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£ % UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
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I I WASHINGTON, D.C. 20460
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If you have any questions or concerns regarding this report, please contact Janet Kasper, the
Director for Assistance Agreement Audits, at (312) 886-3059 or kasper.ianet@epa.gov.
Bill A. Roderick
Acting Inspector General
Attachment
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State of New Hampshire Drinking Water State Revolving Fund Program
Financial Statements for the Year Ended June 30, 2005
Table of Contents
Independent Auditor's Report 1
Statement of Net Assets 2
Statement of Revenues, Expenses, and Changes in Net Assets 3
Statement of Cash Flows 4
Notes to Financial Statements 6
Independent Auditor's Report on Internal Control Over Financial Reporting
and on Compliance and Other Matters Based on an Audit of Financial
Statements Performed in Accordance with Government Auditing Standards 13
Internal Control Findings, Recommendations, and Responses 16
Compliance Findings, Recommendations, and Responses 20
Supplemental Information 23
Status of Recommendations and Potential Monetary Benefits 25
Distribution 26
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$ A \
\mli
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
Independent Auditor's Report
We have audited the accompanying financial statements of the State of New Hampshire
Drinking Water State Revolving Fund Program (the Program) as of and for the year ended
June 30, 2005. These financial statements are the responsibility of the Program's management.
Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
As discussed in Note 1, the financial statements referred to above are intended to present the
financial position, and the changes in financial position and cash flows, where applicable, of the
Program. They do not purport to, and do not, present fairly the financial position of the State of
New Hampshire as of June 30, 2005, and the changes in its financial position and its cash flows,
where applicable, for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
In our opinion, the financial statements for the Program referred to above present fairly, in all
material respects, the financial position of the Program, as of June 30, 2005, and the changes in
financial position and cash flows, where applicable, thereof for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Office of Inspector General
May 24, 2006
1
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State of New Hampshire
Drinking Water State Revolving Fund Program
Statement of Net Assets
as of June 30, 2005
SRF
Management
Total
(Memorandum
Only)
Assets
Current Assets:
Cash and cash equivalents
Current receivables:
Loan interest
Current portion of loans receivable
Due from other funds
$
7,893,014
433,917
2,051,979
228,436
$
843,695
$
8,736,709
433,917
2,051,979
228,436
Total current receivables
2,714,332
-
2,714,332
Total current assets
10,607,346
843,695
11,451,041
Non-Current Assets:
Loans receivable, net of current portion:
Allowance for principal forgiveness
34,421,359
(2,651,485)
34,421,359
(2,651,485)
Total non-current assets
31,769,874
-
31,769,874
Total Assets
$
42,377,220
$
843,695
$
43,220,915
Liabilities and Net Assets
Liabilities:
Due to Federal Government
Accounts payable
$
19,623
208,812
$
19,623
208,812
Total liabilities
228,435
-
228,435
Net assets:
Restricted
42,148,785
843,695
42,992,480
Total Liabilities and Net Assets
$
42,377,220
$
843,695
$
43,220,915
See accompanying notes to the financial statements.
2
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State of New Hampshire
Drinking Water State Revolving Fund Program
Statement of Revenues, Expenses, and Changes in Net Assets
for the Year Ended June 30, 2005
SRF/Set-Asides
Management
Total
(Memorandum
Only)
Operating Revenues:
Loan interest
Grant revenues
Loan fees
Investment earnings
Total operating revenues
Operating Expenses:
Program administration
Technical assistance
State program management
Local Assistance
Principal forgiveness expense
Total operating expenses
Operating Income
Fund Equity:
Contributed capital:
Federal contribution
State contribution
Total capital contributions
956,388
1,978,483
177,316
3,112,187
324,178
164,138
537,529
952,638
750,605
2,729,088
383,099
3,642,373
767,547
301,847
301,847
301,847
956,388
1,978,483
301,847
177,316
3,414,034
324,178
164,138
537,529
952,638
750,605
2,729,088
684,946
3,642,373
767,547
4,409,920
4,409,920
Change in net assets
Net assets, beginning of year
4,793,019
37,355,766
301.847
541.848
5,094,866
37,897,614
Net Assets, End of Year
$ 42,148,785
843,695
$ 42,992,480
See accompanying notes to the financial statements.
