents for
monitoring subrecipient compliance with ARRA requirements.
Scope and Methodology
We conducted this performance audit from February 2010 to April 2011 in
accordance with generally accepted government auditing standards issued by the
Comptroller General of the United States. Those 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 objective.
We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
We reviewed relevant federal regulations and guidance. We interviewed EPA
headquarters and regional CWSRF staff (Regions 2, 6, 9, and 10) regarding how
EPA ensures that ARRA CWSRF projects meet intended project goals and ARRA
requirements. We selected states and project sites based on a risk assessment that
factored in past single audit and annual financial report findings, as well as an
analysis of state financial management of CWSRF programs. We visited state
offices and interviewed staff in Hawaii, New Jersey, Oregon, Puerto Rico, and
Texas. We also visited construction sites in Oregon and Puerto Rico. We surveyed
additional states and EPA regions to increase our audit coverage. Overall, we
visited or surveyed 13 out of the 51 CWSRF-eligible states/territories and 9 out of
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10 EPA regions. See appendix A for further details on our scope and
methodology.
Prior Audit Coverage
EPAOIG
In OIG Report No. 08-P-0290, Innovative Techniques for State Monitoring of
Revolving Funds Noted, September 29, 2009, the OIG suggested that EPA include
a review of how states monitor borrowers as part of its annual review procedures.
Because this report contained no recommendations, EPA was not required to
respond.
In OIG Report No. 10-3-0223, City of Detroit, Comprehensive Annual Financial
Report for the Fiscal Year Ended June 30, 2009, May 28, 2010, the OIG reported
that for some ARRA-funded projects, the Buy American certifications were not
maintained, and the Davis-Bacon Act requirements were not verified, because the
subrecipient, a local government, did not communicate the ARRA requirements to
the construction contractor.
In addition, the OIG conducted unannounced site visits of ARRA projects to
determine compliance with selected requirements of ARRA. As of April 2011, the
OIG issued seven reports on site visits to CWSRF projects, as shown in table 1.
Table 1: EPA OIG reports on site visits to CWSRF ARRA projects
Report Title
American Recovery and Reinvestment Act Site Inspection of
the High-Rate Water Treatment Facility, City of Newark, Ohio
American Recovery and Reinvestment Act Site Inspection of
Sewer Pump Station Rehabilitation and Improvements, Town of
Ball, Louisiana
American Recovery and Reinvestment Act Site Inspection of
the Clean Water State Revolving Fund Projects at the City of
Long Beach, California
American Recovery and Reinvestment Act Site Inspection of
Sewer System Improvement Projects, City of Parma, Ohio
American Recovery and Reinvestment Act Site Visit of the
Denver Street Storage Project, City of Astoria, Oregon
American Recovery and Reinvestment Act Site Visit of Water
System Improvement Project, Waleska, Georgia
American Recovery and Reinvestment Act Site Visit of the
Comprehensive Sewer System Rehabilitation, Subsystem PS-
5, Saugus, Massachusetts
Number
10-R-0147
11-R-0014
11-R-0082
11-R-0083
11-R-0172
11-R-0193
11-R-0192
Date
June 16,2010
November 9, 2010
February 1, 2011
February 2, 2011
March 22, 2011
March 29,2011
March 29,2011
Source: EPAOIG.
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U.S. Government Accountability Office
The U.S. Government Accountability Office (GAO) issued GAO-10-604, States'
and Localities' Uses of [ARRA] Funds and Actions Needed to Address
Implementation Challenges and Bolster Accountability, in May 2010. This report
presented GAO's conclusions and recommendations on agencies' accountability
regarding the use of ARRA funds based on a sample of 16 states, numerous
localities, and agencies' Washington, DC, operations. GAO recommended that
EPA "work with the states to implement specific oversight procedures to monitor
and ensure subrecipients' compliance" with ARRA CWSRF requirements. In
response, EPA stated that it enhanced subrecipient oversight"... through
procedures designed to address EPA review of State ARRA programs and the
frequency, content, and outputs of EPA and State reviews of specific ARRA
projects." These procedures were designed to:
Continue to conduct ARRA reviews of each state on a semiannual basis
Develop the optional state inspection checklist for subrecipient
monitoring
Encourage states to inspect all ARRA projects at least once a year and
require EPA to participate in at least one project site inspection per year
with each state
Continue to conduct webcasts for states and subrecipients on ARRA-
specific provisions
Continue to provide technical assistance as needed
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Chapter 2
States Should Strengthen Oversight of
CWSRF Projects
State oversight of CWSRF projects does not always ensure subrecipient
compliance with ARRA. We found that some states were not ensuring compliance
with the Buy American provisions of ARRA, and states were not using the
optional administrative funds set-aside that is available to perform oversight. We
also found that more frequent inspections are likely to result in identifying more
violations. EPA oversight guidance to the states is not sufficiently detailed to
ensure compliance with ARRA requirements. EPA believes that it lacks statutory
authority to place requirements on states and wants to afford states flexibility in
implementing their programs. However, if states do not properly oversee projects,
projects are at risk of not achieving ARRA goals or not complying with ARRA
requirements, and have an increased risk of fraud, waste, and abuse.
States Required to Oversee ARRA Projects
The OAs between EPA and states require states to maintain a competent
organization and a staff-skill mix to assure that projects meet acceptable technical,
environmental, and financial requirements. The state capitalization grant
agreements we reviewed require states to ensure that subrecipients comply with
ARRA requirements.
OMB's ARRA oversight guidance emphasizes that the ARRA recipient, which in
this case is the state, is responsible for ensuring that all ARRA requirements are
met. EPA gave states the option to use an ARRA inspection checklist to confirm
that projects are in compliance with the Davis-Bacon Act and Buy American
provisions of ARRA. EPA guidance also encouraged states to perform at least one
inspection per year.
States Should Strengthen Oversight of Subrecipients
We found that state oversight did not always ensure subrecipient compliance with
all ARRA provisions. One state did not verify that documents the subrecipients
submitted as evidence actually demonstrated compliance with ARRA
requirements. States were more likely to identify compliance issues when they
conducted more frequent inspections. Some states were also not using all funds
available to oversee ARRA projects.
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States Not Ensuring Compliance with Certain ARRA Provisions
We visited five states. Three of those states do not independently verify
compliance with ARRA requirements.2 We visited five projects in two of those
three states and reviewed subrecipient documentation. EPA developed an ARRA
checklist that states can follow to ensure compliance with requirements; however,
states were not required to use the checklist, and the checklist did not require
verification to source documentation of ARRA requirements. One state we visited
developed its own ARRA checklist, while two other states were adopting EPA's
ARRA checklist. The checklist suggested that states confirm compliance with
Buy American requirements; it did not require states to confirm that subrecipients
verified that the documentation complied with ARRA requirements. For Davis-
Bacon Act wage requirements, the EPA checklist only requires states to confirm
that the subrecipient was verifying compliance. States were not asked to perform
an independent assessment of the records. Two states we visited voluntarily made
it a practice to verify documentation.
We found that 40 of 54 Buy American certifications for the five projects we
reviewed did not include sufficient information (as defined by EPA guidance) to
verify compliance. For example, in one instance the subrecipient accepted the
supplier's statement that materials made in Canada automatically complied with
ARRA, when in fact, materials produced in Canada are not allowable purchases
under the ARRA Buy American provision unless EPA grants a waiver. In other
instances, the documentation that the subrecipient accepted from suppliers was
missing key information such as the name of the ARRA-funded project, detailed
responses to the substantial transformation questionnaire, a description of
complex and meaningful processes that caused a substantial transformation, or the
location where the substantial transformation occurred.
