U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Examination of Costs Claimed
Under EPA Cooperative
Agreement 2A-83440701 Awarded
Under the Recovery Act to
Cascade Sierra Solutions,
Eugene, Oregon
Report No. 12-R-0749
September 4, 2012
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Report Contributors: Michael Owen
Darren Schorer
John Burns
Eileen Collins
Abbreviations
CA
Cooperative Agreement
CARB
California Air Resources Board
CFR
Code of Federal Regulations
CSS
Cascade Sierra Solutions
DERA
Diesel Emissions Reduction Act
EPA
U.S. Environmental Protection Agency
FY
Fiscal year
FTE
Full-time equivalent
MY
Model year
OIG
Office of Inspector General
OMB
Office of Management and Budget
Recovery Act
American Recovery and Reinvestment Act of 2009
Cover photo: Example of an EPA certified SmartWay tractor. (EPA photo)
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: 202-566-2599 Mailcode 2431T
online: http://www.epa.gov/oiq/hotline.htm Washington, DC 20460
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At a Glance
Why We Did This Review
The U.S. Environmental
Protection Agency (EPA),
Office of Inspector General,
reviewed the amounts drawn
by Cascade Sierra Solutions
(CSS) under Cooperative
Agreement (CA) 2A-83440701.
The purpose of the audit was to
determine whether CSS
complied with federal
requirements and terms and
conditions for Diesel Emission
Reduction Act grants or
cooperative agreements
awarded under the American
Recovery and Reinvestment
Act of 2009 (Recovery Act).
EPA awarded the CA to CSS in
August 2009 under the
Recovery Act. The CA provides
$9 million to create a revolving
loan program for heavy duty
diesel trucks to save fuel and
reduce emissions.
This report addresses the
following EPA Goal or Cross-
Cutting Strategy:
• Taking action on climate
change and improving air
quality
For further information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.
The full report is at:
www.epa.qov/oiq/reports/2012/
20120904-12-R-0749.pdf
Examination of Costs Claimed Under EPA
Cooperative Agreement 2A -83440701A warded
Underthe Recovery Act to Cascade Sierra
Solutions, Eugene, Oregon
What We Found
CSS' financial management system did not support that funds drawn are
reasonable, allocable, and allowable in accordance with applicable laws,
regulations, and CA terms and conditions. In particular, CSS':
• Financial management system pertaining to cash draws, revolving fund
accounting, project costs, and progress reporting does not meet the
requirements of the Code of Federal Regulations (CFR) under 40 CFR
Part 30 and 2 CFR Part 230, and the CA.
• Procurements did not meet competition or cost and price analysis
requirements of 40 CFR Part 30, the recipient's procurement policy, or
CA requirements.
• Reporting of the number of jobs created or retained with Recovery Act
funds did not comply with Office of Management and Budget guidance.
As a result, we are unable to provide an opinion on the financial resources,
related liabilities, revenue, expenses, and residual balances of the CA-funded
revolving loan program. Therefore, we have questioned the $9 million drawn
underthe CA as unallowable costs.
Recommendations and Planned Agency Corrective Actions
We recommend that the Director for the Office of Grants and Debarment disallow
and recover $9 million in questioned costs; consider suspension and debarment
of CSS on current and future awards; require CSS to ensure that the use of funds
meets federal criteria; require special conditions for future awards to CSS; and
provide clarifying guidance to CSS on progress reporting requirements. We also
recommend that the Director require CSS to comply with pertinent procurement
requirements; disallow pre-2007 model year trucks as project costs; and assist
CSS with developing a methodology to calculate number of jobs created and
direct CSS to correct the numbers reported, with documentation. The Agency
generally agreed with the findings and said that it has initiated corrective actions
to address some of the weaknesses identified in the report. CSS disagreed with
most of the findings and two of the recommendations. CSS partially agreed with
one recommendation and neither agreed nor disagreed with six
recommendations. CSS described actions planned to document compliance with
EPA procurement regulations and is willing to work with EPA on developing a
Recovery Act job reporting methodology.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
September 4, 2012
MEMORANDUM
SUBJECT: Examination of Costs Claimed Under EPA Cooperative Agreement 2A-83440701
Awarded Under the Recovery Act to Cascade Sierra Solutions, Eugene, Oregon
Report No. 12-R-0749
This is our report on the subject examination 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. EPA
managers in accordance with established audit resolution procedures will make final
determinations on matters in this report.
We performed this examination as part of our responsibility under the American Recovery and
Reinvestment Act of 2009 (Recovery Act). The purpose of our examination was to determine
whether the amounts drawn by Cascade Sierra Solutions (CSS) under Cooperative Agreement
2A-83440701 were reasonable, allocable, and allowable in accordance with federal requirements
and terms and conditions for Diesel Emission Reduction Act grants awarded under the Recovery
Act. CSS received $9 million in Recovery Act funds under the EPA award.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us
your proposed management decision for resolution of the findings contained in this report before
you formally complete resolution with the recipient. As part of the audit resolution process, your
proposed decision is due in 120 days, or on January 2, 2013. To expedite the resolution process,
please e-mail an electronic version of your proposed management decision to
adachi.robert@epa.gov.
FROM:
Arthur A. Elkins, Jr.
TO:
Howard Corcoran
Director, Office of Grants and Debarment
Office of Administration and Resources Management
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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 to be released to the
public; if your response contains such data, you should identify the data for redaction or removal.
We have no objection to the further release of this report to the public. This report will be
available at http://www.epa.gov/oig.
If you or your staff have any questions regarding this report, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0899 or heist.melissa@epa.gov; or
Robert Adachi, Product Line Director, at (415) 947-4537 or adachi.robert@epa.gov.
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Examination of Costs Claimed Under 12-R-0749
EPA Cooperative Agreement 2A-83440701 Awarded Under the
Recovery Act to Cascade Sierra Solutions, Eugene, Oregon
Table of
Chapters
1 Independent Attestation Report 1
2 Introduction 4
3 Financial Management System Does Not Meet Federal Requirements 6
4 Procurements Did Not Meet Federal or Recipient Requirements 16
5 Job Reporting Does Not Comply With OMB Guidance 21
Status of Recommendations and Potential Monetary Benefits 24
Appendices
A Agency's Comments on Draft Report 26
B CSS'Comments on Draft Report and OIG Evaluation 29
C Distribution 66
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Chapter 1
Independent Attestation Report
As part of our oversight of cooperative agreement (CA) awards by the U.S.
Environmental Protection Agency (EPA), we have examined Cascade Sierra
Solutions' (CSS') compliance with the requirements of the Code of Federal
Regulations (CFR) under 2 CFRPart 230, Cost Principles for Non-Profit
Organizations; 40 CFR Part 30, Uniform Administrative Requirements for Grants
and Agreements with Institutions of Higher Education, Hospitals, and Other
Non-Profit Organizations; and the American Recovery and Reinvestment Act of
2009 (Recovery Act) applicable to the outlays for CA 2A-83440701. By
accepting the funding provided through the CA, CSS has responsibility for
complying with these requirements. Our responsibility is to express an opinion on
CSS' compliance based on our examination.
Our examination was conducted in accordance with generally accepted
government auditing standards issued by the Comptroller General of the United
States and the attestation standards established by the American Institute of
Certified Public Accountants. We examined, on a test basis, evidence supporting
management's assertion and performed such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
We contacted EPA's Office of Transportation and Air Quality as well as the
Grants and Interagency Agreements Management Division in EPA's Office of
Grants and Debarment within the Office of Administration and Resources
Management, and the Office of General Counsel. We gathered information on
criteria relevant to the CA; obtained an understanding of the proposed revolving
loan fund; and gathered information concerning CSS' performance. Specifically,
we performed the following steps:
• Reviewed the request for application associated with award of C A
2A-83440701.
• Reviewed CA 2A-83440701 awarded to CSS and its modifications.
• Reviewed CSS' work plan.
• Reviewed 2 CFR Part 230 and 40 CFR Part 30.
• Conducted interviews with EPA's proj ect officer for the CA.
We made site visits to CSS' office in Eugene, Oregon, and performed the
following steps:
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• Reviewed requests for reimbursement to EPA under the CA to determine
whether the draws complied with federal requirements and were disbursed
for expenditures allocable to the CA.
• Reviewed CSS' progress report for the quarter ending December 31, 2010,
to obtain an understanding of the financial status and activities of the
revolving loan program.
• Selected a judgmental sample of $4,336,066 in expenditures that CSS
associated with the $9 million in cash drawn under the CA. We reviewed
supporting invoices, payment documents, and associated accounting
system entries to determine whether the expenditures were allocable and
allowable under 40 CFR Part 30 and the CA.
• Selected a judgmental sample of 4 of 798 projects listed in CSS' progress
report for the quarter ending December 31, 2010, to determine whether
costs were allowable under 2 CFR Part 230, 40 CFR Part 30, and the CA.
The sample represented $229,350 of $47,918,615 in total project costs
reported to EPA. We did not expand the sample because of material
deficiencies with CSS' financial management system.
• Reviewed CSS' chart of accounts and general ledger detail to determine
whether the revolving fund program activity was segregated within the
accounting system.
• Selected a judgmental sample of 4 of 27 completed truck procurement
actions exceeding $100,000 that CSS identified as allocable to the CA-
funded revolving loan program. The sample represented $3,303,337 of the
$10,477,704 in total costs for the 27 procurement actions. We reviewed all
available supporting documentation for the sample of truck procurements
to determine whether CSS met applicable requirements of 40 CFR Part 30.
• Selected a judgmental sample of 11 of 472 emission control equipment
procurements. The sample represented $163,193 of $4,987,923 in total
costs reported by CSS for the 472 procurements. We reviewed all
available supporting documentation for the sample to determine whether
CSS met applicable requirements of 40 CFR Part 30. We did not expand
the sample because of material deficiencies with CSS' financial
management system.
• Conducted interviews of CSS' personnel to gain an understanding of the
organization's accounting system, internal controls, and costs reported
under the CA.
We reviewed other prior independent reviews of CSS' financial management
system for the CA. We reviewed CSS' 2009 audit required under the Single Audit
Act Amendments of 1996 and draft financial statements for 2010. As part of the
review, we interviewed the public accounting firm performing the single audit to
gain a complete understanding of the scope of the 2009 single audit. We reviewed
a 2010 report on a limited scope financial management system review of CSS
performed for EPA's Office of Transportation and Air Quality. We also reviewed
the supporting working papers to obtain a complete understanding of the scope
and results of the evaluation.
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We conducted our audit work between March 2011 and December 2011. Our
examination disclosed material noncompliance and internal control weaknesses
with financial management. In particular, CSS':
• Financial management system pertaining to cash draws, revolving fund
accounting, project costs, and progress reporting does not meet the
requirements of 40 CFR Part 30, 2 CFR Part 230, and the CA.
• Procurements did not meet competition or cost and price analysis
requirements of 40 CFR Part 30, the recipient's procurement policy, or
CA requirements.
• Reporting of the number of jobs created or retained with Recovery Act
funds did not comply with Office of Management and Budget (OMB)
reporting guidance.
As a result, we are unable to provide an opinion on the financial resources, related
liabilities, revenue, expenses, and residual balances of the CA-funded revolving
loan program. Therefore, we have questioned the $9 million drawn under the CA
as unallowable costs and recommend that EPA recover these funds from CSS.
In our opinion, because of the effect of the issues described above, CSS has not
complied with federal requirements for the grant period ending December 31,
2010.
Robert K. Adachi
Director for Forensic Audits
September 4, 2012
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Chapter 2
Introduction
Purpose
EPA's Office of Inspector General (OIG) conducted this review to determine
whether the amounts drawn by CSS under CA 2A-83440701 were reasonable,
allocable, and allowable in accordance with federal requirements and terms and
conditions for Diesel Emission Reduction Act (DERA) grants awarded under the
Recovery Act.
Background
DERA was signed into law in August 2005 under Title VII, Subtitle G, of the
Energy Policy Act of 2005. DERA authorized $200 million per year from fiscal
years (FYs) 2007 to 2011 (or a total of $1 billion) for EPA to fund programs to
achieve significant reductions in diesel emission in terms of tons of pollution
produced and diesel emission exposures, particularly from fleets operating in
areas designated by the Agency as poor air quality areas. Of the authorized DERA
amount, 70 percent is authorized for competitive national grant and low cost
revolving loans, as determined by the EPA Administrator. The remaining
30 percent is for state grant and loan programs. Congress appropriated a total of
$169.2 million for EPA under DERA for FYs 2008 through 2010. Congress
appropriated an additional $300 million to EPA in FY 2009 for DERA grants
under the Recovery Act.
EPA awarded CA 2A-83440701 on August 24, 2009, to CSS through the DERA
SmartWay Clean Diesel Finance Program. EPA's SmartWay Clean Diesel
Finance Program issues grants to establish innovative financing programs for
buyers of eligible diesel or alternatively fueled vehicles and equipment. The
purpose of the award to CSS was to provide federal assistance of $9 million in
Recovery Act funds to create a national revolving loan program for heavy-duty
trucks (trucks) to save fuel and reduce emissions. The grant budget and project
period was from August 1, 2009, to October 31, 2011. As of December 31,2010,
CSS had drawn down all $9 million.
CSS, based in Eugene, Oregon, is a non-profit organization with a mission to save
fuel and reduce emissions from heavy duty diesel engines. CSS promotes EPA
SmartWay-verified technologies and products certified by the California Air
Resources Board, as well as emerging technologies, that have been shown to
provide quantifiable emission reduction benefits. CSS assists truck owners to
finance clean diesel solutions using state, federal, and private sources of funding.
Table 1 identifies some of the sources of CSS' funding as of December 31, 2010.
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Table 1: Partial list of CSS funding sources
Source
Award amount
EPA Region 1
$1,148,236
EPA Region 2
1,404,327
EPA Region 6
1,150,228
EPA Region 8
850,000
EPA Region 10
907,072
EPA SmartWay 1
1,130,000
EPA SmartWay 2 (CA 2A-83440701)
9,000,000
EPA SmartWay 3
2,000,000
Puget Sound Clean Air Authority
2,000,000
City of Sacramento Congestion Mitigation and Air Quality
200,000
California Proposition 1B
19,335,000
U.S. Department of Energy
22,200,000
Total
$61,324,863
Source: Schedule of federal, state, and local awards as of December 31, 2010, provided by CSS.
CSS provides operators with truck replacements and SmartWay equipment
upgrades that are intended to reduce fuel consumption and emissions through the
CA-funded revolving loan program. CSS' revolving loan program focuses on
providing truck replacements and equipment upgrades to operators through lease-
to-own agreements. CSS intends to replenish the revolving loan fund through
payments made under the lease-to-own agreements.
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Chapter 3
Financial Management System Does Not Meet
Federal Requirements
CSS' financial management system does not meet federal requirements that apply
under the EPA CA award. Specifically:
• Cash draws did not comply with 40 CFR Part 30.22, Appendix A of
2 CFR Part 230, or the terms and conditions of the CA.
• A formal revolving fund has not been established to support the revolving
loan program specified by the C A or to meet the requirements of 40 CFR
Part 30.21.
• Revolving loan program projects costs and associated lessee payments
were not fully supported as required by 40 CFR Part 30.21 and
Appendix A of 2 CFR Part 230.
• The progress report for the quarter ending December 2010 did not
accurately identify expenditures by funding source, the number of
projects, and the total cost of projects in the revolving fund program.
As a result, CSS is unable to support that all funds drawn under the CA were used
for expenditures that are allowable under and allocable to the CA. We are also
unable to provide an opinion on the financial resources, related liabilities,
revenue, expenses, and residual balances of the revolving fund. Therefore, we
question the $9 million drawn under the C A as unallowable costs and recommend
that EPA recover these funds from CSS. EPA should also consider suspension
and debarment proceedings against CSS. We found that the financial management
issues were primarily caused by CSS' underestimating accounting system
requirements for the revolving fund.
Cash Draws Did Not Meet Federal Requirements
CSS' advance cash draws did not comply with the requirements of 40 CFR Part
30.22, Appendix A of 2 CFR Part 230, or the terms and conditions of the CA.
CSS cash draws exceeded immediate cash needs during October and November
2009. In addition, CSS' accounting system information and documentation did
not show that the draws were supported by expenditures incurred under the C A.
As a result, CSS was required to repay EPA $1,751 in interest income earned on
the cash draws and was not able to show that the $9 million in draws were used
for expenditures allocable to and allowable under the CA.
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Cash Draws Exceeded Cash Needs
CSS drew down the $9 million award over the period from September 2009
through October 2010. For the months of October and November 2009, six of
CSS' cash draws exceeded immediate cash needs according to the recipient's
records. These cash draws exceeded immediate cash needs by amounts ranging
between $510, 257 and $3,141,127, as summarized in table 2 below.
Table 2: Draws in excess of cash needs
Draws in excess
of needs
Date of draw
Draw amount
(cumulative)
10/01/09
$1,000,000
$510,257
10/07/09
742,000
1,252,257
10/14/09
2,000,000
2,558,257
10/27/09
1,000,000
2,863,497
11/05/09
1,000,000
2,156,127
11/11/09
1,000,000
3,141,127
Total
$6,742,000
Source: CSS Schedule of Federal Awards
Programmatic Condition 16 of the CA specifies that the recipient may request
payment from EPA after it incurs an obligation in accordance with 40 CFR Part
30.22. Under 40 CFR Part 30.22(b), cash advances are limited to the minimum
amounts needed and are to be timed in accordance with the actual, immediate
cash requirements of the recipient. Title 40 CFR Part 30.22(b) also specifies that
the timing and amount of cash advances shall be as close as is administratively
feasible to the actual disbursements by the recipient.
According to CSS management, CSS drew cash in advance to have funds
available for truck procurements. However, CSS management said that CSS was
not able to make some anticipated truck purchases, resulting in the excess CA
funds on hand. The issue of excess CA funds on hand was identified during
October 2010 as part of a limited scope review conducted for EPA by a
contractor. The limited scope review also identified that CSS earned $1,751 of
interest on the excess funds. CSS remitted the interest earned on the CA funds to
EPA based on the finding of the limited scope review. Under 40 CFR Part
30.22(1), interest earned in excess of $250 must be remitted to the federal
government. Therefore, EPA has satisfactorily resolved the interest income issue.