3
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State of New Hampshire
Drinking Water State Revolving Fund Program
Statement of Cash Flows
for the Year Ended June 30, 2005
Cash Flows from Operating Activities:
Loan interest receipts
$ 760,913
Loan fee receipts
301,847
Receipts from operating grants
1,923,008
Receipts from investments
180,159
Loan principal repayments
2,657,456
Payments for program administration
(327,268)
Payments for technical assistance
(172,149)
Payments for state program management
(480,480)
Payments for source water protection/capacity development
(943,111)
Disbursements on loans
(6,782,313)
Net cash (used) by operating activities
(2,881,938)
Cash Flows from Noncapital Financing Activities:
Grant from EPA for loans
3,642,373
Funds from State of New Hampshire
767,547
Net cash provided by noncapital financing activities
4,409,920
Net increase (decrease) in cash
1,527,982
Cash and cash equivalents, beginning of year
7,208,727
Cash and cash equivalents, end of year
$ 8,736,709
Continued on Next Page
See accompanying notes to the financial statements.
4
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State of New Hampshire
Drinking Water State Revolving Fund Program
Statement of Cash Flows
for the Year Ended June 30, 2005
Continued From Previous Page
Reconciliation of Operating (Loss) to Net Cash Used by Operating Activities:
Operating income $ 684,946
Reconcile to operating income to net cash used by operating activities:
Loan principal forgiveness 750,605
Change in assets and liabilities:
(Increase) in interest receivable (192,095)
Decrease in due from Federal Government 74,794
(Increase) in due from other funds (228,026)
Increase in accounts payable 154,720
(Decrease) in accrued payroll (1,488)
(Decrease) in unearned interest (537)
(Decrease) in construction cost payable (11,764)
Loan repayments 2,657,456
Loan disbursements (6,770,549)
Net cash (used) by operating activities $ (2,881,938)
See accompanying notes to the financial statements.
5
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
1. Organization of the Program
The New Hampshire Drinking Water State Revolving Fund Program (the Program) was established
pursuant to section 1452 (a) of the Safe Drinking Water Act amendments (SDWA) of 1996 and RSA-
486:14. The purpose of the SRF is to provide low interest loans to assist public water systems for
financing the costs of infrastructure needed to ensure safe drinking water. The loan repayment period
ranges from five to twenty years, and all repayments, including interest and principal, must be credited
to the Program.
The SRF program is administered by the State of New Hampshire's Department of Environmental
Services (NHDES), and consists of a loan fund to record loan and related activity and an administrative
fund that collects fees and will in the future, pay the operating costs of the program, and are collectively
referred to as the Program. The Department's primary responsibilities for the SRF include obtaining
capitalization grants from the Environmental Protection Agency (EPA), soliciting potential interested
parties for loans, negotiating loan agreements with local water systems, reviewing and approving
payment requests from loan recipients, monitoring the loan repayments, and conducting inspection and
engineering reviews to ensure compliance with all applicable laws, regulations, and program
requirements. In addition to the loan fund, states are allowed to take portions of this fund for non-
infrastructure project activities, or "set-asides", which further the intent of the SDWA. The Program
activities (set-asides) include program administration, state program management, water system
technical assistance, and local assistance.
On a monthly basis the NHDES charges the Program for time spent on SRF activities by its employees.
The charges include the salaries and benefits of employees, as well as indirect costs allocated to the
Program. Employees charging time to the Program are covered by the benefits available to State of New
Hampshire Employees. The fund is also charged indirect costs through a cost allocation plan agreement
between NHDES and U.S. EPA, which is renewed annually.
The Program's financial statements, footnotes, and related schedules are presented for the U.S.
Environmental Protection Agency. The Program is included in the State of New Hampshire's
comprehensive annual financial report (CAFR) as part of the governmental fund financial statements,
which use the modified accrual basis of accounting. Due to differences in reporting methods, there may
be differences between the amounts reported in these financial statements and the State's CAFR.
2. Summary of Significant Accounting Policies
Basis of Accounting
The financial statements for the Program are presented as an enterprise fund. As such, the Program
is accounted for using the flow of economic resources measurement focus and is maintained on the
accrual method of accounting. Under the accrual method of accounting, revenues are recognized
when earned and expenses are recorded at the time the liabilities are incurred. All assets and
liabilities associated with the operations of the Program are included on the balance sheet. The State
6
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
2. Summary of Significant Accounting Policies
has elected to follow the accounting pronouncements of the Governmental Accounting Standards
Board (GASB), as well as statements issued by the Financial Accounting Standards Board on or
before November 30, 1989, unless the pronouncements conflict with or contradict GASB
pronouncements.