EPA said that the subrecipients are responsible for ensuring compliance with the
Buy American provisions of ARRA. The loan agreements between the state and
subrecipient included a requirement that the state ensure compliance with all
applicable regulations, with specific reference to ARRA requirements. The states
we reviewed accepted documentation from subrecipients without verification of
compliance. While the states said that it was the responsibility of the subrecipient
to monitor compliance, the grant agreement identifies monitoring compliance
with applicable laws and regulations as a state responsibility and does not mention
whether the state can delegate the responsibility.
2 Since the OIG on-site review, Puerto Rico has instituted a new Buy American review process for subrecipient
compliance.
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More Frequent Inspections Likely to Identify More Violations
States had varying approaches to CWSRF construction project oversight. Some
states conduct inspections based on a percentage of project completion, while
others have biweekly, monthly, or quarterly inspections, as shown in table 2.
Table 2: ARRA-funded project inspection frequency by state
State
California
Georgia
Hawaii
Indiana
Iowa
New Hampshire
New Jersey
North Dakota
Oregon
Pennsylvania
Puerto Rico
Texas
West Virginia
Biweekly
X
Monthly
X
X
X
X
Quarterly
X
X
X
% completed
X
X
X
X
X
Source: State responses to OIG survey and interviews.
States that conducted more frequent project inspections identified more issues
related to noncompliance with ARRA requirements, as noted in table 3. For
example one state that conducted more frequent (i.e., monthly) inspections
identified goods being used on the sites that did not meet Buy American
requirements. Another state found noncompliance with Buy American
requirements at its quarterly site visits and, as a result, increased its use of
unannounced site visits. In contrast, another state that conducted inspections when
a project was 30, 50, and 90 percent complete (which is less frequently than other
states) did not identify any noncompliance issues. While the evidence we obtained
suggests that the greater the frequency of inspections the more violations are
likely to be found, we recognize other factors also contribute to the identification
of violations. As EPA stated in its response to our draft report, the degree to
which subrecipients understand requirements and are willing to ensure
compliance and technical and managerial competency are contributing factors.
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Table 3: State inspection frequency and violation identified
State
Hawaii
New Jersey
Puerto Rico
Texas
Oregon
Frequency of inspection
Quarterly, unannounced
Quarterly, unannounced
Biweekly
Monthly, unannounced
Project 30, 50, and 90% complete
Types of violations
identified by state
Material on project site
not compliant with Buy
American requirement
Incorrect ARRA signage
Noncompliance with
Davis - Bacon
requirements
Safety violations
Environmental violations
Material not compliant
with Buy American
requirement
Insufficient Davis-Bacon
documentation and ARRA
signage on-site
None
Source: State inspection reports and interviews with state staff.
EPA maintains that it does not have the statutory authority to stipulate the number
or frequency of state inspections of projects. EPA also maintains that it gave
states flexibility in overseeing projects and, along with the states we visited,
places heavy reliance on subrecipients to ensure compliance with ARRA
provisions. According to EPA management, when Congress created the CWSRF
Program, it intended for states to have flexibility in implementing their programs.
However, the OIG has concluded that, taken together, CWA, ARRA, and OMB
guidance provide EPA with the authority to require additional state oversight.
States Not Using Administrative Set-Aside
Six of the 13 states that we surveyed were not using any of their administrative
set-aside funds, as shown in table 4. The CWA allows states to use up to 4 percent
of the capitalization grant to administer the program. Four states did not use any
of their set-aside funds for administrative purposes. Instead, they applied all of the
funds either to projects or to community financial assistance. One state said it did
not need the administrative set-aside funds because it already assesses a 0.05
percent annual fee on the unpaid balance on each loan to support administration
of the CWSRF loan program. One state indicated that resource limitations did not
allow it to review ARRA applications in a timely manner. However, this state did
not use its administrative set-aside.
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Table 4: State set-aside use as of July 30, 2010
State
California
Georgia
Hawaii
Indiana
Iowa
New Hampshire
New Jersey
North Dakota
Oregon
Pennsylvania
Puerto Rico
Texas
West Virginia
State set-aside used
X
X
X
X
X
X
X
Source: State responses to OIG survey.
Conclusion
States should regularly monitor projects to ensure compliance with ARRA
requirements. Regions collect information on state capacity to implement the
programs during semiannual program evaluation reviews. These reviews are
discussed in detail in chapter 3. Our review, while limited in scope, found
instances of potential noncompliance with Buy American requirements. Without
oversight, risk of fraud, waste, and abuse involving government funds increases,
and projects are at risk for not achieving ARRA goals. When states do not
perform sufficient oversight, EPA does not have accurate information on
compliance with ARRA requirements.
A recent single audit report and an EPA study of grant recipients also support the
need for improved state oversight. The 2010 single audit report for the state of
Michigan found that for some ARRA-funded projects, the Buy American
certifications were not maintained, and the Davis-Bacon Act requirements were
not verified, because the subrecipient, a local government, did not communicate
the ARRA requirements to the construction contractor. EPA, in a June 2010
study, also identified local governmentsthe primary subrecipients for CWSRF
fundsas a recipient category that is at high risk for fund mismanagement and
appears to have the highest dollar amount at risk for unallowable costs.
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Recommendations
We recommend that the Assistant Administrator for Water:
1. Develop and implement a plan to supplement the state inspections with
EPA inspections of ARRA projects that includes expanded testing to
verify compliance with ARRA requirements.
2. Require states to follow the updated state ARRA inspection checklist and
reference guide when inspecting ARRA projects.
Agency Response and OIG Comment
OW did not concur with the first recommendation as it was written in the draft
report. The recommendation was for EPA to ensure that states conduct adequate
oversight of subrecipients, including requiring, as needed, that states develop
corrective action plans that address the frequency of inspections. OW explained
that site inspection is only one of many approaches to reduce noncompliance, and
only mitigates the risk in the very few instances of willful and knowing
noncompliance. Prudent management requires EPA to consider the nature, effect,
and available options for resolving noncompliance when evaluating the needed
frequency of inspections. Through conducting reviews of state programs and on-
site inspections in accordance with the regional oversight management plan, OW
has been able to determine which states need to do a better job of inspecting
projects under ARRA. In addition, EPA will be independently inspecting up to
30% of all CWSRF ARRA projects during the remainder of the calendar year
2011.
The OIG evaluated OW's plan to inspect ARRA projects to determine whether it
would address the issues in the finding and meet the intent of the recommendation.
The statement of work does require expanded testing for compliance with ARRA
requirements. The inspection checklist and guidance for the contractor inspections
does include steps to verify compliance with ARRA requirements.
EPA conducting the inspections instead of states will not ensure that in the long-
term states are providing adequate oversight of SRF projects. It would have been
beneficial if EPA chose the sites based on the results of state reviews and focused
on states that may not have been doing a good job at conducting inspections.
However, given that ARRA was a one-time funding source, and the sites to be
inspected have already been selected, the OIG will accept the additional
inspections as adequate corrective action. In responding to the final report, OW
should include an estimate of the minimum number of inspections that will be
done and a milestone date for completing the inspections.
OW did not agree with our original second recommendation to require states to
test and verify that subrecipient documentation complies with ARRA
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requirements. Beyond the question of whether EPA possesses the legal authority
to impose the recommended requirement, OW stated that virtually all states are
already inspecting projects, and many are using or incorporating specific elements
from the inspection checklist developed by the program.
