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OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
Single Audit Report for the
State of Alaska Department of
Environmental Conservation
for the Year Ended June 30, 2003
Report No. 2006-3-00167
July 26, 2006

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Report Contributors:	LeahNikaidoh
Robert Adachi
Janet Lister
Eileen Collins
Abbreviations

CFDA
Catalog of Federal Domestic Assistance
CFR
Code of Federal Regulations
Consortium
Alaska Native Tribal Health Consortium
EPA
U.S. Environmental Protection Agency
IHS
Indian Health Service
OIG
Office of Inspector General
OMB
Office of Management and Budget
Single Auditor
State of Alaska Division of Legislative Audit
State
Alaska Department of Environmental Conservation
Treasury
U.S. Department of the Treasury
USD A
U.S. Department of Agriculture

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U.S. Environmental Protection Agency	2006-3-00167
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Office of Inspector General
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At a Glance
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proI^
Catalyst for Improving the Environment
Why We Did This Review
During our review of a single
audit of the State of Alaska, we
noted that the single auditor
raised issues regarding the State's
Department of Environmental
Conservation (State) that
potentially impact the
allowability of expenditures
incurred by the State.
Background
The Single Audit Act of 1984
established uniform entity-wide
audit requirements for State and
local governments receiving
Federal financial assistance.
The single audit for Alaska for
the year ended June 30, 2003,
was performed by the State's
Division of Legislative Audit.
The Office of Inspector General
is required to review and
disseminate the results of single
audits to responsible
U.S. Environmental Protection
Agency (EPA) officials.
The State identified $33,887,200
in Federal expenditures for EPA
grants under the Alaska Village
Safe Water program.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2006/
20060726-2006-3-00167.pdf
Single Audit Report for the State of Alaska
Department of Environmental Conservation
for the Year Ended June 30, 2003
What We Found
The single audit questioned $1,166,051 in labor costs because State employees
did not account for their activities in accordance with Federal requirements. In
addition, we have questioned the balance of the EPA grant amounts of
$32,721,149 due to the following single audit results:
•	The State claimed disbursements that were advances and not actual costs.
•	The State did not correctly report assets and expenditures.
•	The State did not follow procurement procedures.
We also found that the State did not adequately monitor its subrecipients. As a
result, one subrecipient earned interest and dividend income, contrary to EPA
regulations. We estimate that the potential amount of Federal interest earned on
the over $100 million in investments from 2001 to 2003 would be over $7 million.
What We Recommend
We recommend that the Acting Regional Administrator, EPA Region 10:
•	Implement the single audit recommendations and disallow $1,166,051 of
personnel services costs;
•	Require the State to prepare and submit an indirect cost rate proposal for
indirect costs related to direct labor costs under the Village Safe Water
program;
•	Disallow the remaining $32,721,149 of costs associated with EPA funds
until the State can provide actual cost data, which includes the proper
application of the 4 percent administrative costs under each grant;
•	Require remittance of dividend and interest earned on EPA funds by its
subrecipient; and,
•	Formally place the State on a reimbursable payment basis until EPA
determines the State's cash management, labor, and financial reporting
systems fully meet Federal requirements, and the recommendations of this
report have been fully satisfied.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
July 26, 2006
MEMORANDUM
SUBJECT: Single Audit Report for the State of Alaska Department of Environmental
Conservation for the Year Ended June 30, 2003
Report No. 2006-3-00167
This is the final report on the State of Alaska Department of Environmental Conservation's
single audit for the fiscal year ended June 30, 2003. This report contains findings that describe
issues the Office of Inspector General (OIG) and the single auditor have identified and the
actions necessary to correct the deficiencies. We discussed these findings with representatives
from the State of Alaska Department of Environmental Conservation and U.S. Environmental
Protection Agency (EPA) Region 10, and issued a draft report to the State for its comments. We
have summarized the State comments in this final report and included the complete response in
Appendix A. This report represents the opinion of the OIG and the findings do not necessarily
represent the final EPA position. Final determinations on matters in this report will be made by
EPA managers in accordance with established audit resolution procedures.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $60,882.
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 any formal resolution can be completed with the State of Alaska
Department of Environmental Conservation. Your proposed decision is due on
November 13, 2006. To expedite the resolution process, please email an electronic
version of your proposed management decision to nikaidoh.leah@epa.gov.
We have no objections to the further release of this report to the public. For your convenience,
this report will be available at http://www.epa.gov/oig.
TO:
Ronald Kreizenbeck
Acting Regional Administrator
EPA Region 10

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We want to express our appreciation for the cooperation and support from your staff and
the State of Alaska Department of Environmental Conservation during our review. If you
have any questions about this report, please contact me at (202) 566-0847, or Melissa
Heist at (202) 566-0899.
Sincerely,
Acting Inspector General

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Single Audit Report for the State of Alaska Department of Environmental Conservation
for the Year Ended June 30, 2003
Table of Contents
Purpose of Audit 		1
Background 		1
Results of Single Audit		1
State Cash Management Procedures Need Improvement
(Single Audit Report Recommendation No. 32)		2
State Needs to Obtain Actual Expenditures from Consortium
(Single Audit Report Recommendation No. 33)		4
Timekeeping Not Compliant with OMB Circular A-87
(Single Audit Report Recommendation No. 34)		4
State Procurement Procedures Not Consistently Followed
(Single Audit Report Recommendation No. 35)		6
Additional Issue - Dividend and Interest Income 		7
Recommendations		8
Summary of State Response and OIG Comment		9
Scope and Methodology 		9
Status of Recommendations and Potential Monetary Benefits		11
Exhibit
1	Single Audit Report Recommendations and
Schedule of Federal Expenditures		12
Appendices
A Auditee Response 		20
B Distribution 		37

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Purpose of Audit
During our review of the single audit of the State of Alaska, the single auditor identified issues
that potentially impact the allowability of expenditures incurred by the State's Department of
Environmental Conservation (State). We are issuing the single audit for the fiscal year ended
June 30, 2003, and have provided our comments on specific areas noted in prior audit reports
issued by the U.S. Environmental Protection Agency (EPA) Office of Inspector General (OIG)
and other Governmental agencies. Based on our review of the single audit, we identified
additional issues relating to the State's timekeeping process and subrecipient monitoring that
impact the State's management of grants funded by EPA.
Background
The Single Audit Act of 1984 established uniform entity-wide audit requirements for State and
local governments receiving Federal financial assistance. Single audits are a key control for the
oversight and monitoring of recipient use of Federal awards. Federal agency actions to ensure
that award recipients address audit findings in single audit reports are a critical element in the
Federal Government's ability to efficiently and effectively administer its awards. These findings
can include internal control weaknesses; material noncompliance with the provisions of laws,
regulations, or grant agreements; and fraud affecting a Federal award. In fulfilling its
responsibilities under Office of Management and Budget (OMB) Circular A-133, Audits of
States, Local Governments, andNon-Profit Organizations, the EPA OIG is required to review
and disseminate the results of single audits to responsible EPA officials. The State of Alaska
Division of Legislative Audit performed the single audit for Alaska.
The State of Alaska recognized the need for adequate water and sewer systems through passage
of the Village Safe Water Act in 1970. The purpose of the Village Safe Water program was to
"establish a program designed to provide safe water and hygienic disposal facilities in the state."
The program receives funds from three primary sources: EPA, the U.S. Department of
Agriculture (USD A), and the State of Alaska.
In 1996, Congress amended Section 303 of the Safe Drinking Water Act to authorize grants to
the State of Alaska for the benefit of rural (non-Native) and Native villages for: (1) the
development and construction of public water systems and wastewater systems to improve the
health and sanitation conditions in the villages; and (2) training, technical assistance, and
educational programs relating to the operation and maintenance of sanitation services in rural
Native villages. Since 1995, EPA has awarded $224,980,200 to the State to fund these various
projects. For the year ended June 30, 2003, the State expended EPA funds of $33,887,200 under
its Village Safe Water program.
Results of Single Audit
The State of Alaska Division of Legislative Audit (single auditor) performed the single audit
pursuant to the provisions of OMB Circular A-133. The U.S. Department of Health and Human
Services, as the cognizant agency for the audit, was required to review the work of the single
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auditor.1 The single auditor issued an unqualified opinion on the financial statement report for
the entire State of Alaska and a qualified report on major program compliance. The qualification
referred to the Military Construction Program and did not impact EPA grant expenditures.
The single audit disclosed four findings and related recommendations (nos. 32-35) that pertain to
EPA assistance agreements, per the Catalog of Federal Domestic Assistance (CFDA) 66.606,
Surveys, Studies, Investigations and Special Purpose Grants. These findings pertain to grants
awarded to the State to fund construction projects, training, and technical assistance, as part of
the State's Village Safe Water program. The four findings represent internal control and
noncompliance areas. The single auditor questioned labor costs of $1,166,051.
Additionally, the EPA OIG has questioned the remaining grant amounts of $32,721,149 (total
questioned costs of $33,887,200) listed under CFDA 66.606 due to the magnitude of the findings
presented in the single audit, in conjunction with findings and recommendations made by our
office in prior reports.
In accordance with 40 Code of Federal Regulations (CFR) 31.12, EPA can institute special
conditions or restrictions in grant awards, including payment on a reimbursable basis. Because
of the magnitude of the findings noted, we have recommended that EPA place the State on a
reimbursable payment basis until the cash management, financial reporting, and labor accounting
systems fully meet Federal requirements, and the recommendations of this report have been fully
satisfied.
A summary of the single auditor's recommendations (nos. 32-35) and the OIG comments are
presented below. The full text of the single auditor's results and recommendations nos. 32-35,
along with the Schedule of Federal Expenditures, are included in Exhibit 1 of this report. The
entire single audit report is available upon request.