Cash and Cash Equivalents
All monies of the Program are deposited into the State Treasury Department, which is responsible for
maintaining these deposits in accordance with New Hampshire State law. The Program considers all such
deposits to be cash. The Program, on a monthly basis, receives investment interest earnings on these
deposits. According to State law, the Treasurer is responsible for maintaining the cash balances and
investing excess cash of the Program, as further discussed in Note 3. Consequently, management of the
Program does not have any control over the investment of the excess cash. The statement of cash flows
considers all funds deposited with the Treasurer to be cash or cash equivalents.
Loans Receivable
The loans are funded by Federal capitalization grants and State matching funds. The SRF monies are
disbursed to borrowers on a cost reimbursement basis. When the borrowers have incurred qualifying
expenses, they request a loan disbursement from the Program, and at that time a disbursement is made.
Interest begins accruing when funds are disbursed to the borrower. Repayment of the loan begins within
six months to one year of construction completion. The Program must receive full repayment within
twenty years of project completion. There is no provision for uncollectible accounts, as all repayments are
current, and management believes all loans will be repaid according to the loan terms.
Contributed Capital
In accordance with generally accepted accounting principles, funds received from EPA and the State of
New Hampshire for the capitalization of the Program are recorded under equity as contributed capital.
3. Cash and Cash Equivalents
GASB Statement No. 40 Deposits and Investment Risk Disclosures-an amendment of GASB Statement No.
3 was implemented for the fiscal year ended June 30, 2005. As a result, the disclosures related to deposit
and investment risks were changed.
Deposits: The following statutory requirements and Treasury Department policies have been adopted to
minimize risk associated with deposits:
7
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
3. Cash and Cash Equivalents
RSA 6:7 establishes the policy the state Treasurer must adhere to when depositing public monies.
Operating funds are invested per investment policies that further define appropriate investment choices
and constraints as they apply to those investment types.
Custodial Credit Risk: The custodial risk for deposits is the risk that in the event of a bank failure, the
Program's fund deposits may not be recovered.
Custodial credit risk is managed in a variety of ways. Although State law does not require deposits to be
collateralized, the Treasurer does utilize such arrangements where prudent and/or cost effective. All
banks, where the State has deposits and/or active accounts, are monitored as to their financial health
through the services of Veribanc, Inc., a bank rating firm. In addition, ongoing reviews with officials of
depository institutions are used to allow for frequent monitoring of custodial credit risk.
All depositories used by the State must be approved at least annually by the Governor and Executive
Council. All commercial paper must be from issuers having an Al/Pl rating or better and an AA- or
better long-term debt rating from one or more of the nationally recognized rating agencies. Certificates of
deposits must be with state or federally chartered banking institutions with a branch in New Hampshire.
The institution must have the highest rating as measured by Veribanc, Inc.
Whereas all payments made to the State are to be in U.S. dollars, foreign currency risk is essentially
nonexistent on State deposits.
Interest Rate Risk: Interest rate risk is the risk that changes in interest rates will adversely affect the
value of the State's investments. The State measures the interest rate risk using the weighted average
maturity method (WAM). The State's WAM is dollar weighted in terms of years.
All cash in the Program is deposited with the State Treasurer who is responsible for maintaining and
investing the pooled cash balances in accordance with State laws. The Treasurer is required to maintain a
mix of investments in order to allow funds to be withdrawn at any time to meet normal operating needs.
The Program's share of the investment income from the local government investment pool is based on the
average daily balance for the period and is credited to the Program monthly.
During the most of fiscal year 2005, all cash was primarily invested in the demand deposit account and the
repurchase agreements. Cash is managed in the local government investment pool, and is stated at cost,
which approximates fair market value. Investments in local government pools are not categorized because
they are not evidenced by securities that exist in physical or book entry form.