On the issue of legal authority, the OIG came to the conclusion that EPA had the
authority to require additional reviews based its review of the CWA, ARRA, and
OMB guidance. The CWA provides EPA with the authority to require audits and
reviews "as may be deemed necessary or appropriate ... to carry out the
objectives of this section." This language does not establish a set number or set
circumstances under which additional audits or reviews would be necessary, but it
does provide discretion for the Administrator to direct additional reviews or audits
when necessary or appropriate. OMB guidance3 establishes that "[a]gencies must
take steps, beyond standard practice, to initiate additional oversight mechanisms."
The OMB guidance specifically contemplates mandatory field visits or additional
case examinations to ensure compliance with grant rules and regulations.
In discussing the response to the draft report, OW provided additional information
on revisions to the inspection checklist and reference guide that will address the
report finding if states are required to follow them. In preparation for the
additional site inspections, EPA updated the state ARRA inspection checklist and
included a reference guide that has additional details as to what state personnel
should review in conducting the inspections. The revised checklist and reference
guide, taken together, require testing and verification of subrecipient
documentation. If EPA were to require the states to use the revised ARRA
inspection checklist and reference guide in conducting site inspections, it would
address the findings in this chapter. We revised recommendation 2 to reflect this
alternative action. In responding to the final report, EPA should provide a plan
and milestone date for issuing the updated state ARRA inspection checklist and
reference guide to states.
In responding to the draft report, the Agency did not provide planned completion
dates for the proposed recommendations. For this reason, the recommendations
are unresolved. In responding to the final report, the Agency will need to provide
a corrective action plan and milestone dates for completion.
3 OMB, Updated Implementing Guidance for the American Recovery and Reinvestment Act of 2009, M-09-15, 2009,
Section 5.4.
11-R-0519 12
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Chapter 3
EPA Should Strengthen Oversight of States
EPA's oversight of states does not ensure that ARRA requirements are met on
CWSRF projects. We found that the EPA review checklist does not include
sufficiently detailed questions to facilitate EPA oversight of state programs.
Further, OW is not timely conducting and reporting on the results of its reviews of
state programs and does not use the review reports to make national program
decisions. The CWA and the OAs require EPA to provide technical assistance and
oversight of state programs. The conditions we found exist because OW
management did not make completion of the review reports a priority and did not
use all of the oversight resources available from the ARRA funding. EPA did not
identify untimely completion of the review reports as a risk that ARRA program
goals are not being met and that funds are not used appropriately. As a result, the
EPA oversight process cannot ensure that states are complying with program
requirements and identifying nationwide issues to improve the CWSRF program.
EPA Required to Oversee State Programs
The CWA requires EPA to conduct an annual review of each State Revolving
Fund program. The OAs between EPA and the states establish, in general terms,
the roles and responsibilities of EPA and the states for the CWSRF Program. The
OAs generally require EPA, through the regions, to provide technical assistance,
advice, and consultation to the state; and to provide oversight through the annual
review process. The regions document their annual reviews of state programs in a
program evaluation report (PER).
GAO recommended in May 2010 that the EPA Administrator work with the states
to implement specific oversight procedures to monitor and ensure subrecipients'
compliance with the provisions of the ARRA-funded State Revolving Fund
programs. EPA implemented various actions that addressed GAO's
recommendation. For example, EPA increased the frequency of regional reviews
of states from annual to semiannual. EPA also increased its sampling of project
files and transaction testing from two to four per review.
EPA Should Strengthen Oversight of State Programs
EPA's Review Checklist Did Not Ensure State Program Compliance
OW provided the regions with guidance for conducting semiannual ARRA
reviews of the state CWSRF programs. In conducting the semiannual reviews,
OW instructed the regions to use an EPA-created ARRA checklist to assist in the
11-R-0519 13
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completion of the PERs. The EPA semiannual ARRA review checklist includes
review of:
Eligibility of projects
State program staff capacity and use of funds
Federal cross-cutting authorities
Environmental review requirements
States' receipt and maintenance of documentation related to ARRA
requirements: Section 1512 reporting, green project reserve, Davis-
Bacon, Buy American
Supporting documentation for four projects
Four cash draws of EPA funds
EPA's semiannual ARRA review checklist did not include sufficiently detailed
questions to ensure state program compliance. For example, it does not include:
Detailed questions about state oversight of project construction
Detailed questions about Davis-Bacon and Buy American
documentation review or a recommendation to spot-check to verify
compliance
Expanded transaction testing when erroneous payments are identified
Based on our review of the PERs, adding the important aspects listed above into
EPA's review checklist would strengthen EPA's oversight process and increase
EPA's ability to identify noncompliance. In 2011, EPA will continue to conduct
semiannual reviews of states using the current ARRA checklist.
EPA Not Timely Conducting and Writing Reviews of State Programs
EPA OW management did not establish as a priority the writing of regional
semiannual ARRA state program reviews in a timely manner. Although OW
management provided guidance requiring reviews to be completed semiannually,
it did not establish a timeframe or deadline for the PERs to be written. Similarly,
EPA regions did not establish as a priority the documenting of regional
semiannual ARRA reviews of state programs in a timely manner.
EPA did not timely conduct and document the semiannual ARRA reviews of the
state programs. As of September 30, 2010, only 4 of 10 regions had conducted the
two reviews for the year, required by EPA ARRA program guidance. The
remaining regions had a portion of reviews conducted or a portion of reports
written, as shown in table 5.
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Table 5: Status of regional reviews and PERs as of September 30, 2010
Region
1
2
3
4
5
6
7
8
9
10
Total
Number of
states
6
3
5
8
6
5
4
6
4
4
51
Required number
of reviews
12
6
10
16
12
10
8
12
8
8
102
Reviews
conducted
11
4
10
9
12
10
7
11
7
8
89
Reports
completed
3
1
5
5
5
4
4
5
3
1
36
Source: Status of PERs provided by EPA regions and headquarters as of September 30, 2010.
A region may take several months to write the final PER. On average, 3.7 months
elapsed from when the review was conducted to when the PER was finalized,
with the longest elapsed time being 9.8 months (see appendix B for details). A
written product summarizing what the region found during the review is
important. First, the PER serves as evidence of EPA's oversight. Second, it serves
as a written record of weaknesses and as the basis for developing corrective action
plans. Third, EPA could use the written products to identify trends in state
management of ARRA funds.
EPA Not Using PERs to Make Agency Program Decisions
EPA did not use the PERs collectively to make Agency decisions to improve the
program. Currently, EPA uses PERs solely to identify and correct deficiencies in
program management of individual states. Because EPA is not analyzing the PER
results to identify national trends in the CWSRF Program, it is missing an
opportunity to use the PERs as a tool to address national deficiencies and
highlight best practices that are applicable across multiple states.
We analyzed the 22 PERs and found that 41 percent of the state reviews identified
deficiencies in Davis-Bacon compliance documentation. The results of this
analysis are summarized in table 6.
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Table 6: Potential state trends identified in 22 OIG-reviewed PERs
Issue
Lack of Davis-Bacon documentation
Lack of documentation in general
Concerns with state staffing
Ineligible expenses (erroneous payments)
Buy American documentation or compliance concerns
Number of states
in which issue was identified
9
4
4
2
3
Source: The 22 most recent PERs provided by EPA regions, written as of July 30, 2010.
Note: A state could have more than one issue identified.
EPA could analyze PERs to identify potential best practices in state oversight.
Fourteen of the PERs we reviewed identified best practices. EPA staff recognized
three states for maintaining thorough project files and two states for having
thorough inspection checklists. EPA can use best practices identified in PERs to
inform states of ways to improve their oversight of projects.