State Cash Management Procedures Need Improvement
(Single Audit Report Recommendation No. 32)
The single auditor reported that the State's cash draws and subsequent disbursements for the
Village Safe Water program are not conducted in the best interest of the State. The program's
procedures call for the advance of funds to communities to cover the needs of the project during
the construction season (April to October of each year). Payments for the projects are either sent
to an accounting firm that handles payments for Village Safe Water projects for deposit into
separate bank accounts for each project, or are provided to the Alaska Native Tribal Health
Consortium (Consortium) for the projects it administers. The Consortium is responsible for
administering the majority of Village Safe Water projects. These advances individually may be
small, but in aggregate represent a significant amount of funds outside of the State's control at
any given time.
1 Recipients expending more than $25 million a year in Federal awards shall have a cognizant agency for audit.
The designated cognizant agency for audit shall be the Federal awarding agency that provides the predominant
amount of direct funding.
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As of June 30, 2003, during the construction season, the program's accounting firm held
$11.5 million ($8.4 million in Federal funds and $3.1 million in State general funds). Using
5 percent as a long-term interest rate average, the State is losing approximately $8,000 to
$13,000 in interest each month by having these funds drawn down too early.
According to the single auditor, the State does not currently receive sufficient financial
information from the Consortium to report actual program expenditures instead of advances for
Consortium projects. In the single audit report, the auditor recommended that the State's finance
officer and Village Safe Water program manager work with the program's accounting firm and
the Consortium to move to a semi-monthly advance of funds for program projects. The State
agreed that not all advances were necessary for the entire construction season, but did not agree
with the semi-monthly disbursements recommended by the single audit.
The single auditor identified this recommendation as an Other State Issue. Based on our review
of the finding, we determined this to be a Federal noncompliance issue. Disbursements from the
State to the accounting firm and Consortium were advances and did not represent actual EPA
grant costs. The State is required under 40 CFR 31.22 and OMB Circular A-87 to claim actual
costs under EPA grants. The amounts claimed under CFDA 66.606 of the single audit were
advances and not actual costs.
The State has historically drawn funds in advance to meet cash needs for the construction season.
The accounting firm had cash balances of $13.2 million and $11.5 million as of June 30, 2002
and 2003, respectively. The amount of cash balance for the Consortium is unknown, but a
review of its Federal tax returns showed significant interest and dividend income due to cash and
security investments (see "Additional Issue - Dividend and Interest Income" section for details).
In previous OIG audit reports, we identified the same issues regarding excessive/premature
draws of cash under the EPA Village Safe Water grants. EPA Region 10 had notified the State
that funds must not be drawn in advance of actual immediate cash needs, and the Region also
rescinded its prior approval of drawing cash for the construction season.2 However, Region 10
subsequently awarded a grant that allowed the advance of funds, contrary to the U.S. Department
of the Treasury (Treasury) and EPA regulations.3 Treasury and EPA regulations require that
cash draws be close to the immediate needs or within 3 days of cash outlay. Draws should not
result in accumulation of funds, and the excess cash balances noted were due to improper draw
down procedures.
As discussed in the State's response to the single audit report (see Appendix A for the State's
response and our analysis), the State indicated that it has adopted a new financial management
system, and is drawing funds on a fully reimbursable basis for requesting grant funds. The
State's actions, pending EPA's review and approval of the State's financial management system,
should address this matter.
2	EPA Oversight for the Alaska Village Safe Water Program Needs Improvement, EPA OIG Report No. 2004-P-
00029, issued September 21, 2004.
3	Region 10's Grant for Alaska Village Safe Water Program Did Not Meet EPA Guidelines, EPA OIG Report No.
2005-P-00015, issued June 16, 2005.
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State Needs to Obtain Actual Expenditures from Consortium
(Single Audit Report Recommendation No. 33)
The single auditor reported that the State's financial statements do not correctly report assets and
expenditures for the Consortium. The single audit report said that the State does not have any
information on the Consortium's actual expenditures; the only information the State has on
expenditures is based on advance draws, as discussed regarding recommendation no. 32 above.
The State reported the cash advances as expenditures, which is not in accordance with Generally
Accepted Accounting Principles; those principles require that cash advances be reported as an
asset until payments for goods and services are made.
In the single audit report, the single auditor recommended that the State's finance officer and
Village Safe Water program manager revise the accounting procedures for the program's grants
administered by the Consortium to allow proper financial statement presentation in the State's
Comprehensive Annual Financial Report. The single auditor also recommended that the State
obtain expenditure information for projects administered by the Consortium. To meet the
requirements of 40 CFR 31.22, the expenditure information should be reported by EPA grant
number and by project.
The single auditor reported that the accounting firm handling Village Safe Water projects does
provide the State with actual expenditure information. However, in recommendation no. 32
above, it was noted that the accounting firm had cash balances of $13.2 million and
$11.5 million as of June 30, 2002 and 2003, respectively. The fact that the accounting firm had
such large cash balances suggests that the State is disbursing excess cash to the accounting firm
and may not be reporting actual costs under the EPA grants.
As discussed in the State's response to the single audit report (see Appendix A for the State's
response and our analysis), the State indicated that the Consortium performed project
reconciliations and would be placed on a reimbursable basis for requesting grant funds. The
State also informed us that the Consortium performed its reconciliation internally and that the
State did not review the Consortium's reconciliations. Until the Consortium's reconciliations
and supporting documentation are reviewed and determined to meet applicable EPA regulations,
these funds remain unsupported.
Timekeeping Not Compliant with OMB Circular A-87
(Single Audit Report Recommendation No. 34)
The single auditor questioned labor costs of $1,166,051 because labor charged to EPA's
infrastructure grants did not comply with the provisions of OMB Circular A-87. The single
auditor specifically questioned labor for two reasons.
First, for nine employees who split-fund their time, the State developed annual estimates at the
beginning of the year and used those percentages to allocate labor charges to various grants
throughout the year, regardless of the projects on which employees actually worked. OMB
Circular A-87 states the use of budget estimates does not qualify as adequate support for labor
charging.
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Second, 20 employees charged 100 percent of their time to the Village Safe Water reimbursable
service agreement, and we question whether the employees worked solely on EPA Grant No.
XP97030601. The single auditor noted that:
•	The State used EPA infrastructure grant number XP97030601 as a funding source for
recovering labor costs charged to the reimbursable service agreement. Although
employees prepared time sheets, those time sheets only identified the reimbursable
service agreement and not the actual final cost objectives.
•	The State did not prepare required certifications. OMB Circular A-87, Attachment B
states that where employees work solely on a single Federal award or cost objective, their
charges for salaries and wages will be supported by periodic certifications (at least
semiannually) that they worked solely on the grant being charged for the period certified.
However, since the Village Safe Water program had at least 10 open and active EPA grants and
also receives funds from other Federal agencies and the State, we question whether the
employees actually worked solely on EPA grant number XP97030601 during the year ended
June 30, 2003. Further, if the employees worked on products or activities funded by more than
one Federal award or cost objective, the use of certifications would be inappropriate. When
employees work on multiple activities or cost objectives, the Circular provides that a distribution
of their salaries or wages will be supported by personnel activity reports or equivalent
documentation that must: (a) reflect an after-the-fact distribution of actual activity, (b) account
for the total activity for which each employee is compensated, (c) be prepared at least monthly
and coincide with one or more pay periods, and (d) be signed by the employee. Budget estimates
or other distribution percentages determined before the services are performed do not qualify as
sufficient support.
Through discussions with the single auditor and information from the previous OIG audits, we
identified additional problems regarding the acceptability of the State's labor practices:
•	The State seems to be treating the Village Safe Water program as a final cost objective
without considering which EPA infrastructure grants are funding individual projects, and
without considering specific projects as the final cost objective. The purpose of the EPA
infrastructure grants is to fund specific projects identified in the grant application, not a
continuing environmental program. Therefore, the administrative allocation used by the
State to pay personal service costs (i.e., employee labor charges) should coincide with the
effort performed by these employees. Currently, there are 10 open EPA infrastructure
grants the State is using to fund individual projects, and we found that the State drew
funds from these various grants to pay for individual infrastructure projects.
•	Some State employees are project engineers and work on specific Village Safe Water
projects, and thus should account for their time directly to these projects. However, they
charged their time to a single, general account number. OMB Circular A-87 defines a
direct cost as any cost that can be identified specifically with a particular final cost
objective (in the case of the engineers, the particular project, since each project has a
distinct funding source). By charging the one EPA grant that is awarded in the current
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fiscal year, the engineers are not recording their time to reflect final cost objectives (a
variety of EPA grants that fund individual projects).
• The Village Safe Water program also has State employees who do not manage specific
projects (non-engineering employees), but instead perform support and oversight duties.
The single auditor provided examples of timesheets for a grants administrator, an analyst,
and the Division Director. OMB Circular A-87 defines indirect costs as those incurred
for a common or joint purpose benefiting more than one cost objective, and not readily
assignable to the cost objectives specifically benefited, without effort disproportionate to
the results achieved. The time spent by these State employees who do not manage
specific projects under the Village Safe Water program meet the definition of an indirect
cost under OMB Circular A-87 and must be recovered through a federally approved
indirect cost rate.
Recently, the State acknowledged that there were deficiencies in its labor charging practices. In
response to prior EPA OIG Report No. 2005-P-00015, Region 10 stated that starting with the
Fiscal Year 2005 Village Safe Water grant, the State will begin direct billing all Engineering,
Management, and Travel expenses to the appropriate projects, and the balance will be included
in the State's federally approved indirect cost rate.