Carrying Amount
Not subject to categorization:
Local government investment pool $8,736,709
8
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
4. Loans Receivable
The Program makes loans to qualified entities at interest rates ranging from .1525 percent to 2.688
percent. Interest rates are initially set in the original loan agreement, and then when the project is
completed a supplemental loan agreement is made which fixes the final interest rate to be charged at the
lower of the original loan agreement or prevailing market rate, per the following formula:
Loan Term Interest Rate
5 years 25% of market minus 1%
10 years 50% of market minus 1%
15 years 75% of market minus 1%
20 years 80% of market minus 1%
Details of loans receivable as of June 30, 2005 are as follows:
Loan Status
Loan Amount
Authorized
Remaining
Commitment
Loan Balance
June 30, 2004
Loan
Disbursements
Repayments &
Principal
Forgiveness
Loan Balance
June 30, 2005
Funding Completed
Funding in Progress
Loans Paid Off
Total
36,833,440
30,049,905
5,617,600
22,026,687
29,743,805
2,721,513
199,354
961,956
5,301,705
506,887
(2,255,640)
(706,241)
28,450,121
8,023,218
72,500,945 $ 22,026,687 $ 32,664,672 $ 6,770,548 $ (2,961,881) $ 36,473,339
9
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
4. Loans Receivable
The Program made loans to eight local communities that totaled $1 million or more, and in the
aggregate, exceed $26 million. The outstanding balances of these loans represent approximately 73
percent of the total loans outstanding as of June 30, 2005.
Community
Loan
Authorized
Loan
Percentage
of Total
Berlin Water Works
9,506,246
8,165,283
22.39%
City of Portsmouth
5,962,560
5,366,304
14.71%
City of Manchester
5,008,820
4,112,839
11.28%
Hanover Water Works
4,035,000
3,556,036
9.75%
Town of Raymond
2,500,000
2,375,000
6.51%
Town of Exeter
1,354,340
1,083,472
2.97%
Tilton/Northfield Aqueduct
1,293,694
1,047,011
2.87%
Town of Northumb erl and
2,031,018
1,001,960
2.75%
Subtotal More than $1 Million
31,691,678
26,707,905
73.23%
All Other Loans
32,983,913
9,765,434
26.77%
Total Loans
64,675,591
36,473,339
100.00%
Loans mature at various intervals through May 2025. The scheduled principal and interest amounts
on completely disbursed loans maturing in the next five years and every five years thereafter are as
follows:
FY June 30 Principal
Interest
Total
2006 $ 2,225,936
$
685,734
$
2,911,670
2007 2,178,744
652,678
2,831,422
2008 2,194,042
612,037
2,806,079
2009 2,212,690
570,918
2,783,608
2010 1,523,202
529,344
2,052,546
2011 -2015 7,693,534
2,032,919
9,726,453
2016-2020 7,323,762
995,088
8,318,850
2021 -2025 3,098,211
158,075
3,256,286
Total $ 28,450,121
$
6,236,793
$
3,686,914
10
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
5. Contributed Capital
The Program is capitalized by annual grants through EPA. These grants have been awarded annually.
The State of New Hampshire must also contribute an amount equal to 20 percent of the federal
capitalization amount. New Hampshire's matching contribution has been provided through
appropriation of State general fund resource and general obligation bonds of the State. As of June 30,
2005, EPA has awarded $68,225,700 to the State, of which $45,397,570 has been drawn for loans and
set-aside expenses. The following summarizes the capitalization grant award, amounts drawn on each
grant as of the balance sheet date, and balances available for future loans and set-aside costs:
Total Draws Total Draws Grant Funds
Grant
Grant
as of
2005
as of
Available
Year
Amount
June 30, 2004
Draws
June 30, 2005
June 30, 2005
1997
$ 13,754,800
$ 13,754,800
$
$ 13,754,800
$
1998
7,121,300
7,121,300
7,121,300
-
1999
7,463,800
7,463,800
7,463,800
-
2000
7,757,000
6,643,421
943,111
7,586,532
170,468
2001
7,789,100
3,187,595
3,433,140
6,620,735
1,168,365
2002
8,052,500
1,450,468
409,943
1,860,411
6,192,089
2003
8,004,100
210,805
341,129
551,934
7,452,166
2004
8,283,100
438,058
438,058
7,845,042
Total
$ 68,225,700
$ 39,832,189
$ 5,565,381
$ 45,397,570
$ 22,828,130
As of June 30, 2005, State matching contributions were as follows:
Total Match As of 2005 Total Match As
June 30, 2004 Contributions of June 30, 2005
New Hampshire State Match $ 7,775,397 $ 767,547 $ 8,542,944
11
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NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES
Drinking Water State Revolving Fund Program
Notes to Financial Statements
6. Set-Asides
Of the capitalization grants, the following summarizes the set-aside grants, amounts drawn on each
set-aside as of the balance sheet date, and balances available for future set-aside costs:
Grant Year
Administration
Technical
Assistance
State Program
Management
Local
Assistance
Total
1997
$ 550,192
$ 275,096
$ 233,049
$ 2,063,220
$ 3,121,557
1998
284,852
142,426
712,130
1,068,195
2,207,603
1999
149,276
1,119,570
1,268,846
2000
155,140
268,014
1,163,550
1,586,704
2001
76,356
155,782
503,520
1,168,365
1,904,023
2002
754,881
161,050
735,247
231,436
1,882,614
2003
155,597
160,082
265,294
10,138
591,111
2004
312,124