Cash Draws Not Supported as Allocable and Allowable
CSS' accounting system information and documentation did not show that the
cash draws were supported by expenditures incurred under the CA. Title 40 CFR
Part 30.21(b)(2) specifies that recipient financial management systems shall
provide records that identify adequately the source and application of funds for
federally sponsored activities. In addition, 2 CFR Part 230, Appendix A, A.2(a)
and (g), require costs to be allocable and adequately documented to be considered
12-R-0749
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allowable under an award. Consistent with these regulations, Programmatic
Condition 2.5. A of the CA requires the recipient to maintain records that ensure
Recovery Act funds are accounted for separately from other grant program funds.
Our review of CSS' accounting system information and bank records showed that
the $9 million in draws under the CA were recorded in and deposited to multiple
general ledger and bank accounts that included funds from other grant programs.
These grant programs were funded through other EPA and various state and local
government agreements. For example, CSS initially deposited the $6.7 million of
draws listed in table 2 above into a savings account and subsequently transferred
90 percent of these draws between two checking accounts. These three accounts
included funding from other sources. These deposit transactions were also
recorded in similar savings and checking general ledger accounts that included
funding from other sources. Because the CA funding was recorded in and
deposited to accounts that included funds from other sources, we were unable to
reconcile the $6.7 million in draws with expenditures made under the CA.
We also reviewed a judgmental sample of $4,336,066 in expenditures that CSS
associated with the $9 million in cash draws. Our review of invoices, payment
documents, and accounting system entries provided by CSS to support the
expenditures identified that the documentation and entries did not include
notations or coding showing that the costs were incurred under the CA. The
documentation and accounting entries only provided information on the type of
truck or equipment, cost, and the bank account from which the funds were drawn.
Because of these accounting and documentation issues, we were unable to verify
that CSS used the $9 million of EPA funding for expenditures that are allocable to
and allowable under the CA.
Revolving Loan Fund Requirement Not Met
CSS has not established a formal fund to support the revolving loan program that
meets the requirements of 40 CFR Part 30.21. The CA specifies that CSS
establish a revolving loan program for heavy-duty trucks to save fuel and reduce
emissions with the $9 million award. As discussed earlier in the report, 40 CFR
Part 30.21(b)(2) requires recipients' financial management systems to provide
records that adequately identify the source and application of funds for federally
sponsored activities. Title 40 CFR Part 30.21(b)(3) further specifies that
recipients' financial management systems provide accountability for funds,
property, and other assets. The CA also provides specific accountability
requirements for the award. Programmatic Condition 2.5. A requires the recipient
to maintain records that ensure Recovery Act funds are tracked separately from
other grant programs. Programmatic Condition 2.7 requires the recipient to
maintain effective control over and be accountable for all funds, property, and
other assets accrued as a result of the CA.
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CSS has not segregated in the accounting system all revenues, costs, cash, and
accounts receivables associated with funding provided under the CA from the
organization's other programs or operations. CSS had not implemented a project
cost system for expenditures made under the CA-funded revolving fund program.
CSS did not establish separate accounts for revolving fund transactions during
calendar year 2009. CSS recorded revenues, costs, cash, and accounts receivables
associated with its revolving fund program to accounts that included transactions
from other programs during 2009. During calendar year 2010, CSS used seven
dedicated accounts within its accounting system to track revenues and expenses of
the revolving fund program separately from other CSS programs and operations.
These accounts consisted of one revenue account that contained $78,000 of the
$9,000,000 award and six salary and salary-related accounts that totaled $277,431
in expenses. However, the accounts used by CSS in calendar year 2010 did not
track all revenues, costs, cash, and accounts receivables associated with the
revolving fund program.
Rather than establishing a comprehensive separate set of accounts for the
revolving fund program, CSS tracked revolving fund revenues, costs, and lease
receivables using spreadsheets. We were not able to reconcile the spreadsheets to
the accounting system because most revolving fund transactions were not
segregated from other transactions in the system. For example, a spreadsheet
provided to us by CSS reporting revolving fund transactions as of December 31,
2010, showed a total lease receivable of $37,037,426. We were unable to verify
this total because CSS had not recorded the receivables in a designated revolving
fund account(s) in the accounting system. Because CSS has not established and
used a comprehensive set of accounts for the revolving fund, we are unable to
provide an opinion on the financial resources, related liabilities, revenue,
expenses, and residual balances of the fund.
Project Costs Not Fully Supported
CSS was unable to provide complete support for revolving loan program project
costs and associated lessee payments as required by Appendix A of 2 CFR
Part 230 and 40 CFR Part 30.21. CSS reported in its progress report to EPA for
the quarter ending December 31, 2010, that 798 truck and equipment projects
with a total cost of $47,918,615 were funded through the revolving loan program.
We reviewed a judgmental sample of 4 of the 798 projects to determine if costs
were allowable under 2 CFR Part 230, 40 CFR Part 30, and the CA. The sample
consisted of CSS truck procurements that were subsequently leased by CSS to
truck operators under lease-to-own agreements. The sample represented $229,350
of the $47,918,615 reported total project costs. CSS' supporting records disclosed
that the total reported cost for each project in the sample generally included the
truck purchase price, sales taxes, repair costs, and global positioning system
installation costs. CSS used the total reported cost for each project to calculate the
payments specified in the lease agreement associated with the project. Our review
of invoices and other available supporting records provided by CSS identified that
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the cost of one truck project was understated and the costs of the other three
projects were overstated. Table 3 below summarizes the results of our review.
Table 3: Comparison of reported project costs with supporting records
Project
Reported cost
Supported costs
Difference
PHA -007
$25,925
$26,841
($916)
JBC028
26,816
26,733
83
P1B102-103
93,128
91,855
1,273
P1B102-331
83,481
83,012
469
Total
$229,350
$228,441
$909
Source: Invoices, lease documents, and other supporting documents provided by CSS.
As a result, payments established under leases for these four projects were based
on either understated or overstated project costs. We did not expand the scope of
our testing for reported project costs and lease payments because CSS had not
implemented a project cost system for expenditures under the CA-funded
revolving loan fund program as discussed earlier in this chapter. Therefore, we
were not able to verify whether reported project costs were allocable to the CA.
CSS management acknowledged that project costs could not be reconciled to
supporting records and said that the costs for each project included estimated
rather than actual repair costs. According to CSS management, CSS was required
to estimate the total cost of each project for the following reasons:
• CSS was required to provide potential lessees with the price of the trucks
prior to ordering the vehicles shipped; therefore, CSS was unable to
determine the repair costs associated with the vehicles until they arrived.
• CSS ordered trucks in batches and repaired them in batches.
• The costs associated with repairing the trucks were billed monthly to CSS
and not broken down by individual trucks.
CSS management also stated that the estimated allowance for repairs averages out
over time, and CSS adjusts the estimate according to the projects and anticipated
repairs.
Title 2 CFR Part 230, Appendix A, A.2 (a) and (g), require costs to be allocable
and adequately documented to be considered allowable under an award. In
addition, 40 CFR Part 30.21(b)(2) requires recipients' financial management
systems to include records that adequately identify the source and application of
funds for federally sponsored activities. This regulation further states that these
records should include information pertaining to assets, outlays, income, and
interest. CSS was unable to support that all reported projects costs are allowable
under 2 CFR Part 230 and 40 CFR Part 30. CSS was also unable to accurately
identify income or losses from leases or measure whether leases and the revolving
fund program were economically sound because it did not meet the financial
management requirements of 40 CFR Part 30.
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Progress Reporting Not Accurate
CSS' progress report for the quarter ending December 2010 did not accurately
identify expenditures by funding source, the number of projects, and the total cost
of projects in the revolving fund program.
Programmatic Condition 5 of the CA requires CSS to provide EPA with quarterly
reports that address progress toward achieving the work plan goals. The condition
specifies that the reports will include summary information on planned activities,
implementation of diesel emission reduction strategies, expenditures, and issuance
of loans, leases, or bonds.
Our review of CSS records associated with revolving fund activities identified
that the organization's progress report for the quarter ending December 31, 2010,
submitted to EPA was not accurate. The report disclosed that CSS spent
$8,982,000 of CA funding on revolving fund projects. However, CSS' records
showed that reported funding amounts for expenditures on projects partially
funded through both CA and financial institution loan funding were not correct.
According to CSS records, the recipient overstated EPA and understated financial
institution-funded expenditures for projects listed in the quarterly report. We
discussed this issue with CSS staff and management in March 2011. In response,
in May 2011, CSS provided us with revised report information covering the
quarter ending December 31, 2010. A comparison of the report submitted to EPA
with the revised information showed that the quarterly report overstated CA-
funded expenditures by $5,458,808 and understated expenditures funded through
financial institution loans by $5,354,928. The comparison also identified that the
number of projects was overstated and total project costs and funding from other
sources were understated in the quarterly report. The differences between the
quarterly report and the revised information are summarized in table 4 below.
Table 4: Comparison of quarterly report with corrected information
Report Category
Quarterly report
for period ending
December 2010
Revised report
information
Difference
Number of projects
798
759
39
Total project costs
$47,918,615
$48,531,668
($613,053)
Down payments on projects
$695,969
$904,658
($208,689)
State grant-funded
Expenditures
$20,099,849
$20,220,703
($120,854)
Expenditures funded by
financial institution loans
$18,140,796
$23,495,724
($5,354,928)
CA-funded expenditures
$8,982,000
$3,523,192
$5,458,808
Source: CSS progress report for quarter ending December 2010 and updated
program reporting information covering the reporting period.
Our review of the revised report information also identified that CSS has
$777,545 of EPA funds that appear to be available to revolve to other projects.
However, we were unable to verify whether the revised information was accurate
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because of the other financial management issues discussed earlier in the chapter.
Without accurate quarterly reporting by CSS, EPA is unable to measure the
recipient's progress toward achieving the goals of the CA.
Primary Cause for Financial Management Issues
We found that the financial management issues were primarily caused by CSS'
underestimating accounting system requirements for the revolving fund.
According to CSS management, CSS thought it could manage the revolving fund
without using the limited project cost function of the accounting system.
However, the management said that as the complexity of the fund increased, CSS'
accounting system was not sophisticated enough to provide tracking of all sources
and uses of funding. Management also said that CSS understands that
improvements are needed and the organization is working to make improvements
to the accounting system that will provide better visibility of the revolving fund.
Conclusion
Based on the findings above, CSS does not meet the minimum requirements for a
financial management system. We are unable to provide an opinion on the
financial resources, related liabilities, revenue, expenses, and residual balances of
the revolving fund because of the financial management deficiencies. As a result,
we question the $9 million drawn under the CA as unallowable costs under 2 CFR
Part 230. Therefore, we recommend that EPA recover these questioned costs if
CSS is unable to provide records that show the costs meet federal financial
management requirements.
Title 2 CFR Part 180, OMB Guidelines to Agencies on Governmentwide
Debarment and Suspension (Nonprocurement), at subsection 180.800(b),
specifies that an Agency may pursue a suspension and debarment action for
violations of the terms of a public agreement or transaction so serious as to affect
the integrity of an agency program. During FY 2009, EPA awarded a total of
$30 million in Recovery Act funding to recipients for SmartWay Clean Diesel
Finance Program projects. EPA's $9 million award to CSS represents 30 percent
of the Recovery Act awards under this program. Therefore, CSS' financial
management deficiencies pose a serious threat to the integrity of the Recovery
Act-funded portion of EPA's Clean Diesel Finance Program. Consequently, EPA
should consider suspension and debarment of CSS on current and future awards
under 2 CFR Part 180.
To address the financial management issues identified during our review, CSS
should establish controls to ensure that the use of funding provided under the CA
complies with 40 CFR Part 30.21. These controls should ensure (1) accurate,
current, and complete disclosure of the financial results of the revolving loan
program; (2) records identifying the source and application of funds provided
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under the CA; and (3) effective control over and accountability for all funds,
property, and other assets of the EPA-funded revolving loan program.
EPA should also impose special conditions on all current and future awards of
EPA funds as outlined in 40 CFR Part 30. Title 40 CFR Part 30.14, Special
Award Conditions, states:
If an applicant or recipient: has a history of poor performance, is
not financially stable; has a management system that does not meet
the standards prescribed in Circular A-l 10; has not conformed to
the terms and conditions of a previous award; or is not otherwise
responsible, EPA may impose additional requirements as needed,
provided that such applicant or recipient is notified in writing as to:
the nature of the additional requirements, the reason why the
additional requirements are being imposed, the nature of the
corrective action needed, the time allowed for completing the
corrective actions, and the method for requesting reconsideration
of the additional requirements imposed.
The special conditions should include (1) payment on a reimbursement basis and
(2) EPA review and approval of reimbursement requests prior to payment.
Recommendations
We recommend that the Director for the Office of Grants and Debarment:
1. Disallow and recover $9 million in questioned costs claimed under CA
2A-83440701. If CSS provides documentation that meets appropriate
federal financial management requirements and shows that some or all
of the questioned costs are allocable and allowable to the CA, the
amount to be recovered should be adjusted accordingly.
2. Consider suspension and debarment of CSS on current and future
awards under 2 CFR Part 180.
3. Require CSS to establish controls that ensure the use of funding
provided under the CA is in compliance with 40 CFR Part 30.21. The
controls should ensure:
a. Accurate, current, and complete disclosure of the financial
results of the revolving loan program funded under the CA.
b. Records that identify adequately the source and application of
funds provided under the CA.
c. Effective control over and accountability for all funds,
property, and other assets of the EPA-funded revolving loan
program.
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4. Require that the following special conditions be included for future
EPA awards to CSS until EPA determines that the recipient has met all
applicable federal financial management requirements:
a. Payment on a reimbursement basis.
b. Review and approval by the EPA project officer of
reimbursement requests, including all supporting
documentation for the claims prior to payment.
5. Provide clarifying guidance to CSS on financial and other project
information required to be included in quarterly progress reports and
request the recipient to submit corrected progress reports as
appropriate for prior quarters of the project period.
EPA and Recipient Comments
The OIG received comments on the draft report from EPA's Office of Grants and
Debarment and CSS. CSS also provided supplemental documentation as support
for its comments. The supplemental documentation is not included in the report
but is available upon request.
The Agency generally agreed with the accuracy of the report findings and said
that it has initiated corrective actions to address some of the weaknesses identified
in the draft report. The Agency explained that it changed CSS' status from
advance to reimbursement payments for active assistance agreements to restrict
access to available federal funds and placed a stop work order on the SmartWay
Three Finance Program Agreement. The Agency noted that, in response to the
CSS' 2010 single audit, the recipient acknowledged the limitations of its
accounting system and indicated that significant resources have been invested to
upgrade its information and accounting processes. The Agency further explained
that it is imperative for EPA to determine whether CSS has made the necessary
corrections in order to continue financing for the SmartWay Three Program and
releasing available funding for other assistance agreements with the recipient. As
a result, the Agency requested that the OIG perform a follow-up review of CSS'
financial system and controls. EPA's complete written response is in appendix A.
Recommendation 5 was added after receipt of comments from EPA and CSS.
EPA agreed to the recommendation and commented that, prior to the OIG's
review of the CA, it provided additional guidance to CSS on reporting. EPA
requested CSS provide additional project level information, including a
breakdown of funding sources and an update of "Phase 2" of the cooperative
agreement. EPA also reiterated the need to continue reporting on projects until the
CA is closed out.
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CSS disagreed with all but one of the findings and recommendation 2 in chapter 3
of the draft report. CSS neither agreed or disagreed with recommendations 1 and
3. CSS disagreed primarily because it believed that it has complied with all
federal financial management requirements and shown all costs to be allocable
and allowable under the CA. With regard to recommendation 4, CSS said that it
concurred with a caveat that regional awards be exempt. CSS explained that the
special conditions under recommendation 4 should not be placed on regional
awards because these funding agreements are straightforward to administer and
EPA has never had questions concerning the recipient's implementation of the
awards. CSS' complete written response is in appendix B.
OIG Response
We agree with the Agency's initial corrective actions to address some of the
findings and will perform the requested follow-up review of CSS' financial
system and controls. The Agency will need to provide a proposed management
decision for full resolution of the findings and recommendations in response to
this report.
CSS' comments and supplemental documentation did not resolve the financial
management issues discussed in the draft report. Therefore, our position on the
findings and recommendations generally remains unchanged. We made two
changes to the report based on CSS' comments. First, we revised the report to
more clearly explain that we were unable to reconcile $6.7 million in draws with
expenditures made under the CA both because the CA funding was recorded in
general ledger accounts and deposited into bank accounts that included funds
from other sources. Second, we added a recommendation that the Agency provide
clarifying guidance to CSS on the content of quarterly progress reports and
request the recipient to submit corrected reports as appropriate.
The full text of our response is embedded as text boxes in CSS' complete written
response in appendix B.
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Chapter 4
Procurements Did Not Meet Federal or
Recipient Requirements
CSS' procurements under the CA did not meet federal requirements or the
organization's procurement policy. Truck and emissions control equipment
procurements did not meet competition or cost and price analysis requirements of
40 CFR Part 30 or CSS' procurement policy. In addition, procurements of pre-
2007 model year (MY) trucks did not meet emission requirements specified by
the CA. As a result, we were unable to determine whether reported total
procurement costs of $8,982,000 for trucks and equipment are fair and reasonable,
and pre-2007 MY trucks procured at a total cost of $1,915,918 are not allowable
under the CA. We found two primary causes for the procurement issues. First,
CSS staff believed that CSS followed procurement guidelines provided by the
first project officer for the CA. Second, CSS had not received anticipated grant
funding for retrofitting the pre-2007 MY trucks.
Procurements Did Not Meet Requirements
Truck and emission control equipment procurements did not meet requirements of
40 CFR Part 30 or CSS' procurement policy. CSS procured trucks without
following a formal and documented competitive process. CSS also did not
document cost or price analyses for procurements of truck emission control
equipment.
Title 40 CFR Part 30 includes procurement standards that apply to the CA award.
Title 40 CFR Part 30.43 requires all recipient procurement transactions to be
conducted in a manner that provides, to the maximum extent practical, free and
open competition. Title 40 CFR Part 30.45 also requires some form of a cost or
price analysis to be made and documented in the procurement files for every
procurement action. Minimum documentation requirements for purchases
exceeding $100,000 are specified by 40 CFR Part 30.46. Under 40 CFR Part 30.46,
the recipient's procurement records and files are required to include at a minimum
the (1) basis for selection, (2) justification for lack of competition, and (3) basis for
the award cost or price. Similar to 40 CFR Part 30, CSS' procurement policy
requires a formal bid process and retention in the transaction records of
documentation on the selection process for procurements of $50,000 or greater.
