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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
17-P-0186
April 26, 2017
Why We Did This Audit
The U.S. Environmental
Protection Agency (EPA),
Office of Inspector General
(OIG), received a hotline
complaint from the EPA
regarding financial irregularities
with Puerto Rico's Clean Water
and Drinking Water State
Revolving Funds. The
complaint reported that the
revolving funds had a
combined balance of
approximately $188 million at
the Puerto Rico Government
Development Bank, but the
complaint also alleged that the
bank did not have the funds to
honor the balance. The EPA
was concerned about
recovering the balance and the
potential commingling and/or
misuse of the funds. The OIG
conducted an audit to address
the EPA's concerns.
This report addresses the
following EPA goals or
cross-agency strategies:
•	Protecting America's
waters.
•	Launching a new era of
state, tribal, local and
international partnerships.
Send all inquiries to our public
affairs office at (202) 566-2391
or visit www.epa.gov/oia.
Listing of OIG reports.
Over $744 Million of Puerto Rico State
Revolving Funds at Risk
The OIG confirmed that over $188 million of state
revolving funds is not available because the
Puerto Rico Government Development Bank does
not have the assets (cash) to honor the balance.
This situation resulted from the severe, ongoing
financial crisis faced by the government of Puerto
Rico and the Puerto Rico Government
Development Bank.
Over $774 million of state
revolving funds is at risk
due to Puerto Rico's
ongoing financial crisis.
Restoration of the revolving
funds in the near future is
highly unlikely.
We saw no indication that the managing agencies—the Puerto Rico Department
of Health, Department of Environmental Quality, and Infrastructure Financing
Authority—commingled or misused the funds. The revolving fund balance in
question—which had grown to $194.5 million by November 7, 2016—consisted of
loan repayments and associated interest earnings, not any EPA capitalization
grant funds. The government of Puerto Rico recognizes its obligations and has
included restoration of the revolving funds in its 10-year plan; nonetheless,
withdrawals of any significance in the near future are highly unlikely. In addition,
our audit determined that approximately $580 million in repayments owed by the
revolving funds' largest loan recipient is at risk of nonpayment for at least
2 to 3 years, perhaps longer. As a result, over $774 million of funds may not be
available for an extended period of time. Without access to the revolving fund
balance and a steady stream of loan repayments, Puerto Rico's Clean Water and
Drinking Water State Revolving Funds cannot plan for or meet project needs.
Our audit found that the EPA could not have predicted or prevented this situation.
Prior to 2016, neither the EPA nor the managing agencies received any
indications that the revolving funds were at risk. We did not identify any actions
that could have been taken to safeguard the balance and/or secure the loan
repayments. Furthermore, as soon as the irregularities were discovered, the EPA
provided adequate oversight to address the issues and worked with the
managing agencies to safeguard future revolving fund transactions.
Recommendation and Recipient's Response
We recommend that the Regional Administrator, Region 2, evaluate options to
restore the viability of Puerto Rico's Clean Water and Drinking Water State
Revolving Funds or implement strategies better suited to the financial,
programmatic, public health and environmental needs of the government of
Puerto Rico. On March 2, 2017, we discussed our audit results with Region 2,
which concurred with our findings and recommendation.

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