166,062
830,310
-
1,308,496
Total Grant
2,134,002
1,364,914
3,547,564
6,824,474
13,870,954
Draws thru June 30, 2004
(1,465,571)
(1,110,325)
(2,591,210)
(4,300,956)
(9,468,062)
2005 Draws
(327,268)
(172,149)
(480,480)
(943,111)
(1,923,008)
Available, June 30, 2005
$ 341,163
$ 82,440
$ 475,874
$ 1,580,407
$ 2,479,884
7. Contingencies, Related Parties, and Subsequent Events
Contingencies
The Program is exposed to various risks of loss related to torts, thefts of assets, errors or omissions,
injuries to state employees while performing the Program business, or acts of God. The State
maintains insurance for all risks of loss, which is included in the indirect costs allocated to the
Program.
According to NHDES management and legal counsel, there are no other loss contingencies which
require disclosure or accrual under the Statement of Financial Accounting Standards No. 5.
Related Parties
There are no related party transactions with or related amounts receivable from management of the
Programs.
12
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Independent Auditor's Report on Internal Control Over Financial Reporting and
on Compliance and Other Matters Based on an Audit of Financial Statements
Performed in Accordance with Government Auditing Standards
13
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
We have audited the financial statements of the State of New Hampshire Drinking Water State
Revolving Fund Program (the Program) as of and for the year ended June 30, 2005, and have
issued our report thereon dated May 24, 2006. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America and the standards
applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States.
Internal Control over Financial Reporting
In planning and performing our audit, we considered the Program's internal control over
financial reporting in order to determine our auditing procedures for the purpose of expressing
our opinion on the financial statements and not to provide an opinion on the internal control over
financial reporting. However, we noted certain matters involving the internal control over
financial reporting and its operation that we consider to be reportable conditions. Reportable
conditions involve matters coming to our attention relating to significant deficiencies in the
design or operation of the internal control over financial reporting that, in our judgment, could
adversely affect the Program's ability to initiate, record, process, and report financial data
consistent with the assertions of management in the financial statements. Reportable conditions
are described in the findings, recommendations, and responses.
A material weakness is a reportable condition in which the design or operation of one or more of
the internal control components does not reduce to a relatively low level the risk that
misstatements caused by error or fraud in amounts that would be material in relation to the
financial statements being audited may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions. Our consideration of the
internal control over financial reporting would not necessarily disclose all matters in the internal
control that might be reportable conditions and, accordingly, would not necessarily disclose all
reportable conditions that are also considered to be material weaknesses. However, we consider
the reportable conditions described in the accompanying schedule of findings, recommendations,
and responses to be material weaknesses.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Program's financial statements are
free of material misstatement, we performed tests of its compliance with certain provisions of
laws, regulations, contracts, and grant agreements, noncompliance with which could have a
14
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direct and material effect on the determination of financial statement amounts. This included
tests of specific program requirements governing allowability for specific activities, allowable
types of assistance, State matching, period of availability of funds and binding commitments,
cash management, program income, and subrecipient monitoring that are applicable to the
Program for the year ended June 30, 2005.
The management of the Program is responsible for the Program's compliance with those
requirements. Our responsibility is to express an opinion on those requirements based on our
audit. An audit includes examining, on a test basis, evidence about the Program's compliance
with those requirements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, except for matters discussed in the findings and recommendations sections that
follow, the Program complied, in all material respects, with the specific program requirements
that are applicable to the Program for the year ended June 30, 2005.
This report is intended solely for the information and use of management of the Program and the
U.S. Environmental Protection Agency, and is not intended to be and should not be used by
anyone other than these specified parties.