Our review of a judgmental sample of 4 of CSS' 27 completed truck procurement
actions with costs exceeding $100,000 for the period September 28, 2009, through
June 9, 2010, disclosed that the purchases did not meet competition and
documentation requirements. The sample represented $3,303,337 million of
$10,477,704 in total costs incurred for the 27 procurement actions. Supporting
documents for the sample generally consisted of the invoices and payment records
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for the procurements. The supporting records did not include the cost or price
analysis documentation specified by 40 CFR Part 30.45 or the competition and
other documentation specified by 40 CFR Part 30.46 and CSS' procurement
policy.
We also reviewed a judgmental sample of 11 out of 472 truck emission control
equipment procurements with costs below $100,000 for the period ending
December 31, 2011. The sample represented $163,193 of $4,987,923 in reported
costs incurred for truck emission control equipment. CSS procured the emission
equipment upgrades for trucks owned by truck operators or trucking companies.
Supporting documents for the sample generally consisted of the invoices for the
procurements and calculation documents showing repayment amounts for the
recipients of the equipment. CSS' documentation associated with the
procurements did not show that a cost or price analysis had been conducted.
According to CSS management, CSS did conduct a cost or price analysis for
equipment procurements, but the analysis was not documented. We did not
expand the sample because of the other material deficiencies with CSS' financial
management system discussed earlier in this report.
CSS' progress report for the quarter ending December 31, 2010, identified that
$8,982,000 in CA funding had been spent on truck and emission control
equipment procurements. We were unable to determine whether these
procurement costs are fair and reasonable because CSS did not meet the
procurement requirements of 40 CFR Part 30 or its internal policy.
In response to these procurement issues, CSS staff said that CSS followed
procurement guidelines provided by the first project officer for the CA. As
support, CSS staff provided an April 2010 e-mail from the first project officer
disclosing these guidelines. The first project officer stated in the e-mail:
.. .CSS' lease program allows drivers to either 1) select their
vehicle from a list of eligible vehicles offered by a number of
dealers or 2) present a vehicle that is eligible under CSS' program
requirements. Given CSS' lease program parameters, this approach
sounds reasonable in trying to ensure open competition for
selecting the most appropriate vehicles. Again, all procurement
transactions should provide, to the maximum extent practical, open
and free competition.
The first project officer is no longer employed by EPA. Therefore, we were
unable to discuss the e-mail with this project officer. However, the project
officer's e-mail does not instruct CSS to ignore the cost or price analysis
documentation requirement specified by 40 CFR Part 30.45, the competition and
other documentation requirements specified by 40 CFR Part 30.46, or the
organization's procurement policy.
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Procurement of Pre-2007 Model Year Trucks Did Not Meet CA
Requirements
CSS did not install emission control technologies on pre-2007 MY trucks as
required by the CA. Programmatic Condition 3.1.G of the CA specifies that CSS
may use the funding under the award to purchase or lease pre-2007 MY
on-highway vehicles, used engines, and used pieces of equipment as long as
verified emission control technologies have been installed. CSS' progress report
for the quarter ending December 31, 2010, submitted to EPA, identified that
$1,915,918 in CA funds were used to procure 227 pre-2007 MY trucks. The
quarterly report also disclosed that these trucks had not been retrofitted with
emission control technologies because CSS had not received anticipated grant
funding for the retrofits from California. According to CSS staff, retrofitting the
trucks may not be economically viable because the cost of the emission control
equipment exceeds the value of the trucks.
The $1,915,918 in costs incurred by CSS for the pre-2007 MY trucks are not
allowable under the CA because required emission control technologies have not
been installed. The progress report for the quarter ending December 31, 2010
disclosed that CSS may remove the pre-2007 MY trucks from the revolving fund
program and replace them with trucks that meet the CA requirements to resolve
the issue. At the time of our field work, EPA was working with CSS to resolve the
issue.
Recommendations
We recommend that the Director for the Office of Grants and Debarment:
6. Require CSS to comply at a minimum with 40 CFR Part 30 for past and
future procurements under the CA. Specifically, require CSS to:
a. Maintain in the procurement records the minimum documentation
specified by 40 CFR Part 30.46 for procurements exceeding
$100,000.
b. Conduct and maintain in the procurement records a cost or price
analysis for every procurement action as required by 40 CFR Part
30.45.
7. Disallow the pre-2007 MY trucks as project costs under the EPA-funded
revolving loan program unless CSS provides EPA with documentation
verifying that the trucks have been retrofitted with emission control
devices as specified by the CA.
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EPA and Recipient Comments
The OIG received comments on the draft report from EPA's Office of Grants and
Debarment and CSS. CSS also provided supplemental documentation as support
for its comments. The supplemental documentation is not included in the report
but is available upon request.
The Agency generally agreed with the accuracy of the findings of the report and
said that it has initiated corrective actions to address some of the weaknesses
identified in the draft report.
CSS acknowledged that it did not comply with applicable procurement
requirements for both truck and equipment expenditures. CSS said that it did not
comply because it did not believe the requirements were applicable. CSS
explained that it does not consider itself as the procurer but rather an agent acting
on behalf of its customers who select the trucks and equipment for purchase. CSS
said that it now understands that the OIG and EPA consider its truck and
equipment expenditures to be subject to the procurement requirements of 40 CFR
Part 30. With regard to the pre-2007 MY trucks, CSS said that the retrofits were
significantly delayed because it did not receive anticipated California Air
Resources Board funding for the emission control equipment.
CSS did not specifically state whether it agreed with recommendation 6, but CSS'
comments indicate concurrence. CSS said that it retroactively complied with
EPA's procurement requirements and included documentation presenting the
results with its response to the draft report. CSS also said that, in the future, it will
maintain the minimum required documentation for procurements exceeding
$100,000 and conduct a cost or price analysis for every procurement action.
CSS strongly disagreed with recommendation 7. CSS said the EPA project officer
expressly approved the purchase of the pre-2007 MY trucks with the condition that
the trucks would be retrofitted at a later date. CSS also said that it is in the process
of retrofitting the trucks, and the retrofits will be completed by June 17, 2012.
CSS' complete written response is in appendix B.
OIG Response
We agree with the Agency's initial corrective actions to address some of the
findings in the draft report. The Agency will need to provide a proposed
management decision for full resolution of the findings and recommendations in
response to this report.
CSS' comments and supplemental documentation did not resolve the procurement
issues discussed in the draft report. Therefore, our position on the findings and
recommendations remains unchanged. With regard to CSS' comment that it
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retroactively complied with EPA's procurement requirements for past
procurements, we were unable to verify whether the corrective actions
satisfactorily resolve the documentation and analyses issues because sufficient
information and supporting documentation was not included in the response to the
draft report. CSS' current plan to retrofit the pre-2007 MY trucks by June 2012
will not achieve emissions standards over the long-term. According to CSS, the
retrofits provide emission control equipment that is only valid for approximately
6 months. As a result, expenditures for the pre-2007 MY trucks do not represent
effective and efficient use of Recovery Act funds and are not reasonable costs
under the CA.
The full text of our response is embedded as text boxes in CSS' complete written
response in appendix B.
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Chapter 5
Job Reporting Does Not Comply With OMB Guidance
CSS' reporting of jobs created or retained with Recovery Act funds did not
comply with OMB reporting guidance. The Recovery Act requires quarterly
reporting for the number of jobs created and retained with Recovery Act funding.
OMB guidance on Recovery Act quarterly reporting requirements specifies that
the estimated total number of jobs funded is to be reported by recipients. The
guidance also specifies that information should be collected from all subrecipients
and vendors, to the maximum extent possible, to generate the most
comprehensive and complete job impact numbers available. CSS incorrectly
calculated the number of jobs created or retained for quarterly reports covering
the period October 2009 through June 2010 by including in its computations
(1) CSS labor hours funded with income from the revolving fund program and
(2) full-time equivalent (FTE) positions of truck operators for trucks procured by
CSS with Recovery Act funding and subsequently leased to the operators.
Under the OMB reporting guidance, CSS labor hours should not have been
included in the computation of the number of jobs created or retained because
they were not funded through the Recovery Act. The FTE truck operator positions
should not have been included in the computation because the operators for the
leased trucks are beneficiaries rather than recipients or subrecipients of Recovery
Act funding. As a result, CSS overstated the number of jobs created or retained
with Recovery Act funds during the period October 2009 through June 2010. For
example, we found that CSS overstated the number of jobs created or retained by
79 FTE for the quarter ended December 31, 2009.
According to CSS staff involved in Recovery Act reporting, the number of jobs
CSS reported as created or retained was based on guidance provided by the EPA
project officer for the CA award. The CSS staff said that the first EPA project
officer for the award agreed with CSS' reporting methodology. The staff explained
that the project officer's rationale for agreeing to the methodology was that (1)
income from the revolving loan program was the result of Recovery Act funding,
and (2) FTE positions of operators for trucks leased by CSS capture the essence of
jobs retained as a result of Recovery Act funding. We were unable to confirm
whether EPA agreed to or approved CSS' reporting methodology because the first
project officer for the award is no longer employed by EPA. Neither the current
project officer nor EPA management associated with the award were aware of the
first project officer's guidance on Recovery Act reporting provided to CSS.
OMB's Recovery Act guidance requires that recipients of Recovery Act funding
maintain corrections to erroneous and missing data submitted in prior quarterly
reports in their administrative records. The guidance also requires that recipients
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submit the corrections to the federal government at a time to be specified in the
future.
Recommendations
We recommend that the Director for the Office of Grants and Debarment:
8. Assist CSS with developing a methodology for calculating the number
of jobs created or retained for quarterly reports that meets OMB
guidance on Recovery Act reporting.
9. Direct CSS to correct the number of jobs created or retained in the
quarterly reports covering the period October 1, 2009, to June 30,
2010, and all subsequent periods with job reporting errors, to comply
with OMB guidance on Recovery Act reporting.
10. Direct CSS to maintain the corrected jobs documentation referenced in
recommendation 8 in the administrative records and submit the
corrections to the federal government after a schedule has been
established by future Recovery Act guidance.
EPA and Recipient Comments
The OIG received comments on the draft report from EPA's Office of Grants and
Debarment and CSS. The Agency generally agreed with the accuracy of the
findings and said that it has initiated corrective actions to address some of the
weaknesses identified in the draft report. However, CSS disagreed with the
findings and said that it had followed EPA's methodology and guidance on
reporting the number of jobs created or retained with Recovery Act funds. CSS
explained that the EPA program office had agreed to its methodology after the
recipient had proactively sought guidance from EPA on Recovery Act reporting.
CSS also said that it believed the methodology it was using was appropriate and
correct because EPA was approving the quarterly Recovery Act reports.
Although CSS disagreed with the findings, the recipient said it stands ready to
collaborate with EPA to implement the recommendations. CSS' complete written
response is in appendix B.
OIG Response
We agree with the Agency's initial corrective actions to address some of the
findings in the draft report. The Agency will need to provide a proposed
management decision for full resolution of the findings and recommendations in
response to this report.
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CSS' comments did not resolve the Recovery Act reporting issues discussed in
the draft report. We were unable to confirm whether EPA agreed with CSS'
reporting methodology because the first project officer is no longer employed by
the EPA as discussed in the draft report. With regard to CSS' comment on EPA's
approval of its Recovery Act reports, EPA staff did not verify that the number of
jobs created or retained in the reports were correct and met the OMB guidance on
Recovery Act quarterly reporting. Therefore, our position on the findings and
recommendations remains unchanged.
We agree that CSS should collaborate with EPA to implement the
recommendations. The full text of our response is embedded as text boxes in
CSS' complete written response in appendix B.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Planned
Completion
Action Official Date
Claimed
Amount
Agreed To
Amount
13 Disallow and recover $9 million in questioned costs
claimed under CA 2A-83440701. If CSS provides
documentation that meets appropriate federal
financial management requirements and shows
that some or all of the questioned costs are
allocable and allowable to the CA, the amount to
be recovered should be adjusted accordingly.
13 Consider suspension and debarment of CSS on
current and future awards under 2 CFR Part 180.
13 Require CSS to establish controls that ensure the
use of funding provided under the CA is in
compliance with 40 CFR Part 30.21. The controls
should ensure:
a. Accurate, current, and complete disclosure
of the financial results of the revolving loan
program funded under the CA.
b. Records that identify adequately the source
and application of funds provided under the
CA.
c. Effective control over and accountability for
all funds, property, and other assets of the
EPA-funded revolving loan program.
14 Require that the following special conditions be
included for future EPA awards to CSS until EPA
determines that the recipient has met all applicable
federal financial management requirements:
a. Payment on a reimbursement basis.
b. Review and approval by EPA project officer
of reimbursement requests, including all
supporting documentation for the claims
prior to payment.
14 Provide clarifying guidance to CSS on financial and
other project information required to be included in
quarterly progress reports and request the recipient
to submit corrected progress reports as appropriate
for prior quarters of the project period.
18 Require CSS to comply at a minimum with 40 CFR
Part 30 for past and future procurements under the
CA. Specifically, require CSS to:
a. Maintain in the procurement records the
minimum documentation specified by
40 CFR Part 30.46 for procurements
exceeding $100,000.
b. Conduct and maintain in the procurement
records a cost or price analysis for every
procurement action as required by 40 CFR
Part 30.45.
Director, Office of Grants
and Debarment
$9,000
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
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RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Planned
Completion
Action Official Date
Claimed
Amount
Agreed To
Amount
10
18 Disallow the pre-2007 MY trucks as project costs
under the EPA-funded revolving loan program
unless CSS provides EPA with documentation
verifying that the trucks have been retrofitted with
emission control devices as specified by the CA.
22 Assist CSS with developing a methodology for
calculating the number of jobs created or retained
for quarterly reports that meets OMB guidance on
Recovery Act reporting.
22 Direct CSS to correct the number of jobs created or
retained in the quarterly reports covering the period
October 1, 2009, to June 30, 2010, and all
subsequent periods with job reporting errors, to
comply with OMB guidance on Recovery Act
reporting.
22 Direct CSS to maintain the corrected jobs
documentation referenced in recommendation 8 in
the administrative records and submit the
corrections to the federal government after a
schedule has been established by future Recovery
Act guidance.
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
Director, Office of Grants
and Debarment
1 O = 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
Agency's Comments on Draft Report
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
{:
W>*
WASHINGTON, D.C. 20460
OFFICE OF
ADMINISTRATION
AND RESOURCES
MANAGEMENT
February 3, 2012
MEMORANDUM
SUBJECT: Comments on Draft Attestation Report, "Examination of Costs Claimed Under EPA
Cooperative Agreement 2A-83440701 Awarded Under the Recovery Act to Cascade
Sierra Solutions" Project No. OA-FY1 l-A-0062
FROM: Howard Corcoran, Director
Office of Grants and Debarment
TO:
Robert Adachi, Director
Forensic Audits
Thank you for the opportunity to review and comment on the factual accuracy of the
subject Office of Inspector General Draft Attestation Report dated December 20, 2011.
We sincerely appreciate your prompt and comprehensive examination of this matter. Based
on our review of the Draft Report and information available at this time, we generally
agree with the accuracy of the findings in the Report.
The agency has initiated corrective actions to address some of the weaknesses identified in
the Draft Report. The agency has placed CSS on reimbursement status for the active
assistance agreements to restrict access to available federal funds.
In addition, the agency has placed a stop work order for the Smartway Three Finance
Program Agreement DE-83469401, until CSS can demonstrate that their financial
system can effectively record and report the source and application of funds associated
with the grant project.
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In response to their 2010 single audit, CSS acknowledged the limitations of their
accounting system identified in that report and indicated that they have invested significant
resources to upgrade their information and accounting processes, including an integrated
database system that will provide the additional reporting capabilities they need. CSS
responded that they have added staff and provided training to improve their recording,
tracking and reporting capabilities of their lease and loan programs. In addition, CSS
responded in their single audit that they have created a Grant Compliance Department to
implement the internal controls needed to manage and document their assistance agreement
activities. In a November, 2011 meeting, CSS reiterated these improvements
to the agency.
At present, the agency is unable to determine if the OIG fieldwork for its draft report takes into
account the improvements that CSS has reportedly made in response to their single audit. Many of
the weaknesses and corrective actions identified in the 2010 CSS single audit are similar to those
identified in the OIG Draft Report.
In order to continue with financing the Smartway Three Program as well as release existing
available funds for other headquarters assistance agreements with CSS, it is imperative that the
agency determine whether CSS has made these necessary corrections to their financial systems and
organization and whether the improvements are effective in correcting the weaknesses identified
going forward.
Accordingly, the agency respectfully requests that the OIG perform a follow up review of CSS'
financial systems and controls. The OIG is best equipped to perform this assessment since it
conducted the onsite review identifying the weaknesses in CSS' financial systems and therefore
would be in a position to more quickly determine whether CSS has corrected the system
weaknesses. The intent of the follow up review would be to assess if CSS' financial system can
adequately:
• Provide a current and complete disclosure of the financial results of CSS'
assistance agreements with the agency;
• Identify the source and application of grant funds; and
• Provide control over all funds, property and assets associated with EPA
assistance agreements.
By obtaining this information the agency will be able to determine whether the EPA
should continue its Smartway assistance agreements with CSS.
Thank you once again for the opportunity to comment on the Draft Report and for your review
of the recipient's claimed costs. If you have any questions concerning this matter, please feel
free to contact Joe Lucia, the Office of Grants and Debarment's assistance agreement Audit
Follow-up Coordinator. You may reach Joe by email at lucia.ioseph@epa.gov. or by phone at
202-564-5378.