EPA could also analyze PERs to identify needed changes or improvements in
Agency policies, procedures, and processes. The Agency can use this trend
analysis information to make national decisions to improve the program. Doing so
will help reduce the Agency's vulnerability to fraud, waste, abuse, and
mismanagement.
In addition to state trends, EPA could use PERs to develop a more risk-based
approach to oversight. Currently, the regions are supposed to conduct the same
level of review twice a year for each state. However, EPA could use PER results
to identify states and program areas that may be at a lower or higher risk for not
complying with statutory and ARRA requirements. A risk-based approach to
selecting states for more extensive review would lead to more efficient operations.
EPA Not Using Available Oversight Resources
EPA regions have stated they do not have adequate resources to write PERs in a
timely manner. For example, two EPA regions were dealing with staffing issues
that resulted in PERs not being written. One of these regions mitigated the
resource challenge by hiring or transferring staff from other offices. In addition,
some EPA regions stated that the process of writing up the PERs is time-
intensive.
We also found that EPA did not fully use the resources available from the ARRA
funding. Specifically, ARRA provided the Agency with management and
oversight funding, $25 million of which was allocated to the OW CWSRF
Program. However, in response to a congressional inquiry about unneeded funds,
EPA determined that over $3 million in unexpended management funds
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previously allotted to the CWSRF Program could be reduced, and this amount
was rescinded by Congress as part of a larger $10 million rescission of ARRA
funds.
Figure 1 shows that the OW CWSRF Program had $6.8 million in management
and oversight funds remaining at the end of fiscal years (FYs) 2009-2010, and
was allotted an additional $5.8 million for FY 2011. Therefore, OW will have
$12.6 million available for management and oversight of the CWSRF Program in
FY 2011, more than it has spent since the inception of ARRA in February 2009.
Figure 1: ARRA management and oversight funding
ARRA Funds Allocated to OW CWSRF
(as of 9/30/10)
Allotted for
$5.80 million
Remaining
allotted for
FYs 2009 2010
$6.80 million
Disbursed
from FYs
2009 2010
allotment
$9.30 million
Source: EPA OW data.
EPA Not Identifying Delayed Completion ofPERs as a Risk
In the stewardship plan for ARRA, EPA identified the PERs as a control for
addressing risks such as ARRA program goals not being met and funds not being
used appropriately. While the PERs were not being written timely, EPA did not
identify the issue as a risk in its 2010 Federal Managers' Financial Integrity Act
(FMFIA) assessment and in its September 2010 quarterly stewardship plan report.
OMB's ARRA guidance states that agencies must take steps, beyond standard
practice, to initiate additional oversight mechanisms to mitigate the unique
implementation risks of ARRA. Agencies were to use appropriate internal control
assessments to assess the risks and define strategies to prevent fraud, waste, and
abuse. In addition, in response to OMB's ARRA guidance, EPA developed a
stewardship plan. The stewardship plan is an Agency-level risk mitigation plan
that sets out the Agency's ARRA risk assessment, internal controls, and
monitoring activities. OW identified PERs as a control activity to address the risk
that funds were not used appropriately and program goals were not met. The
quarterly report on the status of the implementation of the stewardship plan for
September 2010 did not identify any issues with OW's implementation of that
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plan, even though our review found that regions were not timely completing or
documenting the PERs.
EPA did not identify regional oversight of states as a risk to the CWSRF Program
during its FY 2010 FMFIA process. The FMFIA assurance letter states, "[t]he
internal controls within OW are adequate to reasonably ensure the protection of
the program operations, functions, and resources." The assurance letter states that
OW is in compliance with EPA's ARRA stewardship plan and that it is
monitoring the risks and internal controls identified in the plan. However, as our
review found, regions are neither timely completing and documenting the PERs
nor fully realizing the benefits of PERs.
Conclusion
OMB guidance states that the unique implementation risks of ARRA merit
increased oversight by the Agency. Therefore, the Agency should strengthen its
oversight process to ensure state program compliance and continuing
improvement of the program. The process for regional semiannual ARRA reviews
of state programs and the resulting PERs is a primary control that EPA
established for overseeing state ARRA programs. However, EPA is not
completing these reviews timely. EPA should increase its oversight of state
CWSRF ARRA programs and adopt a risk-based approach to oversight.
Specifically, OW should strengthen the review checklist, emphasize that this
process is a priority by establishing a deadline for the reviews and PERs, and use
the PERs as a tool to make national decisions to improve the program.
Recommendations
We recommend that the Assistant Administrator for Water:
3. Update the semiannual ARRA review checklist to include:
a. Detailed questions about state oversight of project construction.
b. Expanded transaction testing when erroneous payments are
identified.
c. A question as to whether the project files contain appropriate
documentation that the assistance recipient complied with Davis-
Bacon Act requirements.
4. Update the state inspection checklist to include a review of Davis- Bacon
documentation and a recommendation to independently verify
compliance on a sample basis.
5. Establish deadlines for conducting the regional semiannual ARRA
reviews of state programs and documenting them in PERs.
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6. Use the PERs as a tool to assess Agency trends to make program
decisions.
7. Use the risks that are identified in the PERs to determine the level of
oversight needed for each state.
8. In the next quarterly stewardship plan report, discuss OW actions to
address the timely completion of PERs.
9. In FYs 2011 and 2012, continue to identify the progress in completing
PERs and determine whether failure to complete them, and complete
them in a timely manner, should be identified as an office-level
weakness.
Agency Response and OIG Comment
In responding to the draft report, OW agreed with parts of our recommendation to
revise the semiannual review checklist as written in the draft report. At the exit
conference, the OIG discussed the recommendation and agreed to revise it in the
final report to clarify the changes that we were recommending to the semiannual
review checklist (recommendation 3) and added a new recommendation related to
the state ARRA inspection checklist (recommendation 4). In responding to the
draft report, the Agency stated that it would be revising the semiannual review
checklist and recommending expanding transaction testing when warranted. In
responding to the final report, OW should provide a milestone date for completing
its corrective actions to the semiannual review checklist and state ARRA
inspection checklist.
OW agreed with recommendation 5, to establish deadlines for conducting the
reviews of state programs and documenting the program evaluations. OW stated
that it requires that the state reviews be conducted within 60 days of receiving the
state's annual report, and that the program evaluation be documented within 60
days of the review. At the exit conference, OW managers stated that the direction
was only provided orally during conference calls with regions. The PERs are a
primary tool that EPA uses to oversee states. EPA should hold regions
accountable for completing the PERs, but holding regions accountable is difficult
without written requirements. In responding to the final report, OW should
provide a milestone date as to when it plans to document the decision on when
reviews are to be conducted and when PERs are to be completed.
OW agreed with recommendation 6, to use the PERs to make program decisions.
EPA used the PERs, in addition to interaction with states and regions during
reviews, summary finding memos, individual checklists for projects and
transactions, and semiannual summaries to identify best practices and identify
trends for needed changes and improvements in the program. EPA has used all of
this information to develop program priorities, including expanding the annual
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review checklists, conducting 3-day training in oversight procedures in each
regional office between March and October 2011, establishing discussion points
during the monthly coordinator calls, and updating standard operating procedures
for regional staff. We analyzed the annual review checklist and the agenda for the
3-day training, and they do address the issues in the report. However the Agency
was not able to provide information on the monthly coordinator calls, and the
updated operating procedures only addressed the issue of expanding testing when
erroneous payments were found.