As discussed in the State's response to the single audit report, and through subsequent
discussions with the State (see Appendix A for the State's response and our analysis), the State
has revised its timekeeping system in order to identify labor charges by the engineers to
individual projects. The State has proposed to distribute all related charges under the Village
Safe Water program to individual projects based upon the engineer's direct time charged to the
projects. The State views all of these charges as direct project costs. We have identified two
issues with this practice:
1.	Any costs not specifically identifiable to a final cost objective are, by definition, an
indirect cost. By distributing non-engineering costs using engineering costs as the base,
the State has created an indirect cost pool. Therefore, the State will need to prepare an
indirect cost rate proposal for approval by EPA.
2.	Federal law limits the State's total administrative costs to 4 percent. Until the State
correctly allocates all of its direct and indirect costs to the proper grants, there are no
assurances that the 4 percent statutory limitation has been met.
Until the State addresses these two issues, all labor charges incurred by the State remain
unsupported.
State Procurement Procedures Not Consistently Followed
(Single Audit Report Recommendation No. 35)
The single auditor reported that the State did not consistently follow procurement procedures.
The single auditor reviewed 15 procurement transactions from the Village Safe Water program
and found that 5 transactions did not follow program procedures, as follows:
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•	Two transactions failed to use necessary program purchase orders.
•	A project superintendent verbally agreed to a 1-year, $12,000 rental without going
through the proper procurement procedures or documentation.
•	A single source procurement was not properly approved by the program engineering
supervisor.
•	An existing contract was amended to include work not in the original scope of the
contract; while the program manual does not specify when a contract amendment should
be used, a State administrative code states a construction contract amendment is only
allowable if the amendment is within the scope of the original contract.
The single auditor determined that there is a weakness in the procurement process, and
recommended that the Village Safe Water program manager work with the program's engineers
to ensure that program procurement procedures are followed.
In a separate report, the State of Alaska Legislative Auditor corroborated this single audit
finding. That report4 questioned the State's spending practices and oversight of construction of
water and sewer systems through the program. There is no assurance that the procurements
made under the program comply with EPA requirements and are allowable. As a result of the
procurement weaknesses noted, procurements under EPA grants are unsupported and
unallowable.
Additional Issue - Dividend and Interest Income
The recommendations made by the single auditor raised questions concerning the role of the
Consortium in the Village Safe Water program and whether the Consortium was complying with
EPA regulations. We reviewed the Consortium's single audits and Form 990 tax returns to gain
an understanding of how the Consortium treated EPA funds received. During the review of the
Consortium's single audit and tax returns, we identified one additional issue involving dividend
and interest income.
Specifically, due to the State's drawdown practices and payment of advances to the Consortium
(as described in single audit report recommendation no. 32), the Consortium earned dividend and
interest income on Federal funds and accumulated cash and security investments. In its Form
990 Federal tax return, the Consortium reported the following:
4 Special Report on the Department of Environmental Conservation, Village Safe Water Program, Selected Projects,
Report No. 18-30028-04, issued November 19, 2003.
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Dividend and
Cash and
Percentage of
Potential Dividend

Interest
Security
Revenue from
and Interest Income
Fiscal Year Ended
Income
Investments
Federal Funds
from Federal Funds
September 30, 2001
$6,339,965
$101,599,947
63%
$3,994,178
September 30, 2002
2,522,234
115,882,148
64%
1,614,230
September 30, 2003
2,519,611
105,586,530
72%
1,814,120
Total
$11,381,810


$7,422,528
On June 29, 2005, Region 10 determined that the Consortium, as a subrecipient of Federal funds,
is not subject to the Cash Management Improvement Act. Thus, the provisions of 40 CFR
30.22(1) apply. The CFR requires that nonprofits not subject to the Act must repay interest
income earned on Federal funds. As a result, the Consortium is required to repay any dividend
and interest income earned on EPA funds. Because the majority of the reported revenues are
from Federal sources (averaging 66 percent for the 3 years in the table above), it is reasonable to
conclude that the majority of the cash and security investment accumulated and the resulting
dividend and interest income come from Federal funds.
Based on our review of the Consortium's single audit report, the Consortium did not report in its
single audits the amount of EPA funds expended. Therefore, we cannot reasonably estimate the
amount of dividend and interest income earned on EPA funds versus other Federal sources of
revenue. Based on the percentage of the Consortium's revenue from Federal funds, the potential
dividend and interest income to be repaid on EPA funds would be a portion of the calculated
$7,422,528 as of September 30, 2003. Because we were only able to obtain the Federal tax
forms for a 3-year period, we were unable to determine how much interest the Consortium
earned on its investments prior to year ended 2001. However, any interest income earned on
EPA funds awarded for Village Safe Water projects since 1995 should be recovered by EPA.
Recommendations
Along with recommendations nos. 32-35 in the single audit, we recommend that the Regional
Administrator, EPA Region 10:
1.	Disallow the unsupported personnel service costs of $1,166,051, until the State
provides sufficient documentation to support labor charges in accordance with
Federal requirements.
2.	Require the State to prepare and submit an indirect cost rate proposal for indirect
costs related to direct labor costs under the Village Safe Water program. The indirect
cost rate proposal should be submitted to EPA's Office of Acquisition Management,
Financial Analysis and Rate Negotiation Service Center.
3.	Disallow costs of $32,721,149 representing the remaining balance of CFDA 66.606
funds as unsupported until the State provides actual cost data by EPA grant, for all
EPA grants supporting the Village Safe Water program; any costs that remain
unsupported should be recovered. As part of its reconciliation process, the State will
need to review and approve the reconciliations and supporting documentation
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prepared by the Consortium. As part of its actual cost data, the State will need to
properly apply and account for the 4 percent administrative cost limitation on a grant-
by-grant basis.
4.	Require the State to have the Consortium remit the portion of interest, representing
dividends from EPA-invested funds from the inception of the Village Safe Water
program, through year ended 2003, to the U.S. Department of Health and Human
Services, Payment Management System, Rockville, Maryland 20852.
5.	Formally place the State on a reimbursable payment basis under the authority of 40
CFR 31.12 until the cash management, financial reporting, labor accounting, and
procurement systems fully meet Federal requirements, and the recommendations of
this report have been fully satisfied.
Summary of State Response and OIG Comment
We issued our draft report to the State on March 29, 2006. Based upon the State's response, we
deleted the draft's recommendation three, due to the State's steps to improve its procurement
process. The State's full response is provided in Appendix A of this report. Appendix A also
includes our comments on the State's response in shaded areas.
Scope and Methodology
The single auditor conducted the audit in accordance with Government Auditing Standards,
issued by the Comptroller General of the United States. These standards require that the auditor
obtain an understanding of the program to be audited. The understanding of the program was
obtained through analysis of the laws, regulations, and guidance pertaining to grants awarded to
the State for the Village Safe Water program and an evaluation of internal controls over the
grants. Internal controls include the processes for planning, organizing, directing, and
controlling program operations. Internal controls also include the systems for measuring,
reporting, and monitoring program performance.
In addition to the single auditor's assessment, our understanding of the internal controls was
gained through the performance of the procedures outlined below. The OIG performed its field
work from August 1 to September 30, 2005. To meet the audit objective, we reviewed the
following documents:
•	Single Audit of the State of Alaska for the Fiscal Year Ended June 30, 2003, issued on
July 6, 2004, performed by the State of Alaska Division of Legislative Audit.
•	EPA Oversight for the Alaska Village Safe Water Program Needs Improvement,
EPA OIG Report No. 2004-P-00029, issued September 21, 2004.
•	Region 10's Grant for Alaska Village Safe Water Program Did Not Meet EPA Guidelines,
EPA OIG Report No. 2005-P-00015, issued June 16, 2005.
•	Special Report on the Department of Environmental Conservation, Village Safe Water
Program, Selected Projects, Report No. 18-30028-04, issued November 19, 2003,
performed by the State of Alaska Division of Legislative Audit.
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•	Federal Form 990 for the Alaska Native Tribal Health Consortium for the fiscal year
ended June 30, 2003.
•	Single Audit Report for the Alaska Native Tribal Health Consortium for the fiscal years
ended June 30, 2002, 2003, and 2004.
•	Project Funding Agreements between Indian Health Service and Alaska Native Tribal
Health Consortium for funds received from the Village Safe Water program.
•	EPA Region 10 Determinations concerning the applicability of the Cash Management
Improvement Act to the Alaska Native Tribal Health Consortium.
Instances of noncompliance with laws, regulations, and guidance, and deficiencies in the State's
internal control system have been identified and included in this report. Recommendations have
been made to correct the deficiencies.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Action Official
Planned
Completion
Date
Claimed
Amount
Agreed To
Amount
Disallow the unsupported personnel service costs
of $1,166,051, until the State provides sufficient
documentation to support labor charges in
accordance with Federal requirements.
Require the State to prepare and submit an indirect
cost rate proposal for indirect costs related to direct
labor costs under the Village Safe Water program.
The indirect cost rate proposal should be submitted
to EPA's Office of Acquisition Management,
Financial Analysis and Rate Negotiation Service
Center.
Disallow costs of $32,721,149 representing the
remaining balance of CFDA 66.606 funds as
unsupported until the State provides actual cost
data by EPA grant, for all EPA grants supporting
the Village Safe Water program; any costs that
remain unsupported should be recovered. As part
of its reconciliation process, the State will need to
review and approve the reconciliations and
supporting documentation prepared by the
Consortium. As part of its actual cost data, the
State will need to properly apply and account for
the 4 percent administrative cost limitation on a
grant-by-grant basis.