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cc: Nanci Gelb
Wendel Askew
Don Flattery
Gayle Jefferson
Denise Simons
Phil Schindel
Kysha Holliday
Joe Lucia
Carl Davis
Jessica Durand
Tyler Cooley
Rosalva Tapia
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Appendix B
CSS's Comments on the Draft Report and 01G
Evaluation
The response from CSS is provided verbatim. OIG responses to those comments have been
inserted in text boxes.
oscM)t sierra solution
Examination of Costs Claimed
Under EPA Cooperative Agreement 2A-83440701
Awarded Under the Recovery Act
to Cascade Sierra Solutions
Project No. OA-FY11-A-0062
Response of Cascade Sierra Solutions
February 21,2012
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Examination of Costs Claimed Under EPA Cooperative Agreement 2A-83440701 Awarded
Under the Recovery Act to Cascade Sierra Solutions, Project No. OA-FY11-A-0062
Comments of Cascade Sierra Solutions
I. Introduction
Cascade Sierra Solutions (CSS) appreciates the opportunity to submit these comments on
the Environmental Protection Agency (EPA) Office of Inspector General's (OIG) Draft
Examination of Cost Claimed Under EPA Cooperative Agreement 2A-83440701 Awarded
Under the Recovery Act to Cascade Sierra Solutions (OIG Draft Report). Cooperative
Agreement 2A-83440701 (the CA), which was CSS's second award under EPA's National
SmartWay Finance Program (SWFP), awarded $9 million to CSS under the American
Reinvestment and Recovery Act of 2009 (ARRA or the Recovery Act) for the purpose of
creating a national revolving loan program for heavy-duty diesel trucks to save fuel and reduce
diesel emissions. The CA project period originally covered June 1, 2009 to October 31, 2011, but
has been extended by EPA through October 31, 2012. OIG's audit of CSS commenced on March
7, 2011 and was conducted for the purpose of determining whether CSS complied with the terms
of the CA, ARRA, and applicable EPA and OMB regulations.
CSS takes its responsibility to comply with all applicable federal requirements very
seriously and thus finds the OIG Draft Report's results to be very troubling. Because of this, CSS
has communicated with EPA about the audit's findings and an appropriate response to the audit.
For this reason, CSS, in this document, responds comprehensively to the issues raised by the
audit.
II. Cascade Sierra Solutions and EPA
CSS has an extensive relationship with the EPA SmartWay Program because its focus on
promoting the use of EPA SmartWay Verified Technologies to save diesel fuel and reduce diesel
emissions strongly aligns with the mission of EPA's Clean Diesel Program. The CA that is the
subject of this audit is only one of several grants that CSS has been awarded by EPA. At present,
in addition to the CA, CSS administers six other SmartWay awards—two other active SmartWay
National Finance Program Awards, which help implement the revolving loan fund, and four
other regional SmartWay awards, under which CSS provides incentives for the installation of
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emission control equipment and fuel saving technologies.1 All told, under its ten past and active
SmartWay awards, CSS has successfully administered over $15.7 million in EPA funds.
CSS is a leader in modernizing the American heavy-duty diesel fleet. As a not-for-profit
organization dedicated to lending money to Independent Owner Operators who do not have
ready access to credit, CSS is playing a crucial role in modernizing the heavy-duty diesel fleet
that is not replicated elsewhere in the U.S. CSS' mission and focus on modernizing the diesel
fleet is critical because of its wide-ranging effects: it improves air quality and public health,
reduces American dependence on foreign oil, and creates jobs for small- and minority-owned
businesses.
Because of its success, CSS is a bright light in EPA's SmartWay Program and national
efforts to reduce diesel emissions. In less than five years, CSS has retrofitted more than 7,000
vehicles across the nation to improve their fuel efficiency and reduce the harmful exhaust
emissions they produce. The retrofitted vehicles now save more than 30,000 gallons of diesel
fuel per day and have collectively saved over 35 million gallons to date. Each retrofitted vehicle
will, on average, over the course of its lifetime, reduce its emissions of CO2 by 350 metric tons,
particulate matter by 289 pounds, and NOx by 5,000 pounds, and eliminate $12,500 in health
care costs that would otherwise be incurred because of air pollution. CSS is not merely adding
cleaner vehicles to the fleet; CSS is transforming the fleet. Because of its revolving loan fund,
CSS has already removed thousands of old, fuel-inefficient, and polluting vehicles that would
have remained on American roadways for up to 25 years each, and as the fund revolves, more
benefits continue to accrue.
CSS' success particularly stands out because of the results that CSS has achieved within
the SmartWay program. As the only three-time recipient of a SmartWay Finance Award, CSS
has, by far, put more clean trucks on the nation's roads than any of the other SmartWay Finance
participants. To CSS' knowledge, CSS has reduced more emissions than any other organization
participating in the SmartWay Finance Program. Further, CSS has achieved its results over a
very short time period and against the backdrop of a difficult national economy. With respect to
the CA, which was granted under ARRA to stimulate the national economy, CSS deployed the
majority of the $9 million in CA funds to eligible projects within three months of receipt of those
funds. CSS has delivered impressive results under challenging circumstances.
CSS' outstanding results are possible because of the innovative nature of CSS' revolving
loan fund, which utilizes a model that leverages federal dollars by up to a 16-to-l ratio with
private sector dollars. In a time of reduced government budgets, the CSS public-private
revolving loan fund program is a model for the future, and should not be criticized because it
breaks the mold of government accounting regulations.
CSS' revolving loan fund program, funded by the CA, is the first of its kind. CSS has
achieved great success because of its unique and innovative public-private revolving loan fund
1 The SmartWay Finance Awards are Award Nos. DE-83412001 and DE-83469401, and the Regional
Awards are Award Nos. 2A-96114901 (Region 1), 2A-97232501 (Region 2), DE-00F11201 (Region 6), and DE-
00J606801 (Region 10).
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model. Because the trucking industry is a high-risk industry, many financial institutions are
unwilling to provide financing to Independent Owner Operators (IOOs) or small fleets, and thus,
significant barriers to capital exist. CSS sought to break down this barrier in the credit markets
by developing a revolving loan program that finances SmartWay-eligible equipment for IOOs
and small fleets. The CSS revolving loan fund overcomes the market's inability to provide
financing to these borrowers by utilizing EPA funds to mitigate the credit risk associated with
financing eligible truck replacement and after-market upgrade projects, thereby encouraging
private lenders to participate in the market for small trucking businesses.
CSS knows of no other program that pairs public and private money through a revolving
loan fund that multiplies the effect of federal dollars and continually replenishes itself. Because
of the leveraging of private sector funds, the CSS model is unlike that used by EPA under the
Clean Water Act Revolving Fund. After only a very short period of implementation of the CSS
revolving loan fund, both CSS and the EPA Program Office agreed that the public-private
revolving loan fund model is a very efficient use of government resources that represents a new
and better way to implement public-private partnerships.
However, CSS' success has not come without struggles and hard work. Although CSS
has gotten the revolving loan fund model to function sustainably—it now has several lenders that
actively participate in making CSS loans on an ongoing basis—CSS has found it challenging to
fit its revolving loan fund program into EPA's existing grant regulations. For instance, the design
of the CSS revolving loan fund, as proposed to EPA, blends public and private dollars in
individual financing agreements, and does not rely on traditional segregation of fund principles.
Also, the subordination of EPA funds to private sector funding initially raised questions
concerning the Federal Government's property standards. Through discussion with CSS, EPA
Program Administrators addressed these issues within CSS' third SmartWay Finance (SW3)
award and amended the SW3 agreement as necessary. The development of the SmartWay
Finance program began when EPA Program Administrators approached CSS regarding the
success of the Everybody Wins equipment leasing program and consulted with CSS on the
development of the SmartWay Finance program. In acknowledgement of these challenges, and
the fact that CSS is the first public-private revolving loan fund that EPA has overseen, CSS has
invested substantial time and energy in consulting with EPA regarding how to best implement its
model.
In demonstrating the Everybody Wins program, and in consulting on the development of
the SmartWay Finance program, CSS and EPA reached agreement on the concept of the blended
loan. By blending EPA grant funds with loans from private financial institutions and grants from
states and private sources, CSS maximizes the cost effectiveness of EPA funds. This approach
was clearly outlined in CSS' original proposal for the CA and the SWFP. Customer payments
repay the financial institution's portion of the loan, and the remaining funds are returned to the
revolving loan fund to finance additional projects.
CSS has grown rapidly as an organization. Although CSS currently funds
approximately $20 million in loans per year, it is quite young as an organization. CSS was
founded five years ago, in November of 2006 as a one-employee organization. After a year, CSS
had grown to 10 employees, and now CSS has 57 employees.
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While CSS' rapid growth has increased its capacity to finance clean diesel vehicles and
equipment—CSS has now impacted close to 20,000 heavy-duty diesel trucks on the road in the
United States, and plans to do much more—its success has created challenges as well. In order to
keep pace with its steady growth, CSS has had to upgrade its accounting and administrative
databases several times over the past five years. These upgrades have been necessary, but have at
times resulted in delays and required a significant investment of time and administrative
resources to implement. While CSS strongly believes that it has complied with its SmartWay
grant obligations, these technological upgrades have provided an extra set of logistical
challenges for an organization that operates on very limited resources.
CSS has done, and will continue to do, whatever it takes to makes its program successful,
accountable, and an effective use of taxpayer dollars. Because CSS takes the OIG Draft Report
seriously and values its relationship with EPA's Program and Grants offices, CSS will respond to
each point raised in the Draft Report, account for all of the grant dollars it was awarded, and
explain in detail the upgrades it has made to track funding and payments and address the
concerns raised in the OIG Draft Report. These upgrades have come as a result of taking
recommendations from prior CSS outside auditor reports and numerous discussions between
CSS and EPA staff.
III. Comments on Chapter 3 - Financial Management System
A. Cash Draws Exceeded Cash Needs
The OIG Draft Report states that CSS cash draws exceeded its immediate cash needs in
violation of Title 40 CFR 30.22(b)'s requirement that cash advances be limited to the minimum
amounts needed and be timed to be in accordance with actual, immediate cash requirements.
CSS disagrees that its possession of advance funds in 2009 constituted draws in excess of
its immediate needs in violation of Title 40 CFR 30.22. While CSS did have a large amount of
advance funds in its accounts during 2009, that situation was entirely unavoidable for a number
of reasons.
First, CSS needed advance funds to complete SmartWay projects at the time. In 2009,
CSS did not have sufficient working capital to pre-fund CA projects, and so it requested funds
for CA transactions in advance.
Second, CSS had to take into consideration EPA's turnaround time for processing draw
requests under the CA when coordinating several large transactions that CSS entered into with
truck wholesalers in October and November of 2009. This meant that CSS had no choice but to
request the CA funds well in advance of the transactions. For instance, CSS submitted a draw
request for $742,000 on October 7, 2009, and another for $1 million on October 20, 2009, but
EPA did not release the funds to CSS until October 13, 2009, and October 30, 2009, respectively
- six and ten days later. CSS planned to use the funds it drew down to purchase trucks from a
vendor that required CSS to pay for the trucks within two weeks of inspection of the trucks.
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However, after CSS drew down the advance funds to complete the transaction, the vendor
delayed the inspection date repeatedly without giving CSS advance notice, which delayed the
payment. However, CSS could not forgo the transaction and return the advance funds to EPA,
because it had already placed a $100,000 nonrefundable deposit down on the trucks. The
combination of a short payment window by several vendors, unforeseen delays, and
nonrefundable deposits meant that CSS did not return the advance funds to EPA. Thus, although
CSS was maintaining large amounts of CA funds on hand for a prolonged period of several
weeks, it was necessary to complete several large transactions.
Third, at the time of these transactions, CSS did not have access to EPA's Automated
Standard Application for Payments (ASAP) system. Access to the ASAP system would have
eliminated CSS' need to have advance funds on hand for these large truck purchases, because the
ASAP system reduced EPA's draw turnaround time to three days. When CSS began using the
ASAP system in November 2009, the advance CA funds that it maintained on hand dropped
dramatically, and by the end of December 2009, the balance of advance funds that CSS
maintained on hand dropped to zero. However, while conducting a number of large truck
purchases in October 2009 and early November 2009, the ASAP system was not available to
CSS, so CSS was required to maintain advance funds on hand.
CSS recognized at the time that maintaining a large amount of advance CA funds in its
accounts was problematic and actively consulted EPA about resolving the issue. When CSS
raised the issue with its EPA Project Officer, the project officer advised CSS to obtain access to
the ASAP system, which CSS immediately did. CSS also disclosed the situation to CSS'
independent auditors to ensure that they found its use of advance funds to be appropriate.
i. Subsequent CSS Actions
As the OIG Draft Report stated, CSS repaid EPA $1,751 for interest the CA funds earned
while present in CSS accounts. CSS understands this, together with CSS' enrollment in the
ASAP system, to have satisfactorily resolved this issue, and therefore CSS has not taken further
action.
OIG Response 1. Our position remains unchanged. Regardless of the issues that led to the
excess cash on hand, CSS' cash draws exceeded immediate needs by as much as $3,141,127.
As stated in the report, 40 CFR Part 30.22(b) specifies that cash advances are limited to the
minimum amounts needed and are to be timed in accordance with the actual, immediate cash
requirements of the recipient. Title 40 CFR Part 30.22(b) also specifies that the timing and
amount of cash advances shall be as close as is administratively feasible to the actual
disbursement by the recipient. As acknowledged in the report, CSS satisfactorily resolved the
issue by remitting interest earned in excess of $250 to EPA in accordance with 40 Part
30.22(1). Our report did not recommend any further actions by CSS or EPA.
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B. Cash Draws Not Supported as Allocable and Allowable
The OIG Draft Report states that CSS' cash draws were not supported by expenditures
under the CA that were allocable and allowable. Noting that CSS must maintain documentation
that adequately identifies the source and application of CA funds, and that CSS must track CA
funds separately from other funds, the OIG Draft Report finds CSS' documentation to be
inadequate for two reasons. First, it states that the commingling of CA and non-CA funds is
impermissible: "[bjecause the CA funding was deposited into accounts that included funds from
other sources, we were unable to reconcile . . . deposits with expenditures made under the CA."
Second, the Draft Report OIG claims that CSS documentation is inadequate because
"documentation and [accounting system entries] did not include notations or coding showing that
the costs were incurred under the CA." CSS respectfully disagrees with both rationales.
i. The Commingling of Funds
CSS disagrees strongly with OIG's assertion that CA funds may not be commingled with
non-CA funds, and that such activity means that CSS' records are not adequate. EPA expressly
approved such commingling by CSS, and nothing in the CA or EPA or OMB regulations
prohibits CSS from doing so. Further, the commingling of funds is an important part of the CSS
business model, and does not prohibit CSS from adequately tracking CA funds or identifying
their source and application.
First, CSS submitted in its proposal, and EPA expressly approved, an arrangement in
which CSS commingles CA and non-CA funds. The CA work plan that EPA approved plainly
describes this idea with an example of a blended loan comprised of CA and non-CA funds: "The
average purchase price of these new, clean vehicles is $120,000 each, significantly less than
retail market value. Prop IB grants will pay $50,000 and EPA SmartWay finance funds will pay
the remaining $70,000."2 Further, CA Programmatic Condition 12.4 states that "[l]oans funded
in whole or in part with direct funding from EPA or program income are subject to these Terms
and Conditions, even if the loan is funded in part by a non-federal source."3 Thus, the
commingling of CA and non-CA funds was undertaken only after consultation with and the
express approval of EPA.4
Second, CSS does not find any authority in the CA, ARRA, or EPA or OMB regulations
that requires it to segregate CA funds from non-CA funds. While EPA's regulations permit EPA
to require the segregation of advance funds,5 EPA did not avail itself of that option by inserting
2 CA Revised Work Plan, p.3.
3 CA, Programmatic Condition 12.4.
4 Further, EPA's grant disbursement process requires that funds for each of CSS' regional and national
grants be deposited in the same account, which unavoidably commingles CA and non-CA funds. Although CSS has
established separate bank accounts for different kinds of EPA deposits, the EPA Payment Management System and
the ASAP program maintain a single CSS bank account on file in which all draw requests for each of CSS' six
active grants are deposited.
5 Title 40 CFR Part 30.22(i)(l) states that "[e]xcept for situations [involving advances of federal funds],
EPA shall not require separate depository accounts for funds provided to a recipient or establish any eligibility
requirements for depositories for funds provided to a recipient."
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any segregation requirement into the CA. Even if EPA had required CSS to segregate advance
CA funds from other funds, EPA's regulations expressly prohibit EPA from requiring CSS to
segregate non-advance CA funds, such as revolved loan funds and program income.6 Neither
ARRA, nor OMB regulations, directly address the question of whether C A and non-CA funds
may be commingled. CSS views the fact that EPA regulations expressly address the
commingling of funds, combined with the EPA Program Office's approval of CSS'
commingling, to mean that EPA does not require CSS to completely segregate CA funds in order
to maintain adequate documentation of CA funds.
Third, the ability to commingle funds has allowed CSS to use the CA funds in the most
cost-effective manner possible. Because CSS expressly stated in its workplan, and independently
to EPA, that it desires to stretch the CA funds as much as possible by using them in conjunction
with other funds, CSS frequently uses CA funds and non-CA funds for the same transaction. If
CSS is required to segregate all CSS funds, CSS would be required to maintain three sets of
accounting and financial records in order to continue to operate as it has—one for CA funds, one
for non-CA funds, and another for the combined transaction. This would reduce efficiency, drive
up the administrative costs associated with loans, and correspondingly increase the burden
placed on CSS employees.
OIG Response 2. We agree that nothing in the CA or applicable federal regulations
prohibits CSS from commingling CA funds with other funding included in the revolving
loan program. We also acknowledge that the draft report did not clearly explain the issue
with the $6.7 million in deposits of CA funds to bank accounts that included funds from
other sources. Based on CSS' comments, the report was revised to more clearly explain that
we were unable to reconcile the $6.7 million in draws with expenditures made under the CA
because the C A funding was recorded in general ledger accounts and deposited into bank
accounts that included funds from other sources.
However, we disagree with CSS' comment that segregating CA and other funding for the
revolving loan program would require the recipient to maintain three sets of accounting and
financial records in order to continue to operate the program. Title 40 CFR Part 30.21(b)(2)
specifies that recipients' financial management systems shall provide records that identify
adequately the source and application of funds for federally sponsored activities. To meet
this requirement, CSS will need to establish one comprehensive set of general ledger
accounts for the revolving fund. As discussed in the draft report, CSS has not established this
account structure in the general ledger for the revolving loan fund.
Fourth, the commingling of CA funds with non-CA funds does not prevent CSS from
adequately tracking separately or identifying the source and application of CA funds. CSS
SmartWay Finance awards, including the CA, have been audited multiple times by CSS'
independent Certified Public Accountant, reviewed by EPA project officers and program staff,
and examined under an EPA-contracted limited scope audit. CSS has provided each set of
auditors with the same documentation, which included a full listing of the cash disbursements for
the initial $9 million, which is reproduced in Appendix A, and documentation supporting CSS'
6 Id.
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cash advance requests and management procedures. None of CSS' auditors has claimed that
CSS' commingling of funds has been problematic, or has found that CSS has failed to track
separately or adequately identify the source and application of C A funds.