We agree that these actions are beneficial; however, many of the actions EPA
referred to in its comments took place after we conducted field work. For the
activities described in the response, EPA relied upon personal knowledge of staff
regarding the results of the reviews of state programs, and not on a documented
review of the PERs. EPA should view PER analysis, as recommended in the
report, as part of its internal control structure. According to OMB Circular A-123,
risk assessment is one component of internal controls. When conducting risk
assessment, management should consider internal management reviews, and the
identified risks should be analyzed for their potential impact. EPA Manual 2750
on audit follow-up requires the action official, or delegated program manager, to
maintain documentation on implementation of corrective actions. For this
recommendation, the documentation should include how the PERs were used in
developing program priorities, revising the checklist, and updating training and
standard operating procedures. We are retaining our original recommendation
because we believe the PERs contain valuable information on issues states are
encountering in implementing the program. EPA should conduct and document a
systematic review of the PERs each year to help management make informed
decisions about the program.
In response to recommendation 7, on using the risks in the PERs to determine
level of oversight needed of states, OW stated that it is already a core part of EPA
oversight. However, we observed that EPA does not base its level of oversight on
risk. EPA provides a standardized checklist that is followed for all states. A risk-
based approach would modify the checklist based on results of previous PER
reviews. For example, if a state did not have any problems with the accuracy of
transactions for the past 3 years, a region may consider reducing oversight in that
area. As the Chief Financial Officer stated in a March 2011 memorandum, the
potential for a tight fiscal environment in the future means that the Agency should
rethink how it does business.4 In this area, OW should use a risk-based approach
to oversight rather than one size fits all. In responding to the final report, OW
should provide specifics on how regions use the results of previous PER reviews
to adjust state program oversight.
OW concurred with recommendation 8, to include in the next quarterly
stewardship plan report a discussion of OW actions to address the timely
4 Memorandum from Barbara J. Bennett, Chief Financial Officer, "Guidance on EPA's FY 2013 Annual Plan and
Budget Summer Process," May 26, 2011.
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completion of the PERs. In responding to the final report, OW should provide a
milestone date for completing the corrective action.
In response to recommendation 9, on considering the untimely completion of
PERs as an office-level weakness in FY 2011 or 2012, OW stated that it would
monitor completion of PERs, but did not agree to identify untimely completion of
PERs as an office-level weakness. OW's rationale for not identifying this as an
office-level weakness was that ARRA oversight activities will largely be
completed by the end of FY 2012. However, OW is scheduled to submit its
FY 2011 annual assurance letter in August 2011. OW can analyze the progress of
PERs completion and still consider whether it should be an office-level weakness
for FY 2011.
In responding to the draft report, the Agency did not provide planned completion
dates for the proposed recommendations. For this reason, the recommendations
are unresolved. In responding to the final report, the Agency will need to provide
a corrective action plan and milestone dates for completion.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in SOOOs)
Rec.
No.
1
Page
No. Subject
1 1 Develop and implement a plan to supplement the
state inspections with EPA inspections of ARRA
projects that includes expanded testing to verify
compliance with ARRA requirements
Status1 Action Official
U Assistant Administrator
for Water
Planned
Completion
Date
Claimed Agreed-To
Amount Amount
11 Require states to follow the updated state ARRA
inspection checklist and reference guide when
inspecting ARRA projects.
18 Update the semiannual ARRA review checklist to
include:
a. Detailed questions about state oversight
of project construction.
b. Expanding transaction testing when
erroneous payments are identified.
c. A question as to whether the project files
contain appropriate documentation that
the assistance recipient complied with
Davis-Bacon Act requirements.
18 Update the state inspection checklist to include a
review of Davis-Bacon documentation and a
recommendation to independently verify compliance
on a sample basis.
18 Establish deadlines for conducting the regional
semiannual ARRA reviews of state programs and
documenting then in PERs.
19 Use the PERs as a tool to assess Agency trends to
make program decisions.
19 Use the risks that are identified in the PERs to
determine the level of oversight needed for each
state.
19 In the next quarterly stewardship plan report,
discuss OW actions to address the timely
completion of PERs.
19 In FYs 2011 and 2012, continue to identify the
progress in completing PERs and determine
whether failure to complete them, and complete
them in a timely manner, should be identified as an
office-level weakness.
Assistant Administrator
for Water
Assistant Administrator
for Water
Assistant Administrator
for Water
Assistant Administrator
for Water
Assistant Administrator
for Water
Assistant Administrator
for Water
Assistant Administrator
for Water
Assistant Administrator
for Water
0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is unresolved with resolution efforts in progress
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Appendix A
Details on Scope and Methodology
We reviewed relevant criteria documents, including the CWA, CWSRF regulations, ARRA and
associated OMB guidance, and relevant ARRA CWSRF websites. We analyzed OW guidance
given to EPA regions and states for oversight, including recommended ARRA inspection
checklists for states conducting site visits. Additionally, we reviewed the FMFIA risk assessment
and the EPA Recovery Act Stewardship Plan for Reporting. We developed and conducted a risk
assessment of all 50 states and Puerto Rico that took into consideration the following:
Most recent PERs for each state as of March 2010
FYs 2006-2008 single audit findings for each state
Available FYs 2006-2008 financial statement independent audit findings
Indicators of untimely use of funds:
> FYs 2006-2008 unliquidated obligations
> FYs 2006-2008 National Information Management System financial ratios
State program size based on ARRA CWSRF allotments
State project status
Information from other product lines and divisions within the OIG
With the results of this risk assessment and consideration of prior audits, we selected five
states/territories to visit: Texas, Oregon, New Jersey, Hawaii, and Puerto Rico. On these state
visits, we reviewed EPA-state OAs, capitalization grant agreements, construction manuals, and
other guidance. We analyzed the states' most recent ARRA PERs and conducted further analyses
based on the reports we received. We also interviewed state CWSRF representatives about state
oversight processes.
In conjunction with state visits, we conducted five construction site visits of CWSRF projects
two visits in Oregon and three visits in Puerto Rico. While visiting construction sites, we:
Walked through the site with project staff
Interviewed project staff
Reviewed project file documentation (e.g., inspection files, loan/grant agreements,
change orders, etc.)
Reviewed bid tabulations and independent engineering cost estimates
Reviewed ARRA documentation (i.e., Buy American certifications and payroll
certifications), comparing the subrecipient-maintained ARRA documentation to
EPA's guidance
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To complement our state and site visits, we selected a judgmental sample of seven regions and
nine states/territories to survey. We asked Regions 1, 3, 4, 5, 7, 8, and 9 about any limitations
they faced in conducting their reviews, progress on their semiannual ARRA reviews, and
frequency of site visits. We also surveyed California, Iowa, Indiana, Georgia, North Dakota,
New Hampshire, Pennsylvania, Puerto Rico, and West Virginia regarding states' subrecipient
monitoring processes. Figure A-l portrays our audit coverage of states visited and surveyed.
Figure A-1: States reviewed
C] State Visited
QState &Site(s) Visited
I I State Surveyed
Source: EPAOIG.
We reviewed internal and management controls in the context of EPA and state subrecipient
monitoring. We reviewed th e Agency's ARRA stewardship plan and quarterly monitoring
reports. In its stewardship plan, the Agency identified procedures it would follow to mitigate
oversight risks associated with ARRA. The quarterly monitoring reports identify ARRA-funded
program risks to Agency management. We reviewed documents OW prepared to comply with
FMFIA. We reviewed assurance letters and risk assessments for FYs 2009 and 2010.
OMB ARRA guidance instructed EPA to prepare program plans to identify resources and use of
funds. EPA's CWSRF Program finalized its plan on May 15, 2009. We reviewed this plan to
identify use and timing of ARRA funding.