Require the State to have the Consortium remit the
portion of interest, representing dividends from
EPA-invested funds from the inception of the
Village Safe Water program, through year ended
2003, to the U.S. Department of Health and Human
Services, Payment Management System,
Rockville, Maryland 20852.
Place the State on a reimbursable payment basis
under the authority of 40 CFR 31.12 until the cash
management, financial reporting, labor accounting,
and procurement systems fully meet Federal
requirements, and the recommendations of this
report have been fully satisfied.
Acting Regional
Administrator for Region 10
Acting Regional
Administrator for Region 10
$1,166
Acting Regional
Administrator for Region 10
$32,721
Acting Regional
Administrator for Region 10
Acting Regional
Administrator for Region 10
1 O = recommendation is open with agreed-to corrective actions pending;
C = recommendation is closed with all agreed-to actions completed;
U = recommendation is undecided with resolution efforts in progress
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Exhibit 1
Single Audit Report Recommendations and
Schedule of Federal Expenditures
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
One recommendation was made to the Department of Environmental Conservation (DEC) in the
State of Alaska, Single Audit for the Fiscal Year Ended June 30, 2002. Prior year
Recommendation No. 43 has been resolved.
Additionally, four new recommendations have been made and are included as Recommendation
Nos. 32 through 35.
Recommendation No. 32
The Department of Environmental Conservation (DEC) finance officer and Village Safe Water
(VSW) program manager should work with the State's cash manager to establish VSW
disbursement procedures which maximize conservation of the State's general fund (GF).
The way in which VSW grants are currently distributed is not in the best financial interest of the
State. VSW grants are for the construction of water and sewer facilities in the smallest of
Alaska's communities. DEC's procedures call for the advance of funds to communities to cover
the needs of the project during the construction season. Payments for the construction projects
are either sent to an accounting firm for deposit into separate bank accounts for each project or
provided to the Alaska Native Tribal Health Consortium (ANTHC) for the projects they
administer.
Procedures for advances were initially established over a decade ago to address the difficulties
related to rural Alaska's isolation and short intense construction seasons. Communication
technology has greatly reduced this handicap for the bush community today. Funds can now be
received much more timely from the State, making large advances no longer needed to balance
the fiscal responsibilities of administering projects and the financial interests of the State.
These advances individually may be small, but in aggregate they amount to a significant amount
of funds outside of the State's control at any given time. In March of 2003 the VSW accounting
firm held approximately $8.1 million in cash from the State, of which approximately $2 million
was State general funds. At June 30, 2003, during the construction season, the VSW accounting
firm held $11.5 million. The $11.5 million is comprised of $8.4 million in federal funds passed
through the State, and $3.1 million in state general funds. Using 5% as a long-term interest rate
average, the State is losing approximately $8,000 - $13,000 in interest each month.
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As mentioned earlier, funds are also advanced to ANTHC for the VSW projects they administer.
During FY 03, 44% of funds advanced for VSW projects (federal pass-through and State GF
matching funds), went to ANTHC. As discussed in Recommendation No. 33, DEC does not
currently receive sufficient financial information from ANTHC to report actual VSW
expenditures instead of advances for ANTHC projects. As a result, VSW project cash balance
amounts at June 30, 2003 are not readily available.
Given the speed at which funds can be transferred, it is no longer necessary to provide advances
for an entire construction season. Currently, the accounting firm pays payroll for VSW projects
once every two weeks. The nonpayroll invoices for VSW projects are accumulated for two
weeks and paid at once on the week between payrolls. DEC engineers approve payroll and all
invoices before the accounting firm makes the payments. Therefore, there is abundant
information available to allow for advances of grant funds which more closely approximate the
timing of disbursements. DEC should provide funds based on semimonthly billings from
ANTHC and the accounting firm. These semimonthly billings can be based primarily on invoices
received and not yet paid for VSW projects. Advancing grant funds using electronic funds
transfers on a semimonthly, or even monthly, basis would greatly reduce the excessive cash
balances currently maintained for VSW grantees. Working with the State's cash manager could
maximize establishing procedures that are the most effective and efficient in meeting the VSW
administrative needs and financial interests of the State.
The U.S. Treasury Financial Manual states: "The timing and amount of cash advances will be as
close as is administratively feasible to the actual disbursements by the recipient organization for
direct program costsDEC should be aware that the Environmental Protection Agency (EPA)
could enforce a more stringent interpretation of this federal requirement at any time.
We recommend that DEC's finance officer and VSW program manager work with the VSW
accounting firm and ANTHC to move to a semimonthly advance for funding VSW projects.
Agency Response - Department of Environmental Conservation
This recommendation centers on the prescribed practice of advancing project funding to either
the VSW accounting firm or the Alaska Native Tribal Health Consortium (ANTHC). We will
review our policies and procedures and look at ways to improve our cash management practices
regarding the advancement offunding for VSW projects.
While it is true that VSW procedures for advances were originally established over a decade
ago, it is not accurate to say that communication technology has significantly reduced the
handicap of construction activities and associated requests for project funding in rural Alaska. If
anything, the handicap has grown larger because of the complexities entailed with managing
multiple state andfederal sources ofproject funding, which was not the case a decade ago.
Contrary to your recommendation, there is a great deal more required in making an advance
than the transfer and receipt of funding, which admittedly requires little time. In particular, each
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request for a transfer of funds requires that the VSW Program Manager and Grant Manager
each confirm that a number of grant requirements are being met. These grant requirements have
been established to ensure program compliance with the multiple federal funding sources, and to
promote continued safe, sustainable operation of rural sanitation facilities. For example, the
VSW Program Manager works closely with the Manager for the Department of Community and
Economic Development's Rural Utility Business Advisor (RUBA) program in reviewing requests
for most advances. The RUBA program provides information about Essential Capacity
Indicators (ECIs) for every community that receives a VSW grant, and notifies VSW about
concerns. Requests for funding advances may be denied if ECIs are not being adequately
addressed by the grantee.
Because of the attention and time required to adequately review each request for a funding
advance, and the continuing demands of rural construction management in Alaska, we do not
agree with your recommendation to advance funds on a semimonthly basis. This is because of
the increased risk associated with the advancement of funds for projects where sustainability is
in question.
We acknowledge that in most cases there is no need to provide advances for an entire
construction season, and that the VSW procedures need to be reviewed, and revised to reflect a
consistent process entailing more frequent advances. It is our intent at this time to review this
process in attempt to identify ways to that may reduce the period of time for which advances are
now issued.
Contact Person:	Gary Zepp, Financial Officer
Telephone: 907-465-5289
Legislative Audit's Additional Comments
We have read DEC's response to this recommendation and nothing contained in the response has
provided sufficient information to persuade us to remove or revise this recommendation.
DEC acknowledges that some improvements can be made on the cash management aspect of the
Village Safe Water program. We encourage DEC to minimize the dollar amount and duration for
any cash advances while maintaining the necessary internal controls for both cash advances and
expenditures.
Recommendation No. 33
The DEC finance officer and the VSW program manager should revise the accounting
procedures for VSW grants administered by ANTHC to allow proper financial statement
presentation in the State's Comprehensive Annual Financial Report.
DEC's accounting for VSW grant disbursements to ANTHC is inappropriate for purposes of
financial reporting per generally accepted accounting principles (GAAP). VSW grant
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disbursements to ANTHC are reported as expenditures for the ANTHC-administered projects. In
accordance with GAAP, these payments represent advances, not expenditures.
Expenditures occur when the State incurs a financial liability. The signed project agreement in
itself does not create a financial liability. The point at which the State is financially liable and
expenditures should be recorded for VSW grants administered by ANTHC is at the
receipt of goods or services for authorized construction projects. Payments made prior to this
remain assets of the State and should be classified as advances to the community.
DEC should require ANTHC, at the end of the fiscal year, to provide the State with the financial
information necessary to report actual VSW expenditures for the projects administered by
ANTHC. DEC already requires this information from the accounting firm that handles project
payments for VSW grants administered by DEC.
Alternately, in our view, improved cash management procedures, as discussed in
Recommendation No. 32, would be a more effective way to promote reporting consistent with
GAAP. Better cash management practices would minimize the time between advances and
expenditures. This would allow disbursements to ANTHC and the accounting firm to be
considered a reasonable approximation of VSW expenditures. This would occur if disbursements
to ANTHC and the accounting firm were made on a semimonthly basis.
We recommend that the finance officer and VSW program manager revise their accounting
procedures so that DEC can identify and report VSW grant expenditures for projects
administered by ANTHC for the State's fiscal year as they do for projects with the accounting
firm.
Agency Response - Department of Environmental Conservation
The Department supports this recommendation and will work with ANTHC to develop ayearend
report which reflects actual expenditures of VSWfunding and actual balances remaining.
Contact Person:	Gary Zepp, Financial Officer
Telephone: 907-465-5289
Recommendation No. 34
The DEC finance officer should implement procedures to ensure personal services expenditures
charged to the EPA infrastructure grants comply with federal cost principles.
DEC is not following applicable federal guidance for the personal services costs charged to the
FY 03 EPA infrastructure grant. VSW personal services costs are charged to the EPA
infrastructure grant through a yearly reimbursable service agreement (RSA). During FY 03, 29
DEC employees charged personal services costs to the FY 03 EPA infrastructure grant. Of those
who charged time to the EPA infrastructure grant, 20 charged 100% of their time, and the
remaining nine charged only a portion of their time.
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Office of Management and Budget (OMB) Circular A-87 requires that salaries of employees
chargeable to more than one federal grant or other cost objective be supported by appropriate
time distribution records. State agencies with approval from federal program managers, may
utilize an alternative system. OMB Circular A-87 states that budget estimates or other
distribution percentages determined before the services are performed do not qualify as support
for charges to Federal awards. Charges for employees working solely on a program funded by a
single federal award will be supported by periodic (at least semiannual) certifications that the
employee worked solely on that program for the period covered by the certification.