Office of Inspector General
May 24, 2006
15
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Internal Control Findings, Recommendations, and Responses
Control Environment Needs Improvement
The foundation of the accounting and reporting system is the control environment established by
management. Management sets the tone of the organization, and determines the accounting
systems and procedures to be used. Management also establishes the necessary controls and
policies to assure that the assertions inherent in an accounting system are followed.
The management assertions include:
• Existence or occurrence: The assets and liabilities of the organization exist at a given
date, and recorded transactions occurred during the proper period.
• Completeness: All transactions and accounts that should be included are included in
the accounting system.
• Valuation or allocation: The accounts are recorded and presented at appropriate
amounts.
The DWSRF is accounted for and reported within the New Hampshire Department of
Environmental Services' (NHDES) General Fund. To facilitate program reporting required by
the U.S. Environmental Protection Agency (EPA), NHDES maintains a separate DWSRF
accounting system and provides EPA with program-specific financial statements. We noted
deficiencies in the design and operations of NHDES' internal controls for the DWSRF-specific
financial accounting and reporting that, in our judgment, could adversely affect NHDES' ability
to record, process, and report financial data consistent with the assertions of management in the
DWSRF financial statements. These conditions appear to have resulted, in part, from (1) the use
of a separate spreadsheet-based accounting system that a limited number of employees and
management are familiar with; (2) a lack of adequate training on the DWSRF-specific
accounting system; (3) inadequate written procedures for key areas such as monthly
reconciliations to the DWSRF general ledger and DWSRF financial reporting; (4) lack of
management understanding, review, and approval of entries to the DWSRF general ledger and
supporting schedules; and (5) significant turnover of key staff and management working in the
DWSRF program over the last 2 years. Specifically, we noted problems with the effectiveness
of management assertions as follows.
Existence or Occurrence: Periodic reconciliations of the DWSRF accounting records to
the actual cash and investment deposits maintained by the Treasurer is an important
control aspect that can provide assurances that the accounting records properly record
cash and investment transactions and balances. Management review of these
reconciliations provides assurances that these controls are working as intended.
We found that NHDES was reconciling the account used to deposit Federal draws and
related State match (the "zero balance account") and the account used for loan
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repayments and disbursements ("the repayment account"), but it was not adjusting for
errors and other reconciling items in the DWSRF general ledger. Several other errors
between the loan interest and management fees were identified, but not corrected. As a
result, cash was overstated by $3,941,721 and short-term investments were understated
by $4,000,000 as of June 30, 2005.
Completeness: NHDES' accounting system is not specifically designed for the State
Revolving Funds program. Therefore, the DWSRF accountant maintains a separate
spreadsheet-based DWSRF general ledger to generate the DWSRF financial statements.
This general ledger was not properly reconciled to original source documentation. We
encountered numerous unrecorded transactions and errors in the DWSRF general ledger
that went undetected during the period because DWSRF Program management did not
have procedures in place for approval of the transactions and periodic review of the
general ledger. As a result, control and accountability over State Revolving Funds is
diminished and there is no assurance that the funds are accounted for properly.
Valuation or Allocation: The amounts recorded in the DWSRF general ledger for loans
and related interest receivable should be supported by a subsidiary schedule(s) that
provide details by specific loan. Loans included on the schedule should be supported by
the proper loan documentation (e.g., loan agreement, requests for disbursements, loan
amortizations schedules). The subsidiary schedules should be periodically reconciled to
the DWSRF general ledger.
We discovered numerous instances where the balances of the DWSRF general ledger
accounts were incorrect. Journal entries were incorrectly made because of a lack of
understanding of how the system was designed, a lack of documentation of proper year-
end accounting procedures and closeouts, and the absence of training for new staff and
management. For example, the year-end reclassifying journal entries for Federal funds
and the fund balance were overstated by $9.5 million and understated by the same
amount, respectively, in the DWSRF general ledger. Also, the required State match was
underfunded by $228,436 due to the State using the wrong percentage to calculate the
required matching funds. The State calculated its share at 17 percent of the capitalization
grants instead of the required percentage, which was 20 percent.
Amortization schedules for 5 of the 13 loans executed during the last 2 fiscal years were
prepared incorrectly. Two of the five resulted in improper accounting for principal
forgivenesses and the principal amounts. We also identified a number of loan
repayments that were not recorded. The Program does not have procedures in place to
detect these omissions. Proper reconciliations to the supporting documents, disbursement
and amortizations schedules, and the DWSRF general ledger would have detected these
errors.