For instance, CSS' most recent single audit found that "Cascade Sierra Solutions
complied, in all material respects, with the compliance requirements referred to above that could
have a direct and material effect on each of its major federal programs for the year ended
December 31, 2010," and that the auditor "did not identify any deficiencies in internal control
over financial reporting that [it] considers] to be material weaknesses."7 Given approval in the
past for this approach by EPA and CSS auditors, CSS sees no reason why it should not be
permitted to continue commingling C A and non-CA funds for the few remaining months of the
CA project period.
OIG Response 3. We disagree that CSS has adequately tracked CA funds separately from
other grant programs or identified the source and application of CA funds under the
recipient's current financial management system. As discussed in the report, CSS' financial
management system does not adequately separate the funds and assets accrued as a result of
the C A. Consequently, we are unable to verify that these funds and assets are being used in
accordance with the terms and conditions of the CA. We acknowledge that CSS has been
previously audited by an independent Certified Public Accountant, reviewed by the EPA
project officer and program staff, and examined under an EPA-contracted limited scope
audit. However, these reviews either identified deficiencies similar to issues identified in our
report or were more limited in scope than our examination of CSS' financial management of
EPA funding received under the CA.
Regarding the single audit for the year ended December 31, 2010, the report on this single
audit provided an opinion of the overall financial position of CSS and did not specifically
discuss the financial position of the revolving loan program partly funded by the CA. This
single audit identified five significant deficiencies in internal controls over financial
reporting and two significant deficiencies in internal controls over compliance. The findings
included deficient internal controls over general journal preparation, documentation, and
review and approval, resulting in little or no audit trail for adjustments made by CSS. The
single audit noted that the possibility existed that erroneous or unauthorized journal entries
could be posted to the general ledger and not be detected. The single audit also found
deficiencies in internal controls over grant management for federal awards. These
deficiencies include the procurement of pre-2007 MY trucks that do not meet the
requirements of an EPA award. The single audit also identified interest rates that were above
the rate allowed in the grant agreement for the EPA SmartWay 1 grant.
-contimied-
7 Report on Internal Control over Financial Reporting and on Compliance and Other Matters on an Audit of
Financial Statements Performed in Accordance with Government Auditing Standards, p. 3, Cascade Sierra
Solutions Reports and Schedules Required by the Single Audit Act and OMB Circular A-133, Years Ended
December 31, 2010 Statements and Supplemental Information, For the Year Ended December 31, 2010, EIN 20-
4463950.
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OIG Response 3 (continued).
In response to the significant deficiencies identified by this single audit, EPA designated
CSS as a high-risk recipient and changed their method of payment from "advanced" to
"reimbursement with documentation" in October 2011.
The EPA contracted review was a limited scope review and addressed the draws of EPA
funds and initial disbursement. We reviewed the contractor's supporting workpapers but a
"full listing of cash disbursements for the initial $9 million" cited by CSS was not included.
The contractor's workpapers do include a spreadsheet documenting $8,297,395 of
disbursements through December 31, 2009. These working papers did not show that the
contractor reconciled the spreadsheet information to the accounting system. The
contractor's review also confirmed that CSS had written policies and procedures covering
financial management, procurement, personnel, and payroll. However, the review did not
verify that the policies and procedures were being implemented. The working papers
showed that the contractor performed a general review of CSS' financial management, but
did not verify that the recipient was able to determine the financial position on the
revolving loan fund.
Regarding CSS' comment that it provided each set of auditors with the same
documentation, we acknowledge that we received the same listing or spreadsheet of
expenditures the EPA contractor used to review draws under the C A. However, as
discussed earlier in this OIG response, the contractor's working papers did not show that
the spreadsheet information was reconciled to the accounting system. We also note that the
listing of the cash disbursements for the initial $9 million included in appendix A of CSS'
response to the draft report is not an accurate reproduction of the listing of expenditures
provided to the EPA contractor or the OIG during the audit. The listing provided to the
EPA contractor and the OIG included expenditures for only 2009. However, the listing in
appendix A includes expenditures for 2009 and 2010. Regardless of the difference between
the listings, we were unable to reconcile the information in the listings to the accounting
system and to verify that the draws were used for expenditures meeting the terms and
conditions of the CA.
1. Subsequent CSS Actions
During OIG's audit, OIG suggested an alternative financial structure for the revolving
loan fund that would permit CSS to completely segregate CA funds from non-CA funds. Under
OIG's suggested approach, CSS would use CA funds to finance 100 percent of certain projects,
and those CA-financed projects would be used to secure other privately-financed projects. In this
way, the CA would avoid commingling CA funds and non-CA funds, but would also maintain
the ability to leverage C A funds.
Upon OIG's suggestion, and in consultation with the EPA Program Office, CSS
implemented the OIG's model for its third SmartWay Finance (SW3) award, for which CSS had
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not yet disbursed funds at the time. However, such an approach was not feasible for the CA
portfolio, because all CA funds had already been disbursed via blended loans and were revolving
with other funds. If CSS had been aware of such an approach before it disbursed the CA funds,
or been directed to implement such an approach by EPA before beginning the project, CSS
would have done so. While CSS could theoretically refinance all loans in the CA portfolio and,
in so doing, separate CA funds from non-CA funds, this would cost CSS at least $500,000 in pre-
payment penalties to financial institutions, staff costs, and other document fees. Given CSS' non-
profit status and relatively small levels of operating income, this option is prohibitively
expensive, and would deter CSS from its objectives of cleaning the air, reducing fuel
consumption, and saving jobs.
Although CSS understands the merits of the OIG model for the revolving loan fund that
would permit segregation of CA funds, CSS believes that its commingled-funds approach to the
revolving loan fund complies with the CA and other applicable authority. Thus, while CSS has
implemented the OIG model for its SW3 award, CSS does not consider this to be an
acknowledgement that its commingled-funds approach under the CA is inadequate or
inappropriate.
OIG Response 4. We did not suggest an alternate financial structure for the revolving loan
fund. Rather, we commented to CSS management during the audit that implementation of
the revolving loan fund phased financial structure prescribed in the workplan for the CA
would have simplified the financial management of the revolving loan program. The
financial model described above in CSS' comments is similar to the financial structure for
the revolving loan fund specified in the workplan. Under Phase 1, the workplan specified
that CSS would use the $9 million of EPA funding along with California Proposition IB
funding to finance leases for trucks. For Phase 2, the workplan specified that CSS would
use the assets acquired during Phase 1 to leverage additional financial resources such as
bank loans. CSS' decision not to implement the phased financial structure specified by the
workplan resulted in more complex accounting system requirements for the revolving loan
program. As discussed in our report, CSS management said that the organization's
accounting system was not sophisticated enough to track all sources and uses of funding as
the complexity of the revolving fund increased.
We agree that CSS' use of multiple funding sources to finance leases for the revolving loan
program is acceptable under the CA. However, we do not agree that CSS' financial
management system for the revolving loan program meets the requirements of 40 CFR Part
30.21 and the CA as discussed in OIG Response 3.
ii. Lack of Documentation
Similarly, CSS disagrees with OIG's assertion that CSS documentation of CA project
costs is inadequate because no notations or coding in the accounting system or on CSS' project
documentation indicated that project costs were incurred under the CA. CSS intentionally
purchases trucks and equipment before it knows whether the trucks and equipment will
ultimately be financed with CA funds, because such an approach is most cost-effective. Rather
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than document the assignment of project costs to the CA on the project documentation, or in the
accounting system, CSS uses spreadsheets to track project costs incurred under the CA, because
this method most efficiently allows CSS to take advantage of multiple funding sources and
reallocate CA funds to other projects when possible.
CSS does not immediately decide whether a project will be a permanent part of the CA
portfolio because this allows the most cost-effective use of CA funds. CSS prefers to use private
sector and other non-CA funds to finance truck and equipment projects whenever possible, so as
to keep CA funds available for new projects. However, certain funding sources only become
available for CSS projects after leases or loans are formalized with the customer. In these cases,
CSS uses CA funds as initial working capital for the project, and later substitutes in non-CA
funds, making the CA funds available again. This is the case with many grants, which can take
several months to receive and with most of CSS' private sector partners, which will usually
finance a truck or equipment project only after the lease or loan has been completely formalized
and is in repayment. Thus, in order to exploit these funding opportunities and make the most
effective use of taxpayer funds, CSS does not initially determine whether a truck and equipment
project will be a permanent part of its CA portfolio.
An example helps to illustrate how this principle works and demonstrates why it is a
necessary part of CSS' business model. In October 2009, a California Licensed Motor Carrier
(fleet) began working with CSS to find a solution for its independent owner operators (IOOs)
that wanted to upgrade their trucks. CSS researched available trucks and purchased a batch of
trucks from USA Trucks, a truck wholesaler, with the fleet's approval. The trucks CSS
purchased on behalf of the fleet were located on the East Coast and had to be shipped to the
fleet's yard in California.
In the first phase of the process to put these trucks into service for the fleet and its IOOs,
CSS put a deposit down on the trucks, obtained a signed memorandum of understanding from the
fleet that it would purchase the trucks from CSS, set up customer leases, and then purchased the
trucks and transported them to California. The memorandum of understanding included a
preliminary lease calculation, which the fleet used to explain the project to the drivers and obtain
commitments from the IOOs. CSS subsequently had each of the 30 IOOs planning to purchase
one of the trucks sign a lease document, which is documented by the final lease calculation,
before paying the vendor and transporting the trucks. Although CSS ultimately intended to
obtain California Air Resources Board (CARB) funding to finance the truck retrofits, and
provide private sector lenders for each of the leases associated with these trucks, CSS purchased
the trucks on 10/08/09 for $624,000 using only CA funds. CSS was forced to do this because
CARB funds would not become available until the trucks were licensed, registered, and
physically located in California; CSS' partner banks would not finance the trucks without CSS
having finalized the lease documents and titles, which also required the trucks to be in
California; and USA Trucks, the vendor, would not transport the trucks to California without the
vehicles first being paid for in full. Thus, CSS was forced to pay the entire cost of the trucks up
front to get the process moving.
The second phase of the process involved getting the trucks, after arriving in California,
inspected, repaired, and delivered to the CSS customers. CSS first titled each truck in California,
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which allowed CSS to submit applications for CARB diesel particulate filter retrofit grants for
the trucks. For each truck, this process of titling, inspection, and repair took anywhere between
three and five months to complete.
The third and final phase of the process involved arranging the ultimate financing for
each of the truck leases or loans. As an initial step, CSS replaced the CA funds used to retrofit
the trucks with CARB grant money when it became available. For these trucks, the CARB grant
money arrived between 2-3 months after the trucks were delivered to California. CSS then
submitted a project summary to its partnering financial institutions for bids. After receiving
responses from its partnering financial institutions, CSS evaluated the funding proposals,
including some that provided 100% funding, and others that proposed blended funding, and
selected the best option for its customers. This process of arranging financing was completed in
May of 2010 - nearly nine months after CSS' management and processing of these trucks began
and CSS had IOOs sign leases.
This example demonstrates why it is important for CSS to avoid locking in the final
funding source for a project at the beginning: because other funds may only become available
well after the truck has been purchased and the loan formalized. As a result of implementing this
process for all of its truck lease and equipment loans, CSS has leveraged the initial $9 million in
CA funds it received to generate another $5 million in truck financing from private and state and
local grant sources. That is, after initially spending $9 million of CA funds on trucks, only $3.7
million—42 percent of the original amount—are today associated with these trucks. CSS has
successfully found nearly $5.3 million non CA-funds to replace the CA funds and free them up
for other projects. As a result, CSS has redeployed the $5.3 million in freed-up CA funds in
additional projects, putting more clean trucks on the road.
As discussed below, CSS uses spreadsheets, rather than notations on physical project
documentation, or coding in its accounting system, to track CA funds through this substitution-
of-funds process. CSS' spreadsheet system allows CSS to substitute private or grant funding for
CA funds, and thus free up CSS monies when possible. Making physical notations on
documentation is not a reliable way to track this information, and CSS' accounting system was
not set up at the beginning of the project period to handle multiple funding sources for a single
project. CSS thus used a spreadsheet system to track this information.
OIG Response 5. CSS' comments clearly disclose that it has not established a formal
revolving fund or accounts within its accounting system to track the source and application
of funds. Also, the example that CSS provides does not provide a rationale for not
establishing a revolving loan program that tracks the assets, liabilities, revenues, and
expenses in accordance with federal requirements discussed in OIG Response 3. The
purpose of the funding provided by EPA under the CA was to create a revolving loan
program. The program does not require exclusion of other funding sources that contribute to
the program, but CSS needs to implement internal controls that ensure funding provided by
EPA is being used for eligible purposes. Programmatic Condition 2.7 requires the recipient
to maintain accountability for funds and assets accrued as a result of the C A award.
-continued-
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OIG Response 5 (continued).
However, the funding from the multiple sources used to finance the revolving fund has been
recorded to bank and general ledger accounts that includes cash receipts from programs not
associated with the revolving fund. Disbursements from the cash accounts that include CA
deposits also include disbursements for expenses other than equipment purchases (e.g,
payroll).
Without the use of dedicated accounts and project coding to segregate funding sources and
disbursements for the revolving loan program, we are unable to verify that the source and
application of funds have met the terms and conditions of the CA. We also are unable to
verify the balance of C A funding available for additional truck or equipment leases under
the revolving loan program. As discussed in the draft report, we were unable to reconcile
CSS' spreadsheets to the accounting system for the revolving loan program partly funded by
the CA.
1. Subsequent CSS Actions
CSS strongly believes that it has maintained appropriate documentation under the CA,
and that its use of spreadsheets to track this information was appropriate at the start of the project
period and continues to be appropriate. However, CSS does acknowledge that it has not always
been easy for outside parties to review transactions involving CA funds. In recognition of this
challenge, and in pursuit of greater transparency for its revolving loan fund, CSS has taken a
number of steps to increase its capability to monitor its projects.
In the fourth quarter of 2010, CSS established a Compliance team which performs an
independent review of each project file and coordinates advances and vendor payments with
other CSS departments. Further, CSS established a project origination system and a job cost
system that tracks all costs associated with individual projects, and more easily allows CSS to
assign and reassign financing from multiple sources to a project. In July 2010, the job cost
system was implemented for regional EPA grants. Finally, CSS is in the process of integrating
the project origination system with the job cost system and its accounting system.
OIG Response 6. We disagree that CSS has maintained documentation for revolving loan
program project costs that meets the requirements specified by 2 CFR Part 230 and 40 CFR
Part 30 as discussed in the draft report. Our review of invoices, payment documents, and
accounting system entries provided by CSS to support a judgment sample of $4,336,066
expenditures identified that the documentation and entries did not include notations or
coding showing that the costs were incurred under the CA. With regard to CSS' comment
that the use of spreadsheets was appropriate to track information under the CA, we were not
able to reconcile project information in the spreadsheets to the accounting system because
most revolving fund program transactions were not segregated from other transactions in the
system.
We acknowledge CSS' comments identifying steps taken to increase its capability to
monitor projects. However, the comments do not explain how the steps have resolved the
specific accounting and documentation issues for the revolving loan program discussed in
the draft report.
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C. Revolving Loan Fund Requirement Not Met
The OIG Draft Report states that CSS failed to (a) establish a formal revolving fund that
meets the requirements of Title 40 CFR 30.21; (b) segregate all revenues, costs, cash, and
accounts receivables associated with the CA within its accounting system; (c) implement a
project cost system for expenditures made under the CA; and (d) reconcile its accounts because
revolving loan fund transactions were not segregated from other transactions in the system.
Each of these statements relates in some way to CSS' initial decision, made before the
project period started, to use spreadsheets to track CA funds in the revolving loan fund. CSS
decided that spreadsheets would be appropriate to use for tracking and reporting obligations
because CSS determined, through discussion with its EPA Project Officer, that CSS only needed
to report on projects undertaken with the initial $9 million in CA funds, and CSS did not need to
report on projects undertaken with revolved loan funds. Because of this understanding, CSS
considered a spreadsheet system to be most appropriate for CA compliance and reporting, and
declined to implement a more complex tracking system.
CSS believes that its tracking of CA funds using spreadsheets constitutes compliance
with the CA and EPA and OMB regulations. CSS declined to create separate lease or loan
transactions for each funding source used in a project, as the Draft Report claims is required,
because such a process would impose significant operational difficulties on CSS and its
customers and is not feasible.8 Such an approach would require, for each project, multiple lease
or loan documents, each of which would require separate monthly payments from the borrower,
and would dramatically increase loan servicing complexity and costs, internal set up, monthly
processing time, and collection efforts. In addition, such an arrangement would place an
untenable burden on CSS' customers, many of whom are small, independent truckers, and do not
speak English as a first language.
With the deployment of the CA funds, CSS created a secondary spreadsheet database
specifically for the purpose of tracking CA funds by project. This secondary database, which
CSS calls its Accounts Receivable Distribution Table, allows CSS to track multiple sources of
funding for a single project and to automatically designate incoming loan repayments associated
with a project proportionately back to its funding sources.9 CSS regularly reviews and reconciles
this database with its lease and loan portfolios. Because of limitations in CSS' accounting system
that existed at the beginning of the project period, these reviews or reconciliations are currently
prepared outside of the accounting system and the net results of the activity are recorded via
journal entry into the accounting system. This process of spreadsheet tracking, with periodic
reviews and reconciliation with the accounting system, provides the same tracking capability as
OIG's preferred approach.
8 CSS understands OIG to interpret EPA and OMB regulations and the CA to require that a project with
multiple funding sources (e.g., CA 5%; State Grant 50%; Financial Institution 45%) be recorded and tracked as three
separate lease or loan transactions.
9 In the deployment of the Accounts Receivable Distribution Table in March 2010, CSS incorporated
categories to separately track each of its EPA SmartWay Finance Grants and other sources of funding. As stated by
CSS Bylaws, any excess net assets are to be reinvested into the CSS revolving loan fund. The Accounts Receivable
Distribution Table therefore incorporated a separate designation for the CSS revolving loan fund.
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CSS is in the process of incorporating this secondary database into its new customer
relationship management (CRM) processing system, which interfaces with the accounting
system, and will have the process completed by August 2012. This integration will eliminate the
need to maintain the secondary database for CA reporting, will significantly streamline CSS
tracking and reporting processes, and will increase the quality and consistency of CSS reporting
data.