We reviewed time sheets for employees charging time to the EPA infrastructure grant, and found
that DEC is not following OMB Circular A-87 requirements for charging personal services costs
to federal programs. Split-funded employees' time was being charged to the EPA infrastructure
grant based on annual estimates which are intended to represent the percent of total time devoted
to the programs charged. Further, employees charging 100% of their time to the EPA
infrastructure grant did not prepare certifications stating the employee worked solely on the
program for the period covered by the certification. While the employees charging 100% of their
time to the EPA infrastructure grant maintained time sheets, the timesheets did not directly
indicate that 100% of the time was being charged to the EPA infrastructure grant, but rather
charged to the VSW Administration RSA.
Finally, we found that all VSW personal services costs were being charged to the EPA
infrastructure grant, CFDA 66.606. No VSW personal services costs were charged to United
States Department of Agriculture - Rural Development (USDA-RD) - CFDA 10.760, even
though VSW activities benefit both programs.
Given the lack of required OMB Circular A-87 support for the personal services costs charge to
EPA infrastructure grant, we question the federal portion of all personal service costs charged to
CFDA 66.606 through the EPA infrastructure grant ($1,166,051).
We recommend the DEC finance officer implement procedures to ensure that VSW personal
service costs comply with OMB Circular A-87 requirements.
CFDA: 66.606 Federal Agency: EPA Questioned Costs: $1,166,051
Agency Response - Department of Environmental Conservation
The Department supports this recommendation. Steps are being taken to ensure that those
employees funded 100% by a federal grant will complete bi-annual certifications. Additionally,
for those funded by multiply [multiple] funding sources, actual hours worked on a particular
project will be reflected on the employee timesheet.
Contact Person:	Gary Zepp, Financial Officer
Telephone: 907-465-5289
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Recommendation No. 35
The VSW program manager should work with project engineers to strength internal controls
over the VSW procurement process.
DEC did not consistently follow procurement procedures for VSW projects. VSW procedures,
including procurement, are prescribed in the EPA approved VSW procedures manual. DEC
engineers, in addition to onsite managers/superintendents hired by the village, are required to
follow the VSW procedures manual.
We reviewed 15 procurement-related transactions from eight projects which were funded by
EPA infrastructure grants. Of the 15 projects reviewed, five did not follow VSW procedures in
some manner:
Two transactions failed to use necessary VSW purchase orders.
A project superintendent verbally agreed to a one year, $12,000 rental without going
through the proper procurement procedures or documentation.
A single source procurement was not properly approved by the VSW engineering
supervisor.
An existing contract was amended to include work not in the original scope of the
contract. While the VSW manual does not specify when a contract amendment should be
used, the Alaska Administrative Code 12.485(b) is clear that a construction contract
amendment is only allowable if the amendment is within the scope of the original
contract.
While no error was significant on its own, the number of errors indicates a weakness in the
internal controls over the VSW procurement process. We recommend the VSW program
manager work with the VSW engineers to ensure VSW procurement procedures are followed.
CFDA: 66.606 Federal Agency: EPA Questioned Costs: None
Agency Responses - Department of Environmental Conservation
The Department supports this recommendation. The Division of Water has created a
procurement specialist position to support the VSW program to provide the kind of support and
guidance needed to strengthen both internal controls and provide training and oversight for
project engineers and superintendents. We share your interest in achieving practices which are
fully consistent with procurement policies.
Contact Person: Gary Zepp, Financial Officer
Telephone: 907-465-5289
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1- ill iu Q a. m UJ •
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Appendix A
Auditee Response
410 Willoughby Ave., Ste 303
Post Office Box 111800
Juneau, AK 99811-1800
OFFICE OF THE COMMISSIONER	phone: (907) 465-5066
FAX: (907) 465-5070
http: / / www.dec.state.ak. us
May 5, 2006
Michael A. Rickey, Director
Assistance Agreement Audits
US Environmental Protection Agency
Washington, D.C. 20460
RE: Single Audit Report for the State of Alaska Department of Environmental
Conservation for the Year Ended June 30, 2003
Dear Mr. Rickey:
Enclosed please find the response to the draft report on the results of the State of Alaska
Department of Environmental Conservation (DEC) Single Audit Report for the year ended June
30, 2003, as well as the additional findings and recommendations prepared by the Office of the
Inspector General (OIG) of the U.S. Environmental Protection Agency.
We have reviewed the findings and recommendations in the above referenced report and
appreciate the opportunity to respond. Upon receipt of the original Single Audit Report in July
2004 the department determined that it was necessary to do a full evaluation all of the Village
Safe Water program. As a result of this evaluation extensive changes were made to the policy
and procedures that governed this program. After your review of the information we are
providing here we feel that you will find all of the procedural concerns raised in this report have
been addressed in full.
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The Single Audit Report for the period ended June 30, 2005 has yet to be released, however,
preliminary results indicate that there will be no recommendations for this year. This along with
the single auditors agreement with the information contained in the Summary of Prior Audit
Findings further support our conclusion that all necessary corrective action has been completed.
In the enclosed document each issue addressed in the OIG audit report is restated and is then
followed by our comments related to each. Thank you for providing this opportunity to
comment on your findings and recommendations. If you have any questions or need additional
information regarding our response, please contact Laura Beason at 907-465-5273.
Sincerely,
Kurt Fredriksson
Commissioner
Enclosures
Cc: Lynn Kent, Director, Division of Water
Mike Maher, Director, Division of Information & Administrative Services
Pat Davidson, Legislative Audit
Nikki Rouget, Legislative Audit
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Department of Environmental Conservation Response to the Office of the
Inspector General (OIG) Draft Report Dated March 29, 2006
[Note: The State included excerpted portions of the single audit report. We deleted these excerpts from
Appendix A because it duplicated information already contained in this report.]
"State Cash Management Procedures Need Improvement
(Single Audit Report Recommendation No. 32)
STATE OF ALASKA COMMENT:
As a result of a complete program review during fiscal year 2005 a new financial management
system was identified and implemented. Full implementation of this new system was completed
in December 2005. As mentioned above the accounting for this program was previously handled
by a contracted accounting firm. The accounting firm was required to maintain individual bank
accounts for each project. Under this system advances were needed to ensure cash was available
within these bank accounts to pay project invoices. Under the new process all accounting for
each project under the Village Safe Water (VSW) program is now handled by State of Alaska
employees and all project expenditures are recorded in the state's accounting system.
The most significant change in regards to cash management procedures is the method by which
we now request federal funds under the VSW program. With the elimination of the contracted
accounting firm cash advances are no longer necessary. Requests for federal funds are now
made only after the project expenses have been paid with state general funds through the state's
accounting system. In other words the VSW program is now operating on a fully reimbursable
basis and the cash balance on hand is zero.
OIG Comment: Pending \eiilicaiion of compliance with OMIi Circular A
X7 and 4<) (T'R I 22. the Slate's actions should address the findings raised in the Single
Audit.
"State Needs to Obtain Actual Expenditures from Consortium
(Single Audit Report Recommendation No. 33)
STATE OF ALASKA COMMENT:
As part of the transition from the contracted accounting firm to the state's accounting system a
contract was issued that required the reconciliation of all projects being managed by the
contracted accounting firm. This was completed in fiscal year 2005. As a result of this
reconciliation we can now easily identify actual expenditures by project, by federal grant and by
state appropriation. Attachment #1 is a sample of the project reconciliation information
available. All project information is available for review.
The review of the VSW program also included an analysis of our relationship with the Indian
Health Service (IHS) and their representative in Alaska the Alaska Native Tribal Health
Consortium (ANTHC) and in particular the method of advancing project funds. This review
22

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resulted in eliminating the practice of advancing funds to IHS/ANTHC. They were notified of
this change in fiscal year 2005. As part of the change in process IHS/ANTHC has been required
to reconcile each project to determine actual expenditures to date and to return funds not yet
spent to the State of Alaska. These funds are then returned to the appropriate federal funding
agency.
IHS/ANTHC contracted with an accounting firm to perform this reconciliation, which is now
substantially complete. However, there are still eight community accounts in which the
reconciliations have not been completed. The last advance payment made to the IHS/ANTHC
occurred in October 2005. Since that date only payments for reimbursement of actual
expenditures have been made. These payments have been for only those projects in which
certified reports detailing expenses by project and by funding source have been received. For the
projects managed by IHS/ANTHC, the project reconciliations have taken longer than expected.
To ensure a timely completion of this process the VSW discontinued reimbursable payments to
IHS/ANTHC for all requests received after March 1, 2006. Attachment #2 is a copy of the
directive given to IHS/ANTHC on this issue.
The amount of cash on hand at IHS/ANTHC is far less than the amount of funding actually owed
to them for their project expenses already incurred. As a result of their desire to get this resolved
and to reinstate the expense reimbursement process they are going to return 100% of the funding
for those projects in which they can't provide a certified detailed expenditure report. We expect
this payment transaction to occur no later than the middle of May 2006. IHS/ANTHC will of
course be allowed to request reimbursement for these project expenditures once the
reconciliations are complete.
With the implementation of our new accounting process and the project reconciliation
performed, the VSW program has complete documentation to support all project costs under
these federal infrastructure grants. Any additional documentation required is available for
review.
OIG Comment: The changes made by the State are significant and show a concerted
effort to correct longstanding internal control and financial management weaknesses.
Given the magnitude of changes made, the State's accounting process will need to be
reviewed and approved by EPA. Therefore, the costs will remain questioned until such a
review is completed and any related issues are resolved.