The short-term investment was understated by $4,000,000 in the DWSRF general ledger.
A $2,000,000 purchase of short-term investments was not recorded. A $500,000 short-
term investment was under recorded at its maturity, and another $500,000 short-term
investment in another instance was over recorded at its maturity. These errors appeared
to be due to the lack of coordination with the State of New Hampshire Treasury, lack of
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subsidiary records to support the general ledger, and lack of proper reconciliations to the
subsidiary records and the DWSRF general ledger.
Recommendations
We recommend that EPA Regional Administrator, Region 1, require the NHDES to:
1. Coordinate with the State of New Hampshire Treasury and obtain up-to-date
documentation on specific cash and investment transactions and balances. A schedule of
cash, investments, and related earnings per the State Treasurer should be properly
reconciled with supporting documents and the DWSRF general ledger on a recurring
basis. DWSRF program management should gain an understanding of the reconciliation
process and review and assess the reconciliations on a periodic basis.
Prior to our audit, NHDES had recognized the need to improve its DWSRF -
specific accounting and management system. NHDES is currently in the process
of developing a new system expected to address this condition.
2. Properly reconcile its subsidiary schedule(s) for loans and interest receivable with the
DWSRF general ledger on a recurring basis. DWSRF program management should gain
an understanding of the reconciliation process and review the reconciliations on a
periodic basis.
Prior to our audit, NHDES had recognized the need to improve its DWSRF-
specific accounting and management system and is in the process of developing a
system that is expected to correct this condition.
3. Develop and implement procedures for appropriate review and approval of accounting
entries and reporting from the DWSRF-specific accounting system, including year-end
closing and reporting.
4. Develop training on the DWSRF-specific accounting system for all appropriate staff and
management, including the accountants, accounting manager, and program manager.
State's Response
The State responded on February 14, 2007, with the following:
With regards to the comments on the accounting system, DES is in the middle of a system
conversion from our manual, Excel spreadsheet based, system to a general ledger system.
When this system conversion is complete, the majority of the posting and reconciliation
issues will be resolved as we will have one integrated accounting package. All
appropriate staff will be trained on using this system including accountants, accounting
manager and program managers.
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Procedures have been developed for preparing accounting entries and for their
appropriate management review and approval andfor the reconciliation of subsidiary
schedules to the general ledger.
Concerning the State Treasury, we are working with that department to improve the
timely receipt of SRF documents from them in order for DES to perform our
reconciliations and postings in a timely manner.
OIG's Response
We find the State's response to be acceptable.
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Compliance Findings, Recommendations, and Responses
State Match Calculations Incorrect
As of June 30, 2005, NHDES had received $228,436 in excess Federal funds and had a $228,436
shortfall in State funds required to be in the revolving loan fund. Pursuant to Title 40, Code of
Federal Regulations (CFR), Section 35.3550(g), the State is to deposit 20 percent of each
capitalization grant into the revolving loan fund. However, the State provided matching funds
based on 17 percent of the capitalization grant, which resulted in a shortfall of $228,436. Each
Federal draw associated with the shortfall was regarded as an erroneous payment by EPA to the
State pursuant to Office of Management and Budget (OMB) Circular No. A-l 1, Section 57.1.
Set-Aside Costs Need to Be Separate and Identifiable for Each Set-Aside by Actual Costs
NHDES has only one code 4718 for charging all set-aside activities, and charges budgeted time
for each employee instead of actual time worked on each set-aside. There are four kinds of set-
asides in the Program, as defined in 40 CFR 35.3535(b)-(e):
NHDES
Allowed Percentage Use
Description
Accounting Code
of Capitalization Grants
Administration
D
4%
Small systems technical assistance
E
2%
State program management
F
10%
Local assistance and other State programs
G
15%
40 CFR 35.3540 (b) requires that a State must maintain separate and identifiable set-aside
accounts for the portion of its capitalization grant to be used for set-aside activities. The State
agency that is awarded the capitalization grant is accountable for the use of the funds provided in
the capitalization grant agreement under the general grant regulations at 40 CFR Part 31.