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Appendix B
Regional Performance Evaluations of States:
Elapsed Time and Findings
(Reviews and Corresponding Reports Completed as of September 30, 2010)
EPA
region
State
Date of
review
Date of
final PER
Elapsed
months
Findings
1
ME
Rl
VT
0
0
07/13/10
O
08/03/10
No findings
Concerns with state staffing
No findings
PR
02/04/10
03/01/10
0.8
Lack of documentation in general
DE
MD
PA
VA
WV
09/23/09
02/23/10
10/21/09
12/09/09
11/19/09
11/24/09
08/03/10
03/08/10
06/21/10
06/15/10
2.0
5.3
4.5
6.4
6.8
No findings
State not maintaining Buy American certifications
in project files
Lack of documentation in general
Lack of Buy American and Davis-Bacon
documentation
Lack of Davis-Bacon documentation
No findings
04/16/10
03/12/10
05/27/10
05/14/10
05/12/10
O
0
No findings
No findings
No findings
No findings
No findings
10/29/09
10/22/09
11/19/09
04/15/10
11/13/09
01/21/10
01/21/10
1/21/10
07/30/10
02/02/10
2.8
3.0
2.1
3.5
2.7
Lack of documentation in general
Lack of Davis-Bacon documentation
Concerns with state staffing
Concerns with state inspections of projects
Lack of Davis-Bacon documentation
Concerns with state staffing
Ineligible expenses
Lack of Davis-Bacon documents
Single audit compliance concerns
Lack of Davis-Bacon documentation
Concerns with state staffing
NM
OK
04/14/10
02/03/10
05/21/10
06/22/10
07/20/10
07/27/10
08/25/10
08/16/10
3.2
5.7
3.2
1.8
Lack of Buy American and Davis-Bacon
documentation
No findings
Lack of documentation for Disadvantaged
Business Enterprise, documentation of ARRA and
of accounting procedures
No findings
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Elapsed
months
Date of
review
Date of
final PER
04/13/10
03/24/10
12/07/09
06/09/10
05/20/10
03/23/10
04/14/10
05/13/1
03/01/10
07/29/10
07/01/10
07/13/10
/10
06/01/10
10/06/10
08/03/10
01/14/10
03/19/10
05/01/10
10/21/10
Findings
4.1
No findings
Ineligible expenses
Concern with state staffing
No findings
No findings
One Davis-Bacon Issue
No findings
Lack of documentation on file
No findings
Lack of documentation in general
Lack of Davis-Bacon documentation
Lack of Davis-Bacon documentation
Concerns with state staffing
9.8
Lack of documentation on file
Source: Most recent PERs received from EPA headquarters and regional CWSRF coordinators as of September 30,
2010.
Note: Only includes states for which PERs have been completed and provided to the OIG. A number of regions have
either not conducted reviews or have conducted reviews but not written or finalized the associated PERs.
a PER did not provide date.
b Report issued after September 30, 2010.
c Average elapsed months only includes reports for which we had date of on-site review and date PER was
issued.
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Appendix C
Agency's Response to Draft Report
The response from Office of Water is provided verbatim. OIG responses to those comments have
been inserted in text boxes
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
MAY 112011
OFFICE OF
WATER
MEMORANDUM
SUBJECT: Response to Draft Report: EPA and States Should Strengthen Oversight of Clean Water State
Revolving Fund Recovery Act Projects, Project No. OA FY10 0088
FROM: Nancy K. Stoner
Acting Assistant Administrator
TO: Melissa M. Heist
Assistant Inspector General for Audit
Thank you for the draft report transmitted on April 4, 2011, entitled, "EPA and States Should
Strengthen Oversight of Clean Water State Revolving Fund Recovery Act Projects." I appreciate the effort
involved in reviewing the inspection and oversight procedures of such a large and fast-paced program, and I
welcome the opportunity to respond.
The report documents a number of findings regarding EPA and State oversight procedures as well as the
frequency and effectiveness of project inspections. Additionally, the report contains eight recommendations
regarding oversight of both States and projects. While I agree with the report's assertion that oversight of such a
large and complex program is essential to prevent fraud, waste, and abuse, many of the conclusions reached in
the report, are based on assumptions limited sample sizes, and in some instances, incomplete understanding of
the Clean Water State Revolving Fund program.
While we disagree with many of the conclusions in the report, we concur with and are implementing most of the
recommendations, which are generally reflective of good management practices.
Attachment 1 provides the office of Water response to the recommendations included in the draft report.
Appendix 2 identifies specific concerns regarding the facts and findings of the draft report.
Again, thank you for the opportunity to respond to these timely findings and recommendations. If you
have and comments or questions regarding this response, please contact me or Sheila Frace,
Director, Municipal Support Division, Office of Wastewater Management, at (202) 564-1153.
Attachments
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Attachment 1
Responses to Recommendations
1. Identify which States do not sufficiently oversee CWSRF projects and require those States to develop
written corrective action plans to ensure adequate oversight of subrecipients. The corrective action
plans must address whether the frequency of site inspections is sufficient to mitigate the risk of
noncompliance with ARRA requirements.
The Office of Water does not concur with the recommendation. Site inspection is only one of many
approaches to reduce noncompliance, and only mitigates the risk in the very few instances of willful
and knowing noncompliance. Although site inspection can be an effective way to identify unknowing
noncompliance, they do not reduce the risk of such noncompliance as cost effectively as through
education and compliance assistance.
Comprehensive inspections (independent of frequency) can discover instances of noncompliance
after they have occurred. Prudent management requires us to consider the nature, effect, and
available options for resolving noncompliance when evaluating the needed frequency of
inspections. Further, given finite and constrained resources, increased frequency of inspections may
adversely impact the quality and comprehensiveness of inspections undertaken.
Through reviews of State programs and onsite inspections, following the regional oversight
management plan, the Office of Water has been able to determine which States need to do a better
job of inspecting projects under ARRA. Regional staff are required to accompany State staff on at
least one, and preferably two, project inspections each year under ARRA, affording EPA the
opportunity to gauge the States' oversight and inspection process. The Office of Water has provided
training for State programmatic staff and local staff, and has provided contractor support to assist
with project inspections for States with limited resources.
EPA will be independently inspecting up to 30% of all CWSRF ARRA projects during the remainder of
the calendar year 2011.
2. Require States to test and verify that subrecipient documentation complies with ARRA
requirements.
The Office of Water does not concur with this recommendation. Beyond the question of whether
EPA possesses the legal authority to impose the recommended requirement, virtually all States are
already inspecting projects and many are using or incorporating specific elements from the
inspection checklist developed by the program. Regional staff are required to accompany State staff
on at least one, and preferably two, project inspections each year under ARRA. The Office of Water
has provided training for State programmatic staff and local staff, and has provided contractor
support to assist with project inspections for States with limited resources. The Office of Water will
be independently inspecting up to 30% of all CWSRF ARRA projects during the remainder of the
calendar year 2011.
3. Update the semiannual ARRA review checklist to include:
a. Detailed questions about State oversight of project construction.
b. Detailed questions about Davis-Bacon and Buy American documentation review and a
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recommendation to independently verifying (sic) compliance on a sample basis.
c. A recommendation for expanded transaction testing when erroneous payments are
identified.