The project reconciliation provided by the State in Attachment 1 showed a reconciliation
of expenditures to the funded amount. It is unclear whether the funded amount reflects the
cash drawn for the project or is just a budgeted figure. In order for the reconciliation to
address the finding, the State will need to compare expenditures against the amount of
cash drawn for the project to determine whether any excess cash exists. The State will
also need to ensure that the expenditures have adequate supporting documentation, and are
allowable under applicable Federal regulations.
In connection with the Consortium, the reconciliation performed by the Consortium will
need to be reviewed for adequacy and allowability. The State has informed us that it has
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not reviewed the Consortium's reconciliation process or examined any related supporting
documentation. As a result, any costs allocable to the Consortium will remain questioned.
"Timekeeping Not Compliant with OMB Circular A-87
(Single Audit Report Recommendation No. 34)
STATE OF ALASKA COMMENT #1:
The statement that employees performing administrative and oversight duties would "normally
be considered indirect" is not accurate and we would recommend that this statement be removed
or restated. The following are excerpts from A-87 and a clarification memorandum produced by
the U.S. Department of Health and Human Services that illustrate this point.
•	OMB Circular A-87 Attachment A, D.2 Classification of Costs, "There is no universal
rule for classifying certain costs as either direct or indirect under every accounting
system."
•	Another federal agency has produced a clarification memorandum outlining direct costs
versus indirect, or "administrative," costs. Per U.S. Department of Health and Human
Services CSBG Memorandum 27 Definition and Allowability of Direct and
Administrative Costs, December 10, 1999: "Direct program costs are incurred for the
service delivery and management components within a particular program or project.
Therefore, direct costs include expenditures on some activities with administrative
qualities, including salaries and benefits of program staff and managers, equipment,
training, conferences, travel, and contracts, as long as those expenses relate specifically to
a particular program or activity, not to the general administration of the organization."
In the Department of Environmental Conservation (DEC), the indirect rate incorporates the costs
of providing department-wide centralized general administrative services. Charges for staff
performing administrative functions dedicated to a particular program (not department-wide) are
not included in the department's indirect rate. DEC fulfills the required test of treating "like
costs in like circumstances" the same, and ensures that allowable costs are either direct or are
included in the indirect rate - not both.
OIG Comment: In its response, the State disagreed with the EPA OIG's position that costs
associated with State employees performing non-engineering functions should be charged
indirectly. To support its argument, the State included a portion of OMB Circular A-87 and
relied upon a definition from another Federal agency in support of its treatment of
administrative functions as direct costs. The State believes that since the staff performing
administrative functions benefits the Village Safe Water program as a whole, these labor
charges should be treated as direct costs. The State's position is dependent on the premise
that the Village Safe Water program is a final cost objective. However, for the purpose of
the EPA grants and what they are funding, the State has incorrectly defined the Village Safe
Water program as a final cost objective.
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The single auditor's finding was that the State was following OMB Circular A-87 for
charging costs to Federal programs. OMB Circular A-87 defines direct costs as those that
can be identified specifically with a particular final cost objective. The VSW is responsible
for projects funded through various sources, including EPA, USD A, and State of Alaska
funds. The individual grant(s) and the associated projects represent the final cost objective,
not the Village Safe Water program. If the Village Safe Water program was the final cost
objective, the State should have, at a minimum, been allocating all of its related costs to all
the various funding sources. Instead, the single auditor found that only the current EPA
grant was being charged.
The non-engineering costs incurred by the State of Alaska to oversee these grants meet
OMB Circular A-87's definition of an indirect cost, which is defined as:
(a) incurred for a common or joint purpose benefiting more than one cost objective,
and (b) not readily assignable to the cost objectives specifically beneffited, without
effort disproportionate to the results achieved.
STATE OF ALASKA COMMENT #2:
The report excerpt above includes the following statement, ".. .the State will begin direct billing
all Engineering, Management and Travel expenses to the appropriate projects and the balance
will be included in the State's federally approved indirect cost rate."
To clarify and ensure there is no misunderstanding, engineers charge time directly to projects.
Supervisors and staff directly supporting the engineers do the following:
1.	Separately identify time spent supporting the Village Safe Water engineering staff each
pay period on their activity report (timesheet), and
2.	Those charges are then allocated to the projects supported as a direct (not indirect) charge
according to the provisions of Circular A-87 Attachment B, 8.h(6)(b).
This process has been reviewed and approved by staff within EPA and is outlined in Attachment
#3, Memorandum of Understanding between the State of Alaska, Department of Environmental
Conservation, The U.S. Department of Agriculture and the U.S. Environmental Protection
Agency.
OIG Comment: The State's response conflicts with the OMB treatment of the costs
associated with State personnel supporting the staff that works directly on projects. This
process is not a direct allocation, but is in fact the accumulation and allocation of indirect
costs.
OMB Circular A-87, Attachment A, E(l) defines a direct cost as ".. .those that can be
identified specifically with a particular final cost objective." It goes on to state typical
direct costs chargeable to Federal awards include "Compensation of employees for the
time devoted and identified specifically to the performance of those awards."
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Conversely, an indirect cost is defined by OMB Circular A-87 as those costs that are
"incurred for a common or joint purpose benefiting more than one cost objective, and (b)
not readily assignable to the cost objective specifically benefitted, without effort
disproportionate to the results achieved."
The process that the State describes is the accumulation of costs into a separate cost pool
prior to allocation to projects, which are the final cost centers. The State's process meets
the definition of an indirect cost, described in OMB Circular A-87, Attachment A, F(l):
To facilitate equitable distribution of indirect expenses to the cost objectives served,
it may be necessary to establish a number ofpools of indirect costs within a
governmental unit department or in other agencies providing services to a
governmental unit department. Indirect cost pools should be distributed to
benefitted cost objectives on bases that will produce an equitable result in
consideration of relative benefits derived.
The State is also misinterpreting the use of OMB Circular A-87, Attachment B, 8.h(6)(b).
Paragraph 8 is entitled "Compensation for personal services," and discusses the
composition of personal services, including fringe benefits and pension costs. Paragraph
8.h discusses the standards regarding support for salaries and wages, including time
distribution and related documentation. Subparagraph 8.h(6) states the following:
(6) Substitute systems for allocating salaries and wages to Federal awards may be
used in place of activity reports. These systems are subject to approval if required
by the cognizant agency ...(6) (b) Allocating charges for the sampled employees'
supervisors, clerical and support staffs, based on the results of the sampled
employees, will be acceptable.
This provision does not authorize the allocation of labor charges as a direct cost. This
provision simply allows a grant recipient to allocate personnel service compensation when
activity reports (i.e., adequate documentation, timesheets, etc.) are not available. This fact
is supported by Subparagraph 8.h(4), which states:
Where employees work on multiple activities or cost objectives, a distribution of
their salaries will be supported [emphasis added] by personnel activity reports or
equivalent documentation which meets the standards in subsection (5) unless a
statistical sampling system ...or other substitute system has been approved by the
cognizant Federal agency.
The State is also incorrect in stating that EPA staff can approve this labor distribution
process. Because the allocated labor method proposed creates an indirect cost pool, the
new indirect cost pools can only be approved by the cognizant Government agency
responsible for negotiating final indirect cost rate for the State. Since EPA is the
cognizant agency for the State, then the approval would need to come from EPA's Office
of Acquisition Management, Financial Analysis and Rate Negotiation Service Center.
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Therefore, in order to properly account for and allocate the non-engineering support staff
charges, the State will need to develop and submit an indirect cost rate proposal to EPA
for approval.
STATE OF ALASKA COMMENT #3:
The report excerpt above includes the following statement. "The purpose of the EPA
infrastructure grants is to fund specific projects identified in the grant application, not a
continuing environmental program." It has been clearly understood by DEC staff as well as
Region 10 EPA staff that from the incorporation of the administrative funding for this program
that the administrative funding provided (if any) would be used to cover the administrative costs
for managing all EPA funded infrastructure grants during each state fiscal year regardless of
which projects were being worked on during that year.
To further support our position we reviewed P.L. 104-[182], which amended Section 303 of the
Safe Drinking Water Act and added the administrative component. Section 303 reads as follows:
"(a) IN GENERAL- The Administrator of the Environmental Protection Agency may make
grants to the State of Alaska for the benefit of rural and Native villages in Alaska to pay the
Federal share of the cost of—
(1)	the development and construction of public water systems and wastewater systems
to improve the health and sanitation conditions in the villages; and
(2)	training, technical assistance, and educational programs relating to the operation
and management of sanitation services in rural and Native villages...
(c) ADMINISTRATIVE EXPENSES- The State of Alaska may use an amount not to exceed 4
percent of any grant made available under this subsection for administrative expenses
necessary to carry out the activities described in subsection (a)."
The Administrative component of each grant year was used in accordance with the above - for
administrative activities necessary to carry out the activities described above. There is no
stipulation that this administrative component may only be used to carry out activities funded
under the same particular grant year.
Additionally, this use of Administrative component is consistent with the use of the Drinking
Water State Revolving Fund program's administrative set-aside, which is also authorized under
the Safe Drinking Water Act. Under this program, up to 4% of an individual grant's funding may
be used to administer loans made from the loan fund. Similarly, there is no stipulation that this
administrative set-aside only be used to administer loans made from the same grant year's funds.