OIG Response 7. We were not able to verify with the EPA project officer CSS'
comments explaining that it considered a spreadsheet system to be most appropriate for
CA compliance and reporting based on a discussion with the EPA project officer. The
original project officer for the CA no longer is employed by EPA, and the current project
officer was assigned to the CA in September 2010. The current project officer told us that
he was not aware of any EPA guidance that would direct or suggest CSS to only report on
the initial deployment of the $9 million in CA funds. This project officer also informed
CSS in February 2011 to continue reporting projects in quarterly reports until the grant is
closed out and the final project report is submitted to EPA.
We do not agree that CSS' use of spreadsheets constitutes compliance with 40 CFR
Part 30.21 and the CA. Title 40 CFR Part 30.21(b)(2) requires recipients' financial
management systems to provide records that adequately identify the source and
application of funds for federally sponsored activities. Title 40 CFR Part 30.21(b)(3)
further specifies that recipients' financial management systems provide accountability for
funds, property and other assets. Programmatic Condition 2.7 of the CA requires the
recipient to maintain effective control over and be accountable for all funds, property, and
other assets accrued as a result of the CA. As discussed in the draft report, we were not
able to reconcile the spreadsheets to the accounting system because most revolving loan
fund transactions were not segregated from other transactions in the system.
The draft report does not state that CSS is required under federal regulations and the CA to
create separate lease or loan transactions for each funding source. Rather, the report
explains that we are unable to provide an opinion on the financial resources, related
liabilities, revenue, expenses, and residual balances of the fund because CSS has not
established and used a comprehensive set of accounts for the revolving fund. Accounting
for all funding associated with the revolving loan program is consistent with the revolving
loan fund model specified in the workplan for the CA. The workplan specifies that
principal in the loan fund (from EPA and other contributors) will remain in the fund
permanently, continuing to revolve and be used for the same purpose of clean technology
leases. Therefore, all financial resources, related liabilities, revenue, expenses, and
residual balances are required to be accounted for as part of the revolving loan program
partly funded by the CA. CSS' comments do not explain why it is unable to establish a
comprehensive set of general ledger accounts that records all revolving loan program
financial transactions.
-contimied-
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OIG Response 7 (continued).
During the course of the audit, CSS provided the OIG with a spreadsheet that includes data
on lease receivables by customer as of December 31, 2010, and appears to be the
"Accounts Receivable Distribution Table" described by CSS in its comments on the draft
report. This spreadsheet identifies the total present value of lease receivables for all CSS
customers. The spreadsheet also appears to identify projects fully or partially funded under
the CA as well as projects funded under other funding sources and programs. The total
present value for the projects includes all funding sources (i.e., commingled funds) used to
finance the lease. Although CSS' comments disclose that the spreadsheet is periodically
reconciled to the accounting system, we are unable to reconcile the lease receivable
balances for projects identified as fully or partially funded under the CA to the accounting
system because revolving loan fund receivables were not segregated from other receivables
in the general ledger.
We acknowledge CSS' comments on the new CRM system. However, CSS has not
explained how the CRM will achieve segregation of lease receivables for the revolving
loan program in the accounting system.
i. A Formal Revolving Loan Fund Is Not Required Under the CA
CSS disagrees with the OIG Draft Report's statement that CSS must establish a "formal"
revolving loan fund to meet the requirements of Title 40 CFR 30.21. That regulation does not
prescribe any requirements for a "formal" revolving loan fund or even mention revolving loan
funds in any respect. As a result, CSS does not believe that the CA, or other applicable ARRA,
EPA, or OMB requirements, mandates that CSS implement a formal revolving loan fund.
At the beginning of the CA project period, CSS decided against a formal revolving loan
framework for several reasons. First, a formal revolving loan fund would require CSS to
formally lock in financing sources before financing a project. As described above in section
III.B.ii, the ability to delay this decision provides many advantages, and allows for the most cost-
effective use of taxpayer money.
Second, at the beginning of the project period, CSS did not have sufficient accounting or
administrative infrastructure to implement a formal revolving loan fund. As noted above, CSS
has grown rapidly in recent years and has, over the past three years, taken significant and
appropriate steps to upgrade its internal control and accounting systems. Over this time period,
CSS has undertaken and completed numerous compliance upgrades, including the upgrade of its
accounting system; the creation of a job cost system dedicated to grants compliance (in July
2010, before the OIG audit began); and the creation and development of a customer management
system that is integrated with the accounting, billing, and collection systems, incorporates grants
and award requirements for both regional and national EPA awards, handles lease and loan
transactions for both trucks and equipment, and allows for multiple funding sources for a single
lease or loan transaction. A formal revolving loan fund disbursing blended public-private loans
would require most, if not all of, these administrative functions to be available at the outset of the
project. Given the resources available to CSS at the time it was awarded the CA, and given the
fact that, at that time of the CA's award, most of the above accounting and administrative
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infrastructure was not in place, it was simply not feasible for CSS to implement a formal
revolving loan fund at that point. However, the CSS system in place today provides the same
result.
ii. Segregated CA Accounts Are Not Required
CSS acknowledges that it did not establish a segregated set of accounts within its
accounting system for the CA, but disagrees with OIG that such a setup is required. As
mentioned above, such an arrangement would significantly increase the administrative burdens
associated with the revolving loan fund CSS and its customers. Moreover, in 2009 and 2010,
EPA was the single largest contributor to the CSS revolving loan fund, and substantially all of
CSS' operations involved the revolving loan fund. Because the CSS revolving loan fund
deliberately blends resources from multiple sources, and because CSS chose to track CA funds
for reporting purposes in a secondary database, CSS did not consider it necessary to segregate
the cost of each financing project by funding source within its accounting system.
iii. A Project Job Cost System Is Not Required
While a Project Job Cost system aids in tracking revenue and costs by grant or contract,
such a system is not required by either Title 40 CFR Part 30 or Title 2 CFR Part 230. Although
CSS implemented a Project Job Cost system in July 2010, this occurred after the initial
disbursement of $9 million in CA funds, which was completed in early 2010. CSS did not
recreate past CA transactions associated with the revolving loan fund in its Project Job Cost
system because it has not been directed to do so by EPA, and this would be a hugely burdensome
undertaking. To fully switch to the Project Job Cost system for the entire CA project period, CSS
would have to reclassify each transaction associated with the revolving loan fund that has taken
place since the beginning of the CA project period, which started on June 1, 2009. The revolved
loan fund now involves 8,500 transactions per month, so reclassifying 30 months of past
transactions would be a truly massive undertaking. However, CSS intends to set up all future
grants and contracts within its Project Job Cost system.
OIG Response 8. We disagree with CSS' position that the CA or federal regulations do not
require a formal revolving fund. The CA award provided Recovery Act funding to CSS for
the creation of a national revolving loan program and specified that the recipient comply
with 40 CFR Part 30. The workplan for the CA specified that CSS will implement a
revolving loan fund using multiple funding sources. The workplan further specified that
principal in the loan fund (from EPA and other contributors) will remain in the fund
permanently, continuing to revolve, and be used for the same purpose of clean technology
leases. The workplan also stated that CSS will not use any EPA funding to pay program
operating costs but would use interest earned from the program.
-contimied-
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OIG Response 8 (continued).
Title 40 CFR Part 30 and the CA include provisions to ensure complete accounting for all
the funds, property, and assets accrued as a result of the CA. Title 40 CFR Part 30.21(b)(2)
clearly specifies that financial management systems should provide records that contain
information pertaining to "assets, outlays, income and interest." Title 40 CFR Part
30.21(b)(3) requires that the financial management system provide "effective control over
and accountability for all funds, property and other assets." Title 40 CFR Part 30.21(b)(3)
also states that "recipients shall adequately safeguard all such assets and assure they are used
solely for authorized purposes." Programmatic Condition 2.5. A of the CA is consistent with
40 CFR Part 30 and requires that the recipient maintain records to track Recovery Act funds
separately from other grant programs. Programmatic Condition 2.7 of the CA requires the
recipient to be accountable for funds, property, and other assets accrued as a result of the
CA. Further, Programmatic Condition 20 requires work under the agreement to be
completed in accordance with the approved workplan.
We disagree that CSS' system in place today provides the same result as a formal revolving
fund established and managed through an accounting system. The complexity of the
revolving loan program transactions described in CSS' comments to the draft report
highlights the need to establish a formal revolving fund that meets the financial management
requirements of federal regulations and the CA. CSS' revolving loan program includes
funding from multiple sources, lease receivables, loan payables, program income, and
expenses. Therefore, a dedicated set of general ledger accounts is necessary to define the
scope of the revolving loan fund and account for all funds and assets accrued as a result of
the CA award. Without records that reconcile to the accounting system, we are unable to
determine whether funds were used under the revolving loan program in accordance with the
terms and conditions of the CA. We found no evidence during the examination that CSS'
accounting system lacked the capacity to establish a formal revolving loan fund through a
dedicated set of general ledger accounts at the time of the C A award.
We disagree that a project cost system is not required by either 40 CFR Part 30 or 2 CFR
Part 230. The CA award provided CSS with $9 million in Recovery Act funds specifically to
create a revolving loan program for heavy-duty trucks to save fuel and reduce emissions.
Title 40 CFR Part 30.21(b)(2) specifies that a recipient's financial management systems shall
provide records that adequately identify the source and application of funds for federally
sponsored activities. In addition, 2 CFR Part 230, Appendix A, A.2(a) and (g), require costs
to be allocable and adequately documented to be considered allowable under an award.
A project cost system accounts for costs by a specific project or program rather than by
department or the overall organization. Therefore, a project cost system is required by these
regulations to show that the expenditures for the revolving loan program are specifically
allocable to and allowable under the CA.
-contimied-
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OIG Response 8 (continued).
With regard to CSS' comments that a project job cost system was implemented in 2010,
we found that CSS' general ledger covering 2010 financial transactions included only one
revenue account that contained $78,000 of the $9 million award and six salary and salary-
related accounts that totaled $277,431 in expenses for the revolving loan fund program. We
found no general ledger accounts for trucks and other equipment expenditures under the
revolving loan program partly funded by the $9 million CA award. Therefore, we agree that
fully accounting for the $9 million award would be a difficult undertaking for CSS.
However, CSS is required under 40 CFR Part 30 to fully account for the Recovery Act
funding. CSS' comment that it intends to set up all future grants and contracts within its
project cost system will not provide acceptable accountability for the $9 million award of
Recovery Act funds.
D. Project Costs Not Fully Supported
The OIG Draft Report states that CSS was unable to provide complete support for
revolving loan program projects and associated lessee payments because the projects and
payments were either understated or overstated. The OIG Draft Report also states that CSS was
unable to accurately identify income or losses from leases or measure whether leases and the
revolving fund program were economically sound because CSS failed to meet applicable
financial management requirements.
Again, CSS disagrees with OIG's assertions. CSS told OIG during the audit, and OIG's
audit bore out, that the discrepancy OIG identified between project receipts and costs for the
audited costs is due to CSS' deliberate approach of estimating, rather than precisely tracking, the
costs associated with the repair of trucks. Trying to itemize this level of detail would be
counterproductive from a cost perspective, and, for three reasons, CSS does not believe such an
approach is feasible.
First, practical considerations require an estimated approach. CSS' business model
requires borrowers to sign fixed price contracts before CSS purchases the trucks to ensure the
borrower is committed to the project. However, the repair costs associated with a particular truck
can vary and are not known until after CSS takes delivery of the truck, which occurs only after
the borrower has signed a contract with CSS.
Second, efficiency considerations make CSS' estimated approach highly preferential.
CSS makes necessary repairs to the trucks that it finances using both new and used parts. If CSS
is required to align precisely its costs and receipts for each repair project it undertakes, this
would require a comprehensive inventory system that tracks individual repair parts. Merely
tracking general prices of commonly used parts would not be sufficient, because the prices at
which CSS purchases various parts can vary from day to day and from order to order. For
example, CSS normally purchases tires in bulk in order to receive the lowest prices possible.
However, the price of a single tire may vary based on the model of tire; its condition; and the
batch in which CSS buys the tire. While CSS could theoretically create an inventory system to
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calculate and record the individual prices of individual parts, it would be hugely burdensome.
Moreover, such a system would still not adequately track certain repair costs including oil
changes, lube jobs, and repainting (when necessary), which do not always involve measurable or
discrete amounts of inventory.
Third, and most importantly, the benefits associated with implementing such a tracking
system are very small, and are significantly outweighed by the corresponding administrative
costs. CSS' experience indicates that a $500 repair charge accurately reflects the average cost
associated with the repair of the used trucks it purchases. This charge comprises, on average, less
than three percent of the cost of each truck. The OIG reviewed financing projects that totaled
$229,350 and reported a net discrepancy of $909, which represents 0.4 percent of the total cost
of those projects. CSS does not believe such a small differential represents a material
discrepancy. Thus, CSS believes the benefit from implementing such a system would be
minimal.
However, the costs associated with implementing such an inventory tracking system in
CSS' truck department would be highly burdensome. Such a system would require CSS to (a)
require its vendors to provide a unit-by-unit breakdown of the cost associated with the parts it
purchases; (b) physically label each part that it purchases with an identifier; (c) input that
identifier into the CSS project database and associate it with the purchase receipt; and (d) update
the project database each time a part is used on a particular truck. Given that CSS may install
several parts on a truck while repairing it, requiring such particularized information would
greatly multiply the administrative burden placed on CSS accounting staff and its truck
department, with little appreciable benefit.
Further, even if CSS were able to implement such an inventory system, the cost
associated with truck repair would go up significantly. Under such a system, CSS would likely
cease to buy parts in bulk in advance, and instead only buy repair parts upon the knowledge that
such parts are needed for particular repairs. This means CSS would buy them in smaller
quantities and at higher prices. Thus, implementing an inventory part tracking system would
likely lead to more expensive parts, and CA funds would not be used as cost effectively as they
are currently—a counter-productive result.
CSS strongly believes that its repair cost system complies with the requirements set out in
EPA regulations, and the CA, and that CSS adequately identifies the source and application of
the CA funds used for repairs of trucks. Given that a comprehensive inventory system is unlikely
to be able to adequately track all pieces of inventory, would place a significant burden on CSS'
truck department, and would not adequately document all inventory that CSS uses to repair its
trucks, CSS believes that its approach is the most prudent use of CA funds and constitutes
compliance with the CA and EPA and OMB regulations.
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OIG Response 9. Our position remains unchanged. CSS' comments disclose that project
costs include estimated repair costs rather than actual costs. CSS' comments further disclose
that parts purchased in bulk are not included in an inventory tracking system and allocated to
projects based on actual costs. As discussed in the draft report, 2 CFR Part 230, Appendix A,
A.2 (a) and (g), require costs to be allocable and adequately documented to be considered
allowable under an award. In addition, 40 CFR Part 30.21(b)(2) requires recipients' financial
management systems to include records that identify adequately the source and application of
funds for federally sponsored activities. This regulation further states that these records
should include information pertaining to assets, outlays, income, and interest. CSS was
unable to support that all reported projects costs are allowable under 2 CFR Part 230 and
40 CFR Part 30.
In the absence of a fully implemented project cost system, we were unable to determine
whether the cost records that CSS provided were complete or that the costs were allocable to
the CA. We were also unable to determine whether CSS' cost estimates were accurate or
project costs were materially over- or under-stated. CSS was unable to accurately identify
income or losses from leases or measure whether leases and the revolving fund program were
economically sound because it did not meet the financial management requirements of 40
CFR Part 30.
E. Progress Reporting Not Accurate
The OIG Draft Report states that CSS' progress report for the quarter ending December
2010 did not accurately identify expenditures by funding source, the number of projects, and the
total costs of projects in the revolving fund program. OIG asserts that this led to an
overstatement of the number of projects financed by CA funds and an understatement of the total
project costs and funding from other sources.
CSS agrees with OIG that the CSS progress report for the quarter ending in December
2010 did contain certain errors that led to inaccurately reported results. Certain figures contained
errors due to oversight or improper calculation by CSS. For instance, the amended report
submitted by CSS removed 39 projects, because CSS discovered during an internal audit that
those projects took place outside of the CA project period. CSS also amended the report to
include previously excluded total down payments and state and local grants, and the current
outstanding balance of each lease or loan funded by the CA. This had the effect of increasing
total project costs, down payments, and state funded expenditures. The amended report also
reflects reimbursements from financial institutions for vehicles initially funded by the C A, which
decreased the cumulative CA expenditures and increased financial institution expenditures by
approximately $5.4 million.
However, CSS believes that most of the reporting discrepancies that OIG identified in the
report are not due to error, but instead due a misunderstanding over the scope of the progress
reports in question. CSS, in submitting the December 2010 and other progress reports, followed
instructions it received from its EPA Project Officer to report only upon projects funded by the
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initial deployment of the $9 million in CA funds, and to exclude any projects funded with
revolved funds. Thus, neither the original nor the amended progress report included
approximately $3.8 million of emission control devices funded solely through CA revolved
funds.
CSS believes that, even if EPA determines that its Project Officer's guidance was
erroneous, discrepancies arising due to CSS' reliance on that guidance should not be considered
erroneous. CSS' EPA Project Officer serves as its primary contact for the EPA Program Office.
Given the innovative nature of the CSS revolving loan fund, CSS relied upon its Project Officer,
as its principal point of contact with EPA, to provide accurate guidance on the nature of its C A
obligations. Given that CSS complied with, and relied upon in good faith, its Project Officer's
instructions, if EPA does determine, two years after the fact, that the Project Officer's
instructions were given in error, CSS should not be held responsible for any errors that directly
resulted from CSS' compliance with the erroneous instructions.
OIG Response 10. Our position remains unchanged. CSS agrees that the progress report for
the quarter ending December 2010 is inaccurate and that certain figures in the report
contained errors due to oversight or improper calculation. CSS' comments also acknowledge
that the amended quarterly report ending December 2010 is inaccurate and excludes
approximately $3.8 million of emission equipment apparently funded under the CA. As
discussed in the draft report, Programmatic Condition 5 of the CA requires CSS to provide
EPA with quarterly reports that address progress toward achieving the workplan goals. The
condition specifies that the reports include summary information on planned activities,
implementation of diesel emission reduction strategies, expenditures, and issuance of loans,
leases, or bonds. Without accurate quarterly reporting by CSS, EPA is unable to measure the
recipient's progress toward achieving the goals of the CA.
With regard to CSS' comment that it believes most of the reporting discrepancies identified
in the draft report were caused from following guidance provided by the EPA project
officer, we were unable to confirm the comment with EPA. The current project officer was
assigned to the CA during September 2010 and told us that he was not aware of any EPA
guidance that would direct or suggest CSS to only report on the initial deployment of the
$9 million in CA funds. This project officer also informed CSS in February 2011 to continue
reporting projects in quarterly reports until the grant is closed out and the final project report
is submitted to EPA.