The Office of Water concurs with recommendation 3(a) and the first element of recommendation 3
(b). The existing checklist already includes these types of questions, but the questions will be
supplemented during a checklist revision. The Office of Water does not concur with the second
element of recommendation 3(b), which appears to be completely misplaced, as it is does not
pertain to the review checklist, but appears to be related to recommendation 2 above. While
recommendation 3(c) is likewise misplaced and does not pertain to the review checklist, the Office
of Water agrees to the recommendation to expand transaction testing, but only where warranted by
cases of serious, or systemic erroneous payments. Regarding recommendation 3(c), based on
findings to date, our transaction tests are sufficiently rigorous when combined with our state
reviews to identify if additional transaction tests should be incorporated into a future review as a
follow-up item.
4. Establish deadlines for conducting the regional semiannual ARRA reviews of State programs and
documenting them in PERs.
The Office of Water concurs, as this recommendation has already been implemented. Semiannual
ARRA reviews are to be done approximately every 6 months, and are typically coordinated with the
established schedule of the primary annual review. The primary annual review is a pre-existing and
ongoing monitoring element of the base CWSRF program. It is recommended that the primary
annual review be conducted within 60 days of receipt of the State's annual report, which is to be
submitted within 90 days of the end of the State's fiscal year. As a result, the schedule does not
comport with the Federal Fiscal Year. Guidance has already been issued directing PERs to be issued
within 60 days of a review.
5. Use the PERs as a tool to assess Agency trends to make program decisions.
The Office of Water concurs, as this is already a core part of EPA oversight. EPA used the PERs, in
addition to interaction with States and Regions during reviews, summary finding memos, individual
checklists for projects and transactions, and semiannual summaries to identify best practices and
identify trends for needed changes and improvements in the program. EPA has used all of this
information to develop program priorities, including: expanding the annual review checklists;
conducting 3-day training in oversight procedures in each Regional office between March and
October 2011; establishing discussion points during the monthly coordinator calls; and updating
Standard Operating Procedures for Regional staff.
6. Use the risks that are identified in the PERs to determine the level of oversight needed for each
State.
The Office of Water concurs, as this is already a core part of EPA oversight. It must be noted,
however, that EPA provides findings to States during the exit conference of the State review and
initiates corrective actions, if needed, well before final PERs are signed. This approach allows EPA
the flexibility, for example, to increase the number of project file reviews even during the course of
the ongoing review or in supplementary reviews should an issue be identified. It also allows State to
immediately begin corrective actions, as needed.
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7. In the next quarterly stewardship plan report, discuss OW actions to address the timely completion
of PERs.
The Office of Water concurs.
8. In FYs 2011 and 2012, continue to identify the progress in completing PERs and determine whether
failure to complete them, and complete them in a timely manner, should be identified as an office-
level weakness.
The Office of Water concurs with recommendation to continue monitoring the progress in
completing PERs. The Office of Water does not concur with the recommendation to make a
determination of weakness based on results from FY2011 and FY2012, given that CWSRF ARRA
oversight activities will have been largely, if not fully completed by end of FY2012.
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Attachment 2
Comments on Findings
Chapter 2: States Should Strengthen Oversight of CWSRF Projects
Page 8: States Not Ensuring Compliance with Certain ARRA Provisions
The report states that four of five States visited do not independently verify compliance with ARRA
requirements. This conclusion does not appear to be supported by any of the facts presented in this
section. Independent verification of Buy American and Davis-Bacon documentation is not required, as
noted in the report, by EPA guidance. State programs review project files to determine if proper
documentation has been received. However, no State has the resources to determine independently the
accuracy of the claims made by contractors and suppliers. States were instructed to include provisions in
loan agreements requiring verification by assistance recipients and by requiring assistance recipients to
include language in contracts signed with contractors, suppliers and vendors that would hold
responsible any party making false claims. Requiring each party to independently verify documentation
would have created an inefficient application of the ARRA requirements leading to construction delays
that would have violated the spirit of the ARRA.
In developing the inspection checklist, EPA made a conscious decision to focus the State's reviews on
verifying that the assistance recipient was performing due diligence and appropriate oversight of ARRA
projects. The inspection checklist was not intended to be an instrument for the States to fully duplicate
the ARRA oversight activities which were the responsibility of the assistance recipient. This decision was
made based on the following:
Assistance recipients bear the ultimate responsibility for ensuring compliance with ARRA
requirements, as they are the parties contracting for construction and purchasing materials;
States do not have the staff or resources to complete duplicative oversight of the numerous
ARRA-funded projects;
EPA does not have the authority to require States to perform detailed inspections of ARRA
projects; and
The Davis-Bacon grant condition developed by the Office of Grants and Debarment did not
require States to perform independent assessments.
The report states that for Davis-Bacon Act wage requirements, the EPA checklist only requires States to
confirm that the subrecipient was verifying compliance. However, when the instructions for the
checklist are followed, there is a thorough process for confirming compliance that extends beyond
merely reviewing signed compliance statements. The process is as follows:
Review payroll records to ensure they are present for every week;
Ensure employees are paid weekly;
Check for signed statement of compliance;
Confirm that the assistance recipient conducted employee wage interviews, which ask whether
the employee is being paid the appropriate wage rates;
Check that the Davis-Bacon wage rates and the WH-1321 poster are posted conspicuously and
in relevant languages;
Confirm that the wage rates posted are those used in the construction contract;
Have assistance recipients describe the methodology used to review payroll records;
Verify that fringe benefits have been reviewed;
Confirm that the assistance recipient has reviewed all appropriate documentation and
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eligibility for all apprentices and trainees working onsite.
Verify that the ratio of trainees to journeymen complies with the approved plan;
OIG Response: The steps identified above are included in the revised checklist that EPA
provided when responding to the draft report. However, Regions did not conduct these steps during
the 2010 state performance evaluations that we reviewed during the audit because the Regions did not
use a site inspection checklist during the semiannual ARRA reviews. Implementation of the revised
checklist steps will address the findings in the report.
Again, the checklist is designed to confirm Davis-Bacon compliance, not to repeat actions already
conducted by the assistance recipient. The assistance recipient is also required to submit certifications
on a regular basis to certify that it has complied with the Davis-Bacon requirements, as laid out in the
grant agreement.
The report states that 48 of 53 Buy American certifications for the five projects reviewed did not include
sufficient documentation to verify compliance. Only one example is given, where a supplier stated that
material made in Canada automatically complies. Without further details related to these finding, it is
impossible to comment. The report also states that in 26 of 53 instances, the country of origin of
components used to manufacture the goods were not identified. However, if the good is manufactured
in the US, there is no need to identify the country of origin of the components. OMB guidance has
clearly established that there is no requirement with regard to the origin of components or
subcomponents in manufactured goods, as long as the manufacture of the goods occurs in the United
States.
OIG Response: We included additional examples in the report and provided additional
documentation where regions requested the information.
The report cites one example where Davis-Bacon documentation was reviewed and found that a
recipient did not ensure contractors complied with wage requirements. There are no supporting details
regarding this finding. Due to the complexities of the Davis-Bacon requirements, it is impossible to
determine whether the IG inspectors were correctly applying the Davis-Bacon requirements.
OIG Response: We removed the example from the final report.
The report states that loan agreements between States and recipients include a requirement that the
State ensure compliance with all ARRA requirements but does not mention that the States can simply
delegate this requirement to the loan recipients. However, the IG is misinterpreting the requirements of
the loan agreements and the execution of these agreements. The recipients are required to perform due
diligence to ensure compliance with ARRA requirements. The States are required to verify that such due
diligence has occurred, thereby ensuring compliance. This is accomplished through the use of inspection
checklists, which with outline specific steps to be taken by State inspectors.