OIG Comment: We do not agree with the State's response in connection with the
allowable period for administrative costs or what constitutes administrative costs subject
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to the 4 percent limitation. OMB Circular A-87, which establishes applicable cost
principles,5 states that the Circular is intended to assure the "efficient administration of
Federal awards." While it uses but does not directly define the term "administrative
costs," as it does other cost terms, such as "direct" and "indirect" costs,6 the most explicit
treatment about administrative costs is seen in Attachment D, wherein OMB states "All
administrative costs (direct and indirect) are normally charged to Federal awards by
implementing the public assistance cost allocation plan." Again, OMB does not say
precisely what is or is not included in administrative costs, though it seems clear that there
are or can be both direct and indirect cost components to administrative costs.
In addition, while Circular A-87 separately discusses certain categories of cost items, such
as advertising and travel, there is no specific category for "administrative." If
administrative costs were considered as a specific subset category of costs, it is reasonable
to assume that OMB would have treated it in similar fashion.
Based on the above, "administrative costs" is a general term that refers to all of the costs
of executing or managing the program, and that it is composed of both direct and indirect
costs. Thus, for example, the issue of how the Alaska Department of Environmental
Conservation categorizes the cost of its project engineers as either direct or indirect costs
is not relevant as far as 33 U.S.C. ง 1263a(c) is concerned because both fall under
administrative costs.
The statute provides that the administrative percentage cap applies to "any grant" and does
not contain further words of limitation, e.g., to fiscal year. Nothing in this language
suggests that the cap only applies to the fiscal year in which the grant is awarded. Rather,
it seems clear that the percentage cap applies to administrative expenses over the life of
the grant. As such, there is no "grant year" that applies to the administrative costs, as
argued by the State. Instead, the administrative cost cap of 4 percent is meant to apply to
administration of the projects funded under the grant.
STATE OF ALASKA COMMENT #4:
As noted above we do acknowledge that our labor charging practices during this fiscal year did
not meet the requirements outlined in OMB Circular A-87. However, we are in the process of
developing an alternative allocation process in accordance with OMB Circular A-87 Section 8,
Subsection 6(c) for these labor charges. We will be submitting this proposal to EPA for
consideration. We will await further instruction from EPA on how this proposal process should
proceed.
5	Pursuant to 40 CFR Part 31.22, the Alaska Department of Environmental Conservation must follow OMB
Circular A-87 cost principles, which "establishes principles and standards for determining costs for Federal
awards carried out through grants, cost reimbursement contracts, and other agreements with State and local
governments and federally recognized Indian tribal governments."
6	"Direct costs are those that can be identified specifically with a particular final cost objective." A-87,
Section E (1). "Indirect costs are those: (a) incurred for a common or joint purpose benefiting more than
one cost objective, and (b) not readily assignable to the cost objectives specifically benefited, without effort
disproportionate to the results achieved." Id., Section F (1).
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OIG Comment: The State acknowledges that its labor charging practices did not comply
with OMB Circular A-87. In its response, the State provided alternatives to address
historical costs. We have no comment regarding any of the alternatives provided except
that the section referred to by the State is only allowable under certain circumstances.
OMB Circular A-87, Attachment B, Section 8.h(6)c states:
Less than full compliance with the statistical sampling standards noted in
subsection (a) may be accepted by the cognizant agency if it concludes that the
amounts to be allocated to Federal awards will be minimal, or if it concludes that
the system proposed by the governmental unit will result in lower costs to Federal
awards than a system which complies with the standards.
As discussed previously, OMB Circular A-87, 8.h(6) simply allows for a means to allocate
personnel service costs, in lieu of activity reports, and does not relate to what alternative
systems can be used. The State has not demonstrated that it is unable to prepare activity
reports for all personnel; instead, the State is using Section 8.h as its basis for allocating
indirect labor costs and treating these costs as direct charges. Again, any cost that is not a
direct cost is an indirect cost. Indirect costs needs to be accumulated into pools and
allocated as an indirect expense. Until the State correctly treats the allocated labor as
indirect costs, we have no opinion or basis for accepting any alternatives proposed by the
State to allocate prior labor costs to the various EPA grants. Additionally, the State must
treat these costs consistently across all of its projects, including USDA and State-funded
projects.
In order for any of the alternatives to be allowable, the State will need to demonstrate that
the amount allocated to the grants are minimal or will result in less costs than what would
have been allowed had the State's labor charging practices complied with OMB Circular
A-87. In order for this to happen, the State, for each grant, will need to provide
appropriate documentation that not only supports the direct project costs charged (as
discussed in the previous findings), but also correctly identifies and applies the 4 percent
administrative charge to the grants. Until this full reconciliation is performed and
reviewed, the $1,166,051 in labor charges remain questioned.
"State Procurement Procedures Not Consistently Followed
(Single Audit Report Recommendation No. 35)
STATE OF ALASKA COMMENT #1:
The procurement process in place during this fiscal year was a process that had previously been
reviewed and approved by EPA staff. The issue raised in the single audit report was one of
insufficient oversight rather than the process being flawed in some way. We do agree that
staffing levels at the time simply did not allow for the necessary review or the necessary
expertise to provide sufficient oversight.
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To address this need the VSW program created a new Procurement Specialist position to provide
this needed oversight in September 2004. This position is solely dedicated to the VSW program,
and is supervised by the Division of Information and Administrative Services to ensure
appropriate segregation of duties and authorities. The incumbent has worked to strengthen
internal controls and to provide appropriate oversight and guidance for VSW procurement
practices. To further illustrate our commitment to ensure appropriate procurement practices are
followed we are creating an additional procurement position. We expect have to this position
filled by the end of May 2006.
OIG Comment: The State's actions sufficiently address this finding. The single auditor
informed the OIG that under the current single audit being performed (for fiscal year
2005) there were no problems identified with procurement testing. Therefore no further
action is required by the State at this time. We will delete the recommendation that
Region 10 should review and approve all State solicitations and contracts under EPA
grants and cooperative agreements other than small purchases until the State's
procurement system is reviewed and determined to comply with EPA requirements. The
State's actions do not address historical problems with its procurement process and the
contracts issued under the grants prior to 2005. As such we do not accept or approve any
procurement costs claimed prior to 2005. Such procurement costs may be unallowable if
such costs were not incurred following applicable Federal requirements.
Additional Issue - Dividend and Interest Income
STATE OF ALASKA COMMENT #1:
To address this issue we must first clarify our relationship with the Alaska Native Tribal Health
Consortium (ANTHC). In order to prevent duplication of effort and to make the most of the
funds available for rural sanitation projects, the State of Alaska, Department of Environmental
and the Indian Health Service (IHS) have executed an agreement to transfer the management of
certain sanitation project funding between the two agencies. Attachment #5 is a copy of this
agreement. This is the most current version of this agreement and is currently being routed
through the signature process. As you can see the IHS has stated that ANTHC would manage
these projects on their behalf in some situations. DEC does not have any direct relationship with
ANTHC.
In attempting to address the interest income issue presented above we asked for IHS/ANTHC to
provide documentation supporting their position on this interest income. What follows is their
response.
"The Alaska Native Tribal Health Consortium (ANTHC) stands in the shoes of the U.S. Indian
Health Service (IHS) and is entitled to receive additional funding on the same terms and
conditions as the IHS statewide health programs in Alaska under the terms and conditions of the
Compact and Funding Agreement. The ANTHC Compact and Funding Agreement are
implemented through the authority of Title V of P L. 106-260; both the agreements and the
statute authorize ANTHC to receive advance payments and earn interest on all funds received
through those instruments. All sanitation facilities construction project funding was received as
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cooperative project agreements through the IHS and are therefore included in ANTHC's funding
agreement. Thus, the authorities of P L. 106-260 apply, including its very specific statutory
provisions that supersede any potentially contrary general regulations."
To further support their position IHS/ANTHC provided the following detail information.
"Enclosed is a copy of PL 106-260, Title V, (Attachment #6) and a 1996 letter from the GAO
(Attachment #7) that IHS received regarding advance payment of construction funds and the
propriety of earning interest on such funds when they are transferred to us through our compact
and funding agreement with the IHS.
While Title V needs to be read in its entirety, I see 4 passages as particularly key in establishing
the basis for ANTHC receiving advance payments and generating interest from project funds,
given the following:
The program operating environment of rural Alaska which is 90%+ Alaska Native,
The State being encouraged by the US Gov to work with Indian Tribes as previously
cited, and
All funds provided by the State to IHS were distributed to ANTHC through our
Compact and Funding Agreement (FA) as each cooperative project agreement entered
into between the IHS and ANTHC is an addendum to our FA
PL 106-260 CITES:
1	- Section 505(b)(2) indicates that Programs, functions, services and activities administered by
the IHS may be included in a Compact or FA (Projects are considered an activity). VSW
projects have been administered by IHS since the early 1980's - so the State was utilizing an
established process of long standing and saved the EPA the expense of creating/expanding the
state capacity when the infrastructure grants were first funded.
SEC.505. FUNDING AGREEMENTS.
(b)	CONTENTS.-
(2) INCLUSION OF CERTAIN PROGRAMS, SERVICES, FUNCTIONS, AND
ACTIVITIES.- Such programs, services, functions, or activities (or portions thereof)
include all programs, services, functions, activities (portions thereof), including grants
(which may be added to a funding agreement after an award of such grants), with respect
to which Indian tribes or Indians are primary or significant beneficiaries, administered by
the Department of Health and Human Services through the Indian Health Service and all
local, field, service unit, area, regional, and central headquarters or national office
functions so administered under the authority of-
2	- Section 505(c) indicates that funding may be included in the compact/FA even if it is not
specifically designated for Indian programs.
(c)	INCLUSION IN COMPACT OF FUNDING AGREEMENT. - It shall not be a
requirement that an Indian tribe or Indians be identified in the authorizing statute for a
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program or element of a program to be eligible for inclusion in a compact or funding
agreement under this title.