CSS' comments indicate that there appears to be a misunderstanding with EPA on the
quarterly reporting requirement specified by the C A. Therefore, we have added a
recommendation that EPA provide clarifying guidance to CSS on financial and other project
information required to be included in quarterly progress reports and request the recipient to
submit corrected progress reports as appropriate for prior quarters of the project period in
the final report.
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i. Subsequent CSS Actions
As the OIG Draft Report indicated, CSS submitted a new progress report for the quarter
ending in December 2010 to correct certain errors due to oversight or improper calculation.
However, CSS has not updated its quarterly progress reports to incorporate the use of revolved
funds because it has not received instructions to do so, and such an undertaking would require a
review of all transactions associated with the CA funds that have revolved, which would entail
significant effort and expenditure of administrative resources. However, CSS stands ready to do
so if EPA deems such action necessary.
OIG Response 11. As discussed in the report, 40 CFR Part 30.21(b)(2) requires the
recipient's financial management systems to include records that adequately identify the
source and application of funds for federally sponsored activities. CSS' acknowledgment
that significant effort and expenditure of administrative resources would be required to
report on all transactions associated with the C A funds indicates that the organization is
unable to readily account for all sources and application of funds of the revolving loan fund
partly funded by the CA. Therefore, CSS' response further supports our position that the
recipient's financial management system does not meet federal requirements under the CA
and has not accurately reported on work progress toward meeting workplan goals in
quarterly progress reports. We have added a recommendation that EPA require the recipient
to submit corrected progress reports based on CSS' comments.
F. OIG Recommendations
i. Questioned Costs
OIG has recommended that EPA disallow and recover $9 million in questioned costs
claimed under the CA, unless CSS provides documentation that meets appropriate federal
financial management requirements and shows that some or all of the questioned costs are
allocable and allowable to the CA. CSS believes that it has complied with all federal financial
management requirements and shown all costs to be allocable and allowable under the CA. CSS
has provided documentation of its expenditure of funds under the C A in Appendix A.
OIG Response 12. Our position remains unchanged. As discussed in the draft report, CSS
was unable to support that all funds drawn under the CA were used for expenditures that are
allowable under and allocable to the CA during our examination. We were also unable to
provide an opinion on the financial resources, related liabilities, revenue, expenses, and
residual balances of the revolving fund. The expenditure documentation provided by CSS in
appendix A of the response to the draft report does not provide any new information to
support that the $9 million award has been used for expenditures that are allowable under
and allocable to the C A or that any revolved funds are available for other revolving loan
program projects.
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ii. Suspension and Debarment
CSS strongly disagrees with OIG's recommendation that EPA consider the suspension
and debarment of CSS. Neither is an appropriate course of action, and OIG has provided no
evidence to suggest that such an inquiry is warranted. As a non-profit organization, CSS has
been funded principally by EPA and DOE, which together have entrusted CSS with $41 million
in funds over the past five years. Suspension or debarment would be severely injurious to CSS'
mission, and would severely restrict its ability to lend. For this reason, CSS takes this
recommendation very seriously and strongly disagrees with it.
Debarment is not an appropriate remedy because the OIG Draft Report has not claimed,
or produced any evidence suggesting, that the criteria for debarment under Title 2 CFR 180.800
might be met. No CSS personnel have been convicted of any crime regarding, and neither CSS
nor any of its personnel have been found civilly liable for any act regarding, the administration
of any of CSS' programs or the CA. OIG has not suggested that CSS has willfully violated the
terms of the CA, or EPA or OMB regulations. Far from it, CSS has consistently endeavored in
good faith to comply with all requests and guidance made by the EPA Program Office
concerning the CA. CSS has no history of failure to perform under any of its agreements with
EPA or DOE, and has fully complied with all of its other agreements with EPA and DOE. The
provisions of § 180.800(c) are not applicable, and CSS' responsibility has not been called into
question, as § 180.800(d) requires. Because the OIG Draft Report outlines no facts that in any
way implicate any of the regulatory criteria for debarment, EPA should not consider debarment
of CSS.
Further, suspension is not warranted, because OIG has not claimed, or offered any
evidence to suggest, that the criteria for suspension outlined in Title 2 CFR 180.700 might be
met. No member of CSS personnel has been indicted for any criminal offense, and no evidence
exists that would lead to suspicion of any criminal offense or civil liability as required by Title 2
CFR 180.700 (a). OIG has offered no evidence to suspect any other cause for debarment,
including willful violations of the CA terms or EPA or OMB regulations; a history of failure of
CSS to perform under other agreements; any cause listed in Title 2 CFR 180.800(c); or doubt
about CSS' present responsibility. Finally, no immediate action is necessary to protect the public
interest. Indeed, if EPA undertakes suspension or debarment of CSS, such action would have the
perverse effect of significantly harming the public interest, because such action would forgo the
emissions reductions, public health benefits, and fuel savings associated with the CSS program,
and would deny thousands of future CSS customers access to funding for their small businesses.
Thus, because the regulatory criteria for suspension are not met, and the public interest would be
harmed, rather than protected, by suspending CSS, EPA should not consider suspension of CSS.
Other considerations further buttress the conclusion that EPA should not consider the
suspension or debarment of EPA. CSS' auditor, Isler CPA, has prepared a letter, attached as
Appendix B to this report, which notes that it is not aware of any evidence that would support
consideration of suspension or debarment of CSS. Moreover, suspension or debarment are
actions of last resort, and are premature, because CSS stands ready to work with EPA and OIG to
resolve the audit to the satisfaction of all parties. Because of CSS' good faith efforts to comply
with EPA directives, and because of the novel nature of CSS' public-private revolving loan fund,
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EPA should first consider whether specific guidance would remedy any deficiencies or
shortcomings it may find and give CSS a chance to comply with such guidance. Thus, because
OIG has not shown or suggested that the criteria set out in EPA's regulations for suspension and
debarment might be met, and because CSS is willing to work diligently in implementing the
guidance of EPA as the revolving loan fund continues to evolve, CSS respectfully requests that
EPA not consider suspension and debarment.
OIG Response 13. Our position remains unchanged. Title 2 CFR Part 180.800(b) specifies
that an Agency may pursue a suspension and debarment action for violations of the terms of
a public agreement or transaction so serious as to affect the integrity of an agency program.
As discussed in the draft report, the $9 million awarded to CSS represents 30 percent of the
Recovery Act awards under the SmartWay Clean Diesel Finance Program. Therefore, CSS'
financial management deficiencies discussed in the draft report pose a serious threat to the
integrity of the Recovery Act-funded portion of EPA's Clean Diesel Finance Program.
We also disagree with CSS' position that the recipient has no performance or compliance
deficiencies under any of its agreements with EPA. During October 2011, EPA's Office of
Grants and Debarment designated CSS as a "high-risk" recipient as a result of material
noncompliance with the terms and conditions of several federal awards discussed in its
single audit report for the year ended December 31, 2010. Because of the designation, the
Office of Grants and Debarment changed CSS' method of payment under EPA awards from
"advance" to "reimbursement with documentation" for all active awards. A history of
failure to perform or unsatisfactory performance under one or more public agreements is
another of the criteria for suspension and debarment under 2 CFR Part 180. CSS financial
management issues under the CA and material noncompliance issues under other federal
awards identified in the single audit report establish a history of failure to perform under
federal agreements.
We acknowledge the letter from CSS' Certified Public Accountant commenting that they
did not find any material noncompliance with federal regulations or requirements of the
award during the single audit. However, the single audit report covering the year ended
December 31, 2010, does not discuss the specific requirements of the CA, present any
financial details of the revolving loan program partly funded by the EPA award, or the
financial position of the revolving loan fund.
CSS' comments to the draft report indicate that it does not fully understand the financial
management requirements specified by 40 CFR Part 30, 2 CFR Part 230, and the CA. These
regulations and the terms and conditions of the award include provisions that require CSS'
financial management system to provide accountability for funds and other assets. Without
segregated accounts for all funds and assets, we are unable to determine whether funds,
including revolved funds, are being used in accordance with the terms and conditions of the
CA. We also cannot determine whether CSS can meet operating expenses of the program
with program income or if expenses are in fact eroding the capital provided by EPA and
other sources.
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iii. Establishment of Internal Controls
OIG also recommends that CSS establish controls that ensure the use of CA funding
complies with Title 40 CFR 30.21. Such controls should ensure (a) accurate, current, and
complete disclosure of the financial results of the revolving loan program funded under the CA;
(b) records that identify adequately the source and application of CA funds; and (c) effective
control over and accountability for all funds, property, and other assets of the EPA-funded
revolving loan program.
The steps CSS has taken prior to, and in response to, the concerns laid out in the OIG
Draft Report should eliminate any doubt that CSS has sufficient controls in place to respond
these concerns. CSS has implemented a job cost system that meets OIG and EPA's concerns,
interfaces with CSS' accounting system, and adequately tracks projects with funding from
multiple sources. Further, based on OIG's suggestion, CSS has implemented a new financial
structure that avoids the commingling of CA and non-CA funds in its SW3 award. Finally, CSS
has created a 3-member compliance department that did not exist at the beginning of the CA
project period and that is solely dedicated to ensuring CSS meets its reporting obligations under
the CA, other EPA and DOE awards, and all relevant federal statutes, regulations, and guidance.
CSS believes that it has always complied with its obligations to report and track CA
funds, but emphasizes that its capacity to administer a complex financial structure, such as its
revolving loan fund, has grown immensely over the past three years. Should EPA require further
steps to ensure that CSS' internal controls are sufficient, CSS stands ready to discuss how any
such controls can be implemented in a reasonable manner.
OIG Response 14. Our position remains unchanged. With regard to CSS' comment that it has
implemented a job cost system, our examination of the recipient's accounting system and
supporting documentation disclosed that a job (or project) cost system has not been fully
implemented for the revolving fund. As discussed in the draft report, CSS' general ledger
included only one revenue account that contained $78,000 of the $9 million award and six
salary and salary-related accounts that totaled $277,431 in expenses for the revolving loan
fund program. We found no general ledger accounts for truck and other equipment
expenditures for the revolving loan program even though CSS has claimed that the majority of
the $9 million award has been deployed for eligible projects. Further, our review of supporting
records for a judgmental sample of $4,336,066 in expenditures CSS associated with the
$9 million in cash draws under the CA showed no project coding. As a result, we were unable
to verify that the expenditures were allocable to and allowable under the CA. We were also
unable to provide an opinion on the assets, liabilities, revenues, and expenses for the revolving
loan program because of the lack of a comprehensive set of accounts for the revolving loan
program. CSS has not explained changes to its accounting system that ensure the use of
funding provided under the CA complies with 40 CFR Part 30.21. CSS will need to explain
these changes in response to the final report.
-contimied-
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OIG Response 14 (continued).
We acknowledge CSS' comment that a new financial structure has been implemented for its
EPA SmartWay 3 award. However, CSS has not explained how the new financial structure for
the SmartWay 3 award resolves the financial management issues and establishes internal
controls that ensure the use of funding provided under the CA is in compliance with 40 CFR
Part 30.21. CSS will need to explain the internal controls in its response to the final report.
Although CSS commented that a three-member compliance department has been created to
ensure compliance with federal regulations and award requirements, the recipient has not
explained the internal controls implemented by this department to achieve compliance. CSS
will need to explain these internal controls in its response to the final report.
We do not agree that CSS has always complied with its obligations to report and track CA
funds. As discussed in the draft report, we were unable to verify that CSS used the $9 million
of EPA funding for expenditures that are allocable to and allowable under the CA. We are also
unable to provide an opinion on the financial resources, related liabilities, revenue, expenses,
and residual balances of the revolving fund because of material noncompliance and internal
control weaknesses with financial management.
iv. Special Conditions on Future EPA Awards
OIG has also recommended that EPA awards to CSS include special conditions requiring
payment on a reimbursement basis, subject to approval by the EPA Project Officer, until EPA
agrees that CSS has met all applicable federal financial management requirements. CSS concurs
with this approach, with the following caveat.
CSS respectfully urges EPA to apply such special conditions only to CSS' EPA
SmartWay Finance awards and to exempt its regional awards from such treatment. These
regional awards are straightforward to administer and EPA has never had questions concerning
their implementation. However, they are very capital-intensive. Because CSS' size is small when
compared to the amount of money that it distributes through these grants, CSS does not have the
ability to spend money extensively out of pocket and be reimbursed later. Because of CSS' lack
of working capital, reimbursement status on these grants works a serious financial hardship on
CSS. That was recently illustrated in vivid detail when an unexpected month-long delay in
reimbursement by EPA nearly resulted in legal action against CSS by one of its vendors that had
not been paid as a result of the delay. Given that the transactions occurring under these grants are
straightforward and do not involve the revolving loan fund in any way, EPA should not place
any special conditions on CSS' regional grants.
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OIG Response 15. Our position on the recommendation remains unchanged. During
October 2011, EPA's Office of Grants and Debarment designated CSS as a "high-risk"
recipient as a result of material noncompliance with the terms and conditions of several
federal (including EPA) awards discussed in its single audit report for the year ended
December 31, 2010. Because of the designation, the Office of Grants and Debarment
changed CSS' method of payment under EPA awards from "Advance" to "Reimbursement
with Documentation" for all active awards. Therefore, EPA has already established the
recommended special conditions for all active awards.
CSS' response to the draft report further supports the necessity for full implementation of the
recommendation. CSS' response discloses that the recipient has not resolved the financial
management issues identified in the report and does not fully understand the financial
management requirements specified by federal regulations and the CA. EPA should establish
the special conditions for future awards until CSS is able to fully demonstrate compliance
with federal financial management requirements.
IV. Comments on Chapter 4 - Procurement Requirements
A. Truck Procurements Did Not Follow Competitive Process
The OIG Draft Report states that CSS' truck procurements did not meet the requirements
of Title 40 CFR Part 30, or CSS' own procurement policy, because CSS procured trucks without
following a formal and documented competitive process. While CSS acknowledges that it did
not comply with applicable procurement requirements for its truck purchases, this is only
because CSS did not think those procurement requirements were applicable. CSS strongly
believes that its purchasing decisions have always been in the best interests of its consumers, and
that its ability to purchase trucks from wholesalers and fleets at below market value has
consistently resulted in excellent value for its customers. Thus, while CSS disagrees with OIG's
application of the procurement requirements to its truck purchases, CSS is confident that it can
provide a sound and reasonable basis for each of the purchasing decisions questioned in the OIG
Draft Report.
CSS has always understood its obligations to follow EPA, and its own, procurement
policy when appropriate. This is evidenced by a competitive bid process that CSS undertook in
2008 for new model year 2009 diesel trucks from truck manufacturers. However, after evaluating
the bids it received, CSS realized that new trucks were not feasible for most of its target
audience, and shifted its focus to used trucks, which are a more cost-effective and realistic option
for its customers.
CSS does not believe that the procurement regulations should apply to its used truck
purchases because, in acquiring the trucks, CSS acts as an agent of its customers. Because there
is a lack of uniformity in the trucks available on the used heavy-duty diesel truck market, and
because CSS borrowers have different budgets and different needs for their trucks, CSS
borrowers need to be able to select their own used trucks. They are the only ones who can
realistically make a decision as to whether a particular used truck at a particular price is
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acceptable. Because CSS customers make the final decision on whether to accept a truck, CSS
views itself as a middleman buying wholesale trucks on behalf of retail borrowers, and views the
procurement requirements as inapplicable in such a context.
CSS confirmed that its interpretation of the procurement rules in this respect was
acceptable by consulting with its EPA Project Officer, who agreed with CSS that its approach to
purchasing vehicles did not constitute procurement: "While CSS lists eligible vehicles available
from multiple dealers, CSS isn't directly selecting the vehicles because it is decided by the
driver.... [t]his approach sounded reasonable in trying to ensure open competition for selection
the most appropriate vehicles."10
However, CSS now understands OIG and the EPA Program Office to consider this CSS
wholesaling activity to be a procurement activity subject to the requirements of Title 40 CFR
30.45. CSS does not contest this interpretation.
As a result of this change in procurement policy, CSS has implemented a price analysis
procedure that it believes complies with Title 40 CFR 30.45. Under this procedure, whenever
CSS purchases a truck or fleet of trucks, it documents that the purchase price is competitive with
the prices of other comparable used trucks, as indicated by North American Dealer Association
(NADA) valuations and industry publications, such as Truck Paper.
CSS has also applied this procedure retroactively to confirm that each of its truck
purchases conducted under the CA resulted in prices lower than those that could have been
obtained using federal procurement procedures. The results of this comparison are available in
Appendix C.
OIG Response 16. We acknowledge CSS' statement that it now understands that truck
procurements under the CA are subject to 40 CFR Part 30.45. However, we disagree the EPA
project officer for the CA agreed that CSS' approach to purchasing vehicles did not constitute
procurement. CSS' comment is based on an April 15, 2010, e-mail from the EPA project
officer that discloses she understands that the selection of vehicles for purchase is made by the
drivers rather than CSS. The e-mail does not instruct CSS to ignore the cost or price analysis,
competition, and other documentation requirements specified by 40 CFR Part 30 as discussed
in the draft report. As discussed in the report, CSS is also obligated to meet both the
competition and other documentation requirements specified by 40 CFR Part 30.46 for
purchases exceeding $100,000.
CSS' recently implemented price analysis procedure should meet the price analysis
requirements of 40 CFR Part 30.45 if completed analyses show vehicle purchase prices are
fair and reasonable and are fully documented. However, the results of CSS' retroactive
application of the procedure for truck purchases included in appendix C of its response does
-contimied-
111 Email from Annie Kee to Sharon Banks, dated April 15, 2010, Appendix C, page C-2.
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OIG Response 16 (continued).
not resolve the truck procurement issues discussed in the draft report. CSS provided in
appendix C a document showing a retroactive comparison of purchase prices with National
Automobile Dealers Association (NADA) retail values for a sample of 425 trucks placed in
service during 2010. The comparison identifies that all 425 trucks in the sample were
purchased at a price below the retail NADA value. Although CSS disclosed that the sample
was representative of trucks placed in service in 2010, we were unable to determine whether
the sample provided sufficient coverage of vehicle procurements allocable to the CA because
the methodology was not included in appendix C. We were also unable to verify the accuracy
of CSS' price analysis for two primary reasons. First, the comparison data did not include the
mileage for 178 of the trucks even though mileage is one of the factors used in determining the
NADA value of a vehicle. Second, documentation supporting truck model, purchase price, and
other data presented in the comparison document was not included in appendix C.