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Page 9: State Inspection Frequency of ARRA CWSRF Projects Varied
Noting the varied frequency of project inspections, the report states, "According to EPA management,
when Congress created the CWSRF program, it intended for states to have flexibility in implementing
their programs." This conclusion is supported by the brevity of the implementing language, the
legislative history, and the continued funding by Congress of a program that has not been changed or
reauthorized since 1987. Congress has never granted the authority for EPA to require additional
oversight of projects by State programs or to mandate a particular number or frequency of inspections.
The report notes that the IG has concluded that EPA has such authority, however, no support or
accompanying legal analysis for this conclusion is given.
The report states that when a State conducts more frequent inspection, more issues of noncompliance
are found. This is a faulty conclusion. It specifically highlights 5 States. Two States do quarterly
inspections, one does monthly inspections, one does biweekly inspections, and another does
inspections when the project is 30%, 50% and 90% complete. First, the report concludes that the State
that inspects at certain milestones (30%, 50%, and 90%) inspects a project fewer times than one that
inspects quarterly. Construction projects with duration of less than 9 months would actually be
inspected more frequently in such a State. The report then shows that in this State, no violations were
found, concluding that less frequent inspections leads to no findings of violations. In this case, a faulty
assumption leads to a faulty conclusion. Even if the assumption that fewer inspections were performed
was correct, the conclusion would be based on a very small sample size, which is wholly insufficient to
draw a conclusion or even establish a correlation. Furthermore, the frequency of the inspections is not
necessarily related to the number of violations found. The occurrence and discovery of violations would
be based on a variety of factors, including but not limited to subrecipient understanding of
requirements, willingness to ensure compliance, and technical and managerial competency to achieve
compliance.
Page 10: States Not Using Administrative Set-Aside
The report states that, "Six of the 13 States that we surveyed were not using any of their administrative
set-aside funds" and that, "One state indicates that resource limitations did not allow it to review ARRA
applications in a timely manner. However, this State did not use its administrative set-aside." It isn't
clear why this observation is relevant, as all States met the statutory deadline of "under contract or
construction" and thus were, by definition, timely.
OIG Response: While all projects were under construction, one state did tell the auditors that
not all applications were reviewed and that those not reviewed were instead considered for the
next SRF funding opportunity.
More importantly, it is critical to recognize that States have their own rules in place that can make
utilizing a sharp and sudden increase in funds difficult. State-wide hiring freezes and furloughs and
legislative spending caps created a lengthy process in some States and an impossible situation in others.
Despite the fact that States were able to access an increased amount of funds under the 4% set-aside,
many were unable to do so in a timely or useful manner, and unable to hire staff to deal with the
increased workload. State programs and EPA had very little control over this process. Finally, some
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States chose to use 100% of funds provided to build projects, which clearly aligns with the goals of
ARRA.
Chapter 3: EPA Should Strengthen Oversight of States
Page 13: EPA Required to Oversee State Programs
The report states EPA implemented various actions in response to GAO recommendations, for example,
increasing frequency of regional reviews and sampling of project files and transaction testing. This is
incorrect. EPA had actually adopted these changes in the Stewardship Plan developed the previous
year.
Page 14: EPA's Review Checklist Did Not Ensure State Program Compliance
The report states that the semiannual ARRA review checklist did not include enough detailed questions
to ensure State compliance. Specifically that the checklist was lacking detailed questions about State
oversight of project construction, Davis-Bacon and Buy American documentation review and a
recommendation to spot-check to verify compliance, and a recommendation for expanded transaction
testing when erroneous payments are identified.
Expanded transaction testing when erroneous payments are identified may not be practical in the time
frame of any given review considering the time involved per transaction, however, it may be feasible as
a follow-up item for future visits.
The finding that the checklist is not detailed enough regarding oversight of program requirements does
not take into consideration that Regions, in addition to performing semiannual State reviews, are
required to examine all files and documents within a project file relating to such requirements and are
required to accompany State staff on at least 1 project review per State. The examination of all project
file documents and the experience of accompanying State staff on reviews provide Regional staff with
the ability to accurately assess State program compliance. Checklists are used as a guide for program
reviews and have been released in conjunction with detailed training sessions for Regional staff.
Page 14: EPA Not Timely Conducting and Writing Reviews of State Programs
The report states that EPA OW management did not establish a timeframe for completion of PERs,
however, EPA instituted a 60 day requirement for submission of PERs in FY 2011. The report also states
that both EPA OW management and Regional management did not establish as a priority the writing and
documenting of reviews in a timely manner. EPA communicated regularly with all EPA Regional staff
regarding the frequency and timing of the semiannual reviews of ARRA programs. EPA also provided
contractor support to each Region for the reviews and every Region accepted this offer. EPA HQ staff
attended and participated in reviews in most States during 2009 and 2010 to oversee the review
process. Regions are aware of the findings of reviews prior to the exit conference of the review. EPA also
receives the findings of any review activities completed by their contractor in memo form within 2
weeks of completion of the review. We agree that timeliness of completion of the review memo is
important and will strive to ensure that all Regions meet the established deadline. It should be noted,
however, that EPA communicates all findings to States at the State review exit conferences and
corrective actions begin long before final PERs are signed.
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Page 15: EPA Not Using PERs to Make Agency Program Decisions
The report states that EPA did not use the PERs to collectively make Agency decisions to improve the
program or to analyze national trends. EPA used the PERs, in addition to interaction with States and
Regions during attendance of reviews, summary finding memos, individual checklists for projects and
transactions, and semiannual summaries to identify best practices and identify trends for needed
changes and improvements in the program. As noted above, PERs are used to document findings that
have already been presented to State programs and acted upon by EPA. EPA has used all of this
information to develop program priorities, including:
Expanding the annual review checklists;
Conducting 3-day training in oversight procedures in each Regional office between March and
October 2011;
Establishing discussion points during the monthly coordinator calls;
Editing Standard Operating Procedures for Regional staff in conducting reviews;
Determining the need for additional specific training on topics such as Buy American and Davis-
Bacon compliance.
Again, conclusions are presented without any supporting examples or documentation.
OIG Response: Our review considered PERs completed during FY 2010. These activities took
place after that time. At the time of the review, OW had neither accumulated nor analyzed the
PER reviews to identify areas in which improvements in guidance or oversight were needed.
Additional Factual Corrections
Table 5 shows Regions having only completed 49 reviews as of September 30, 2010. This number is
incorrect, and likely indicates at minimum, confusion regarding the data requested. Footnote (a) in Table
5 indicates Region 3 completed two reviews for each of its' 5 states, while the Table inconsistently
reports 5 reviews and 5 reports. The footnote also incorrectly indicates EPA guidance specifies a review
cycle based on the fiscal year. Further, Region 5 completed all 6 PERs.
Appendix B only lists one review for each State, which is incorrect. Further, it is missing all reviews for
Indiana.
OIG Response: The information in appendix B summarizes the PER reports that were completed
as of September 30, 2010, and provided to the OIG. Chapter 3, table 5, lists the number of
actual reviews that were completed. While a region may have completed a review, if it did not
also complete the report, we were not able to analyze what the review found. Therefore, the
review is not included in appendix B. Regarding Indiana, we confirmed that the PER report was
not completed as of September 30, 2010. Therefore, we have not revised the report.
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Appendix D
Distribution
Office of the Administrator
Assistant Administrator, Office of Water
Assistant Administrator, Office of Administration and Resources Management
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, Office of Regional Operations
Director, Office of Wastewater Management, Office of Water
Director, Municipal Support Division, Office of Wastewater Management, Office of Water
Chief, State Revolving Fund Branch, Office of Wastewater Management, Office of Water
Audit Followup Coordinator, Office of Water
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