3	- Section 508(a) authorizes annual, semiannual or periodic advance transfer of funding.
SEC.508. TRANSFER OF FUNDS.
(a) IN GENERAL. - Pursuant to the terms of any compact or funding agreement entered
into under this title, the Secretary shall transfer to the Indian tribe all funds provided for
in the funding agreement, pursuant to subsection (c), and provide funding for periods
covered by joint resolution adopted by Congress making continuing appropriations, to the
extent permitted by such resolutions. In any instance where a funding agreement requires
an annual transfer of funding to be made at the beginning of a fiscal year, or requires
semiannual or other periodic transfers of funding to be made commencing at the
beginning of a fiscal year, the first such transfer shall be made not later than 10 days after
the apportionment of such funds by the Office of Management and Budget to the
Department, unless the funding agreement provides otherwise.
4	- Section 508(h) authorizes the collection of interest on all funds received through the Compact
or FA.
(h) INTEREST OR OTHER INCOME OF TRANSFERS. - An Indian tribe is entitled to
retain interest earned on any funds paid under a compact or funding agreement to carry
out governmental or health purposes and such interest shall not diminish the amount of
funds the Indian tribe is authorized to receive under its funding agreement in the year the
interest is earned or in any subsequent fiscal year. Funds transferred under this title shall
be managed using the prudent investment standard.
The GAO letter is of particular interest because it specifically addresses the advance transfer of
funds for construction projects and specifically states that treasury regulations do not apply..
DEC has taken no position on this particular issue as it seems to come down to a difference in
the interpretation of law between two federal agencies. We will await further guidance on this
from the various agencies involved.
OIG Comment: We maintain our position that any funds that the Consortium obtains
from EPA remain EPA funds, regardless of how the Consortium ultimately receives these
funds. EPA funds are not subject to any IHS regulations, legislation, opinions, etc. The
EPA funds do not become part of an IHS program; therefore, any agreements between
IHS and the Consortium regarding IHS-funded programs are not germane.
Agreements among agencies, Federal or State, do not override Federal regulations and a
Federal agency cannot override a Federal regulation unless it has the authority to do so.
Unless EPA was a party to an agreement between IHS and the State, and waived the
treatment of program income (assuming it had the authority to do so), any agreement
between Alaska and the IHS does not override the application of EPA's grant regulations
to an EPA-funded grant.
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The State cites the Title V Tribal Self-Governance law as the basis for allowing the
Consortium to keep any interest earned on EPA funds. However, section 505 of this law
makes clear that this provision only pertains to grants made by the Indian Health Service,
not grants made by other Federal agencies for other purpose. Section 505 provides that
the Department of Health and Human Services shall negotiate "written funding
agreements] with each Indian tribe" to carry out the various programs "administered by
the Department of Health and Human Services through the [IHS]." Accordingly, this law
does not affect EPA-funded grants and does not provide the authority to retain program
income from EPA-funded grants.
Recommendations
"Along with recommendations 32-35 in the single audit, we recommend that the Regional
Administrator, EPA Region 10:
1. Disallow the unsupported personnel service costs of $1,166,051, until the State provides
sufficient documentation to support labor charges in accordance with Federal requirements."
STATE OF ALASKA RESPONSE:
We acknowledge that our labor charging practices during this fiscal year did not meet the
requirements outlined in OMB Circular A-87. We are in the process of developing an alternative
allocation process in accordance with OMB Circular A-87 Section 8, Subsection 6(c) for the
labor charges. We will be submitting this proposal to EPA for consideration. We will await
further instruction from EPA on how this proposal process should proceed.
OIG Comment: The State acknowledges that its labor charging practices did not comply
with OMB Circular A-87. However, the State's response deals with correcting future
labor charging in order to correct the problem and not how the historical costs will be
treated. Two issues need to be addressed regarding the unsupported personnel service
charges:
1.	EPA will need to determine what is included in the definition of administrative
expenses under the Village Safe Water grants. Once this definition is determined, the
State will need to apply this definition accordingly, in order to ascertain how labor
charges will be treated for reimbursement by EPA.
2.	The State will have to develop and submit an indirect cost rate proposal for non-direct
personnel costs for EPA's review and approval.
Once these two issues are addressed, the State will need to fully reconcile all costs under
the various EPA grants, both direct project costs and administrative project costs, to the
best of its ability. As a result, these labor charges remain questioned.
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Recommendations
"2. Disallow costs of $32,721,149 representing the remaining balance of CFDA 66.606 funds as
unsupported until the State provides actual cost data by EPA grant, by project, for all EPA grants
supporting the Village Safe Water Program; any costs that remain unsupported should be
recovered."
STATE OF ALASKA RESPONSE:
In January 2005, the VSW program contracted with an independent accounting firm, to provide a
detailed project-by-project reconciliation of actual project expenses by funding source. In doing
this reconciliation, the contractor compared the actual scope of work completed to the scope of
work allowed under the federal award and state appropriation in assigning expenditures to the
appropriate funding source. This was done for all expenses through December 31, 2004. VSW's
in-house accounting staff then updated the reconciliations provided by the contractor for activity
between January 1, 2005 and the transition to the State accounting system. Attachment #1 is an
example showing the "Job Report" (expenditures by actual scope of work completed), and the
"Funding Report" (expenditures applied to funding sources according to the allowable timeframe
and scope of work for the funding source matched to the actual scope of work and timeframe of
expenses). Attachment #4 is an example of a report by project by federal award.
With the implementation of our new accounting process outlined on page 2 of this document and
the project reconciliation performed, the VSW program has complete documentation to support
all project costs under these federal infrastructure grants. Any additional documentation required
is available for review.
OIG Comment: EPA will need to resolve the definition and application of the 4 percent
administrative expense in order for the State to fully account for all costs under the various
EPA grants. Additionally, the State has not reviewed any of the reconciliations prepared by
the Consortium; therefore these costs cannot be accepted until the State reviews the
reconciliations prepared by the State.
Recommendations
"3. Review and approve all State solicitations and contracts under EPA grants and cooperative
agreements, other than small purchases, until the State's procurement system is reviewed and
determined to comply with EPA requirements."
STATE OF ALASKA RESPONSE:
The procurement process in place during this fiscal year was a process that had previously been
reviewed and approved by EPA staff. The issue raised in the single audit report was one of
insufficient oversight rather than the process being flawed in some way. We do agree that
staffing levels at the time simply did not allow for the necessary review or the necessary
expertise to provide sufficient oversight.
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To address this need the VSW program created a new Procurement Specialist position to provide
this needed oversight in September 2004. This position is solely dedicated to the VSW program,
and is supervised by the Division of Information and Administrative Services to ensure
appropriate segregation of duties and authorities. The incumbent has worked to strengthen
internal controls and to provide appropriate oversight and guidance for VSW procurement
practices. To further illustrate our commitment to ensure appropriate procurement practices are
followed we are creating an additional procurement position also dedicated solely to the VSW
program. We expect have to this position filled by the end of May 2006.
OIG Comment: As stated previously, the State's corrective actions have effectively
addressed this finding. Therefore, we have deleted the recommendation in the final report.
However, we want to emphasize that by deleting this recommendation we are not
approving any procurement costs incurred prior to 2005. There may be historical
procurement costs incurred by the State that do not meet Federal requirements for
allowability. As such, these costs could be determined to be unallowable under future
grant reviews.
Recommendations
"4. Require the State to have the Consortium remit the portion of interest, representing dividends
from EPA-invested funds from the inception of the Village Safe Water Program, through year
end 2003, to the U.S. Department of Health and Human Services, Payment Management System,
Rockville, Maryland 20852."
STATE OF ALASKA RESPONSE:
As explained on pages 11 through 13 of this response DEC has taken no position on this
particular issue as it seems to come down to a difference in the interpretation of law between two
federal agencies. We will await further guidance on this from the various agencies involved.
OIG Comment: The State funds passed through IHS to the Consortium are EPA funds.
Therefore, the Consortium is required to comply with all EPA regulations and policies in
the administration of these funds. As such, the provisions of 40 CFR 30.22(1) apply. The
CFR requires that nonprofits not subject to the Cash Management Improvement Act must
repay interest income earned on Federal funds. Therefore, we have made no changes to
this recommendation.
Recommendations
"5. Place the State on a reimbursable payment basis under the authority of 40 CFR 31.12 until
the cash management, financial reporting, labor accounting, and procurement systems fully meet
Federal requirements."
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STATE OF ALASKA RESPONSE:
The VSW program is now on an entirely reimbursable payment basis and will remain so under
our new accounting procedures.
OIG Comment: In order to comply with Federal procedures to draw down funds on a
timely basis, the State has chosen to request funds from EPA on a reimbursement type
basis. However, Region 10 has not formally placed the State on a reimbursable payment
basis, in accordance with 40 CFR 31.12. While the State has made progress in the areas of
cash management and procurements, issues regarding financial reporting, labor
accounting, and applicable administration expenses still remain unresolved. Until these
matters are resolved, we continue to recommend that the State be formally placed upon a
reimbursable payment basis.
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Appendix B
Distribution
EPA Headquarters
Office of the Administrator
Assistant Administrator for Water
Agency Followup Official (the CFO)
Agency Followup Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Director, Office of Regional Operations
Director, Office of Grants and Debarment
Director, Grants Administration Division
Acting Inspector General
EPA Region 10
Acting Regional Administrator
Acting Deputy Regional Administrator
Director, Office of Water Quality
Director, Office of Management Programs
Director, Office of Ecosystems, Tribal and Public Affairs
Director, Alaska Operations Office
Audit Followup Coordinator
State of Alaska
Director, Alaska Department of Environmental Conservation
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