B. Documented Cost or Price Analysis for Emission Control Equipment
Procurements
Like its policy on truck purchases, CSS did not, until recently, consider EPA and CSS' own
procurement requirements to apply to emission control equipment purchases made on behalf of CSS
borrowers. This was the case for two reasons. First, as with its truck purchases, CSS does not
consider itself to be the procurer of emission control equipment, but rather an agent acting on behalf
of its borrowers. Second, CSS, in financing emission control equipment, never takes ownership or
possession of the emission control equipment. CSS merely acts as a broker for such equipment, and
allows the customer to select the exhaust retrofit that is installed by an authorized dealer.
However, CSS now understands OIG and the EPA Program Office to consider CSS
financing of emission control equipment to constitute a procurement activity for purposes of
EPA procurement requirements and, as such, must be justified by a cost or price analysis. CSS
does not contest this interpretation.
As it has done with its truck purchases, CSS has instituted a procedure for price analysis
of emission control equipment. In many cases, only one option is available to a customer because
CARB has only one verified technology for the specific engine type. In such cases, CSS
documents that this is the case. Further, CSS periodically issues requests for proposals, using
industry publications and/or valuation tools, to ensure that it accurately provides current prices to
customers making decisions about which emission control equipment to buy through CSS.
OIG Response 17. We acknowledge CSS' statement that it now understands that
expenditures for emission control equipment under the CA are required by 40 CFR
Part 30.45 to be supported by a cost or price analysis. We also acknowledge CSS' statement
that it has instituted a procedure for price analysis of emission control equipment. However,
CSS' comments do not disclose and include documentation supporting that the recipient has
completed cost or price analyses for the $4,987,923 in reported costs incurred for truck
emission control equipment discussed in the draft report. Therefore, CSS' comments have
not resolved the cost or price analysis issue for these equipment procurements.
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C. Retrofit of 227 Pre-2007 Model Year Trucks
The OIG Draft Report states that the costs associated with 227 pre-MY 2007 trucks are
not allowable because the trucks have not yet been retrofitted with emission control technologies.
Although these trucks were not retrofitted immediately after their purchase due to an unforeseen
but significant delay, they are being retrofitted now and will be completed by June 17, 2012.
CSS did not retrofit the trucks immediately upon purchasing them because it anticipated
receiving CARB grant funds for the trucks shortly after they were purchased that would enable
CSS to install much more effective retrofits on the trucks. CSS purchased the trucks on behalf of
California buyers and decided not to install diesel oxidation catalyst (DOC) retrofits, which were
the most economical retrofits allowable under the CA, because the DOCs would only reduce
20% of particulate matter emissions, and would only be valid in California through the end of
2012. Instead, CSS planned to utilize CARB grants to install diesel particulate filters (DPFs),
which reduce 85% of particulate matter emissions, and are permitted in California after 2012.
CSS viewed the decision to forgo DOC retrofits and wait for DPFs instead as a reasonable one,
because it would achieve greater emissions reductions and eliminate the need for truckers to
upgrade their trucks again after 2013 to maintain compliance with the new, tougher California
emissions standards.
CSS did not make the decision to pursue DPFs imprudently. In the year prior to
purchasing these trucks, CSS had successfully applied for, and secured, approximately 300
CARB grants for DPFs, and CSS had no reason to think that it would not be successful in
securing CARB grants for the 227 trucks. Further, CSS confirmed this course of action in writing
with its EPA Project Officer before deciding against the DOC retrofits.11
In April 2011, after a one-year delay, CSS was informed by CARB that the 2006 model
year truck projects would not qualify for the CARB retrofit grant due to a rule change after the
purchase of the trucks. Since then, CSS has been researching other options to implement the
proposed strategy. After finding no other solutions, CSS is now installing the DOCs.
CSS completed a bid process for the equipment and installation process of the DOCs and
ordered the retrofits in November 2011. Although CSS encountered a slight delay in installation
because the State of California had not approved the technology as CARB verified, CSS' DOC
vendor, Johnson Matthey, received an "After Market Parts Exemption" to allow the installation
of these retrofits on February 8, 2012. CSS plans to follow the schedule it set out in a letter dated
October 31, 2011 to the EPA Program Office, and finish the retrofits of the 227 pre-2007 MY
trucks by June 17, 2012.
11 Email from Annie Kee to Sharon Banks, dated April 15, 2010, Appendix C, page C-2.
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OIG Response 18. Our position remains unchanged. Programmatic Condition 3.1.G of the
CA specifies that CSS may use the funding under the award to purchase or lease pre-2007
MY on-highway vehicles, used engines, and used pieces of equipment as long as verified
emission control technologies have been installed. CSS' comments disclosed that the
emission control equipment retrofits for the pre-2007 MY trucks had not been completed as
of February 21, 2012, the date of its response to the draft report.
We acknowledge CSS' comment that its decision to pursue diesel particulate filters rather
than diesel oxidation catalyst retrofits was confirmed in writing with the EPA project officer.
This confirmation was in the form of an April 15, 2010, e-mail to CSS from the EPA project
officer disclosing that she was aware of the recipient's plan to install the diesel particulate
filters. The e-mail also disclosed that the project officer was aware that this process may take
a "little bit of time." As of February 2012, we note the emission control equipment retrofits
for the pre-2007 MY trucks had not been completed as required by the CA even though
almost two years had elapsed since the project officer sent the April 2010 email to CSS.
CSS' comments also disclose that the recipient's current plan to install diesel oxidation
catalyst retrofits rather than diesel particulate filters by June 2012 does not satisfactorily
resolve the CA compliance issue with the pre-2007 MY trucks. CSS' comments disclose that
the diesel oxidation catalyst retrofits are only valid as emission control equipment through
2012, and equipment meeting more stringent emissions standards will be required for the
trucks in 2013. Therefore, the retrofitted trucks will not achieve emissions standards over the
long-term. Consequently, the expenditures for the pre-2007 MY trucks do not represent
effective and efficient use of Recovery Act funds and are not reasonable costs under the CA.
D. CSS Response to OIG Recommendations
i. Compliance with Title 40 CFR Part 30.45 and 30.46
The OIG Draft Report recommends that CSS be required to comply, at a minimum, with
EPA procurement requirements for past and future procurements under the C A by (a)
maintaining in the procurement records the minimum documentation required by Title 40 CFR
30.46 for procurements exceeding $100,000, and (b) conducting and maintaining in the
procurement records a cost or price analysis for every procurement action.
In response to OIG and EPA direction, CSS has retroactively complied with EPA's
procurement requirements for its past procurements. It now maintains the minimum
documentation required for each procurement CSS has conducted over $100,000 and a cost or
price analysis for every procurement action it has conducted. For future procurements, CSS will
maintain the minimum required documentation for procurements over $100,000 and will conduct
a cost or price analysis for every procurement action it undertakes.
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OIG Response 19. CSS did not specifically state whether it agreed with the recommendation.
However, CSS' comments indicate concurrence with the recommended corrective action.
With regard to CSS' comment that it retroactively complied with EPA's procurement
requirements for past procurements, we were unable to verify whether the corrective actions
satisfactorily resolve the documentation and analyses issues because sufficient information
and supporting documentation was not included in the response to the draft report as discussed
in OIG Responses 16 and 17.
ii. Disallowance of Pre-2007 MY Trucks as Project Costs
The OIG Draft Report also recommends that EPA disallow the pre-2007 MY trucks as
project costs under the CA. CSS strongly objects to this recommendation, as EPA, through the
direction of CSS' EPA Project Officer, expressly approved CSS' purchase of the pre-2007 MY
trucks without retrofits as an eligible cost on the condition that they be retrofitted at a later date.
At stated above, CSS is in the process of retrofitting the trucks and will be done with the retrofits
by June 17, 2012.
OIG Response 20. Our position on the recommendation remains unchanged. CSS did not
provide during the audit or with its response to the draft report documentation showing EPA's
approval of the purchase of the pre-2007 MY trucks. As discussed in OIG Response 18, we
acknowledge that the EPA project officer confirmed with CSS that she was aware the process
of retrofitting the trucks may take a "little bit of time." However, the retrofits for the pre-2007
MY trucks had not been completed even though almost 2 years had elapsed since the project
officer confirmed her understanding of CSS' plan to upgrade the trucks with emission control
equipment as of February 2012. With regard to CSS' comment that the truck retrofits will be
completed by June 2012, the retrofits do not satisfactorily resolve the CA compliance issue
with the pre-2007 MY trucks as discussed in OIG Response 18.
V. Comments on Chapter 5 - ARRA Job Reporting
The OIG Draft Report states that CSS' reporting of jobs created or retained with Recovery
Act funds did not comply with OMB reporting guidance in two respects. First, CSS incorrectly
included in its computations CSS labor hours funded with income from the revolving fund program.
Second, it states that CSS reported as full-time equivalent (FTE) the positions of truck operators for
trucks procured by CSS with Recovery Act funding and subsequently leased to the operators.
Since EPA's award of the CA to CSS in 2009, CSS has consistently sought guidance from
EPA on how to comply with ARRA jobs reporting guidance. After EPA provided specific
guidance on ARRA job calculation methodology to all ARRA grant recipients in October 2009,
CSS proactively sought additional guidance from its EPA Project Officer on several specific
questions unique to CSS about proper application of EPA's methodology. During those
discussions, CSS and the EPA Program Office agreed upon a specific methodology that addressed
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CSS' questions, pursuant to which CSS has reported its ARRA jobs created or retained figures.
Although the ARRA jobs calculation methodology has been revised at least once, during the
second quarter of the CA project period, EPA has approved each CSS quarterly report on
Recovery Act jobs created or retained since 2009. Therefore, because CSS followed EPA's
methodology and guidance, and because EPA was approving its ARRA jobs reports, CSS believed
that the methodology it was using was appropriate and consistent with ARRA requirements.
Although CSS has been diligent in applying EPA's ARRA jobs calculation methodology,
applying that methodology to the transactions incurred under the CA has always been
challenging because the ARRA jobs methodology is inherently unclear. This is evidenced by
OIG's own struggle to arrive at a conclusive interpretation of the ARRA methodology as applied
to CSS' revolving loan fund during the OIG audit. During the audit, the OIG examiners initially
believed CSS had understated its jobs figures, but later decided that CSS had overstated its jobs
figures. Ultimately, the OIG examiners decided that almost none of the jobs CSS reported were
eligible for Recovery Act purposes. CSS believes this interpretation of the ARRA jobs
methodology is deficient, because it fails to capture the significant positive economic impacts
that CSS' revolving loan fund has had, and continues to have, on thousands of independent
truckers and small businesses. CSS believes it is beyond dispute that CSS' deployment of the CA
funds has created or helped retain the jobs of scores of truckers throughout the United States.
While CSS is willing to apply the ARRA jobs methodology as OIG and the Program Office
decide, CSS strongly believes that the methodology should reflect as accurately as possible the
actual, positive impacts that CSS has on the national economy.
OIG Response 21. Our position remains unchanged. As discussed in the draft report, we
were unable to confirm whether the EPA agreed with CSS' reporting methodology
because the first project officer is no longer employed by the EPA. With regard to CSS'
comment on EPA's approval of its ARRA reports, EPA staff did not verify that the
number of jobs created or retained in the reports were correct and met the OMB guidance
on Recovery Act quarterly reporting.
We acknowledge that applying the OMB Recovery Act reporting guidance to CSS'
revolving loan program expenditures under the CA has been challenging because the
guidance provides only general instructions and criteria. However, the guidance does
specify that recipients report the estimated number of jobs created or retained with
Recovery Act funding. As discussed in the draft report, CSS included data for jobs that
were not funded by the Recovery Act in its quarterly reports.
A. Labor Hours Funded with Income from the Revolving Loan Fund Program
The OIG Draft Report states that CSS incorrectly calculated the number of jobs created
or retained for quarterly reports covering the period October 2009 through June 2010 because
CSS included in those reports labor hours funded with income from the CSS' Revolving Loan
Fund. The OIG Draft Report states that, under OMB reporting guidance, such labor hours should
not have been included in the computation of the number of jobs created or retained because they
were not funded under the Recovery Act.
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CSS believes that were it not for the income generated by the loan fund, CSS would not
have been able to maintain and/or add the staff it reported. Thus, even though CSS has not used
CA funds directly for employee labor costs, it has used program income for such expenses. The
CA calls for CSS to "use program income under the same terms and conditions of this agreement,"
so CSS believes that labor hours funded with CA program income should be reported in ARRA
jobs calculations.12 Conservatively, CSS believes the income derived from the CA funds in CSS'
revolving loan fund has, over the course of the project period, created or preserved over 100 FTE
positions for CSS staff. Thus, these labor hours are directly attributable to Recovery Act funds. As
such, CSS reported these labor hours as jobs created with Recovery Act funds.
OIG Response 22. We acknowledge CSS' comments on income generated by the revolving
loan program. However, the OMB guidance on Recovery Act reporting specifies that
recipients report the estimated number of jobs created or retained with Recovery Act funding
as discussed in OIG Response 21. The CA programmatic condition cited in CSS' comments
establishes the allowable and required usage of program income earned as a result of the EPA
award. The programmatic condition does not pertain to the reporting of jobs created or
retained with Recovery Act funds. As discussed in the draft report, CSS overstated the number
of jobs created or retained in the quarterly reports in part because it included labor hours
funded with program income.
B. FTE Truck Operator Positions
The OIG Draft Report also states that the full-time equivalent (FTE) positions of truck
operators driving trucks procured by CSS with Recovery Act funding should not have been
reported in CSS' ARRA job figures. The OIG Draft Report states that these positions should not
have been included because the truck operators of the leased trucks are "beneficiaries" of
Recovery Act funding, rather than "recipients" or "sub-recipients."
CSS disagrees with the OIG Draft Report's interpretation of the ARRA guidance. OMB
requires that Recovery Act jobs be reported for sub-recipients, which OMB reporting guidance
defines as "non-Federal entities that are awarded Recovery funding through a legal instrument
from a Prime Recipient. Sub Recipients typically receive a contract, grant, or loan from the
Prime Recipient to support performance of any portion of a project or program funded with
Recovery dollars."13 CSS believes that, because CSS only awards CA funds to its truck operators
through legal instruments—namely, leases or conditional loans—these truck operators should
constitute sub-recipients for purposes of ARRA reporting.
The OIG Draft Report, in excluding CSS customers from ARRA reporting figures,
focused on the absence of the word "lease" from the OMB reporting guidance. CSS disagrees
and notes that (a) leases are indisputably legal instruments; (b) the phrase "contract, grant, or
loan" does not represent an exclusive list of legal instruments under which ARRA recipients can
award funds to sub-recipients, and this is signaled by the presence of the word "typically"; and
(c) interpreting the guidance to exclude these CSS customers is contrary to the intent of the
12 CA, Programmatic Condition 12.
13 OMB Guidance M-09-021, Implementing Guidance for the Reports on Use of Funds Pursuant to the
American Recovery and Reinvestment Act of2009.
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Recovery Act, which requires CSS to, as accurately as possible, report the number of all jobs
created or retained with Recovery Act funds.14
With the CA funds, CSS had, as of 12/31/2010, replaced or upgraded 1,148 trucks, and in
so doing, created or preserved the jobs of at least as many drivers, loaders, maintenance, and
dispatch staff. Using a conservative estimate of 1.5 jobs per truck, this means CSS created or
preserved 1,722 jobs, at a cost of $5,226 in Recovery Act funding per job. Thus, thousands of
truck drivers are in business and operating with clean and efficient diesel trucks because of the
Recovery Act funds granted to CSS. Had CSS not provided a mechanism for these operators to
stay in business, these jobs would have been lost and new jobs would not have been created.
OIG Response 23. We agree that leases are legal instruments. However, CSS did not provide
Recovery Act funding to truck operators through lease agreements. According to CSS'
records, it directly purchased trucks from wholesalers and fleets using Recovery Act funds.
Therefore, wholesalers and fleets received Recovery Act funds. The truck operators benefitted
from the Recovery Act funds through the truck lease agreements but did not receive Recovery
Act funding. As discussed in the draft report, CSS overstated the number of jobs created or
retained in the quarterly reports in part because it included FTE positions of operators for
trucks procured with Recovery Act funds and subsequently leased to the operators.
C. CSS Response to OIG Recommendations
The OIG Draft Report recommends that EPA (a) assist CSS with developing an ARRA
jobs reporting methodology that complies with OMB guidance; (b) correct past ARRA job
reports with erroneous estimates; and (c) direct CSS to maintain corrected ARRA jobs
documentation in its administrative records and submit any corrections to the federal government
pursuant to future Recovery Act guidance.
While CSS disagrees with the OIG Draft Report's conclusions about CSS' job reporting
figures, CSS stands ready to collaborate with the EPA Program Office to develop an ARRA job
reporting methodology that is compliant with OMB guidance. Once the revised methodology is
determined, CSS will recalculate and correct its prior ARRA quarterly reports, retain corrected
jobs documentation in its administrative records, and submit updated reports to the federal
government consistent with future Recovery Act guidance.
OIG Response 24. As discussed in the OIG responses above, our position remains unchanged
on the jobs reporting issues discussed in the draft report. However, we agree that CSS should
collaborate with EPA to develop a jobs created and retained reporting methodology that meets
OMB Recovery Act guidance. CSS' planned actions to correct the reporting errors after the
methodology is developed should satisfactorily address the recommendations.
14 ARRA § 1512(c) requires that ARRA grant recipients report "an estimate of the number of jobs created and the
number of jobs retained by the project or activity
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Appendix C
Distribution
Assistant Administrator for Administration and Resources Management
Assistant Administrator for Air and Radiation
Director, Office of Grants and Debarment, Office of Administration and Resources Management
Director, Grants and Interagency Agreements Management Division, Office of Administration
and Resources Management
Director, Office of Transportation and Air Quality, Office of Air and Radiation
Agency Follow-Up Official (the CFO)
Agency Follow-Up Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Audit Follow-Up Coordinator, Office of Administration and Resources Management
Audit Follow-Up Coordinator, Office of Air and Radiation
Audit Follow-Up Coordinator, Office of Grants and Debarment, Office of Administration and
Resources Management
Cascade Sierra Solutions, Chief Executive Officer
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