40 CFR 31.22 (b) states that allowable costs are to be determined in accordance with the cost
principles in OMB Circular A-87. Attachment B, §8(h) of OMB Circular A-87 provides the
requirements for support of salaries and wages charged to Federal programs. When employees
work on multiple activities or cost objectives, a distribution of their salaries or wages are to be
supported by personnel activity reports that meet the standards in §8(h)(5), which state that the
activity report must reflect an after-the-fact distribution of the actual activity of each employee
and that budget estimates do not qualify as support for charges.
Employees in the NHDES Water Supply Engineering Bureau are assigned to specific set-asides
by budget, and a list of these employees is provided to the DWSRF accountant. Employees
working on set-aside activities charge Organization Code 4718 for all activities. The DWSRF
accountant then enters letter codes to the corresponding set-aside employees' payroll transactions
according to the list in order to identify costs for each set-aside. As a result, budgeted time, not
actual time, is charged to the set-aside accounts. Since the charges were not adequately
supported, they would be considered erroneous payments as defined by OMB Circular A-l 1.
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For example, an employee was promoted to a supervisory position during the year; however, the
accountant coded and charged the employee's time to the 15-percent set-aside even though the
employee's responsibilities changed. The costs should have been allocated to three set-asides -
4 percent, 10 percent, and 15 percent - based on the actual time spent on each activity. Based on
budgeted time, $30,538 of this employee's time was charged to the wrong set-aside account.
The actual cost of this employee's time that should have been charged to each set-aside activity
is not known since employee did not maintain records of the activities they performed.
Subrecipient Monitoring Not Performed
OMB Circular A-133 and 40 CFR 31.26 require that a pass-through entity ensure that
subrecipients expending $500,000 or more in Federal awards during the subrecipient's fiscal
year meet the Single Audit requirements for that fiscal year. The pass through entity is to issue a
management decision on any audit findings within 6 months after receipt of the subrecipient's
audit report and ensure that the subrecipient takes appropriate and timely corrective action.
NHDES did not have procedures in place to ensure that borrowers expending Federal awards met
the Single Audit requirements to issue management decisions within 6 months of receipt of the
audit reports, and to ensure that subrecipients took appropriate and timely corrective action.
Program management was not aware that the monitoring of and response to Single Audit
requirements was necessary. As a result, NHDES was unaware of the Single Audit status of its
borrowers and, thus, whether the borrowers' audits had uncovered any issues of noncompliance.
Recommendations
We recommend that EPA Regional Administrator, Region 1, require the NHDES to:
5. Deposit $228,436 to correct the underfunded State matching funds, and calculate future
matching contributions according to the appropriate formula.
6. Establish subcodes for each set-aside so that employees, not the Program accountant,
identify and charge set-aside activities on their timesheets.
By the end of the audit field work, we noted that the State had already established
subcodes for each set-aside, and employees identified set-aside activities on their
timesheets instead of being coded by the Program accountant later.
7. Implement a Single Audit report review and corrective action policy consistent with
OMB Circular A-133 and EPA regulations.
State's Response
The State responded on February 14, 2007, with the following:
The DWSRF state match percentage has been corrected and DES made-up the under
funding issue of $228,436 in State Fiscal Year 2006.
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OIG's Response
The State has adequately addressed recommendations 5 and 6. However, the State did not
respond to the recommendation of implementing a Single Audit report review. EPA Region 1
should work with the State to assure that it meets the requirements of OMB Circular A-133 and
40 CFR 31.26 regarding pass-through entity responsibilities for followup on subrecipient audits.
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Supplemental Information
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State of New Hampshire
Drinking Water State Revolving Fund Program
Schedule of Set-Aside Expenses
Year Ended June 30, 2005
Technical State Program Local
Description Administration Assistance Management Assistance Total
Payroll $ 206,866 $ - $ 347,671 $ 773,684 $ 1,328,221
Contracts 12,289 164,138 - 20,023 196,450
Grants - - 41,736 138,465 180,201
Rent 44,430 - - - 44,430
Indirect Cost 38,244 - - - 38,244
Travel 1,024 - 18,890 12,177 32,091
Other Operating Costs 21,326 - 129,232 8,289 158,847
Total $ 324,178 $ 164,138 $ 537,529 $ 952,638 $ 1,978,483
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
Rec.
No.
Page
No.
Subject
Status1
Action Official
Planned
Completion
Date
POTENTIAL MONETARY
BENEFITS (in!
Claimed Agreed To
Amount Amount
18 Coordinate with the State of New Hampshire
Treasury and obtain up-to-date documentation on
specific cash and investment transactions and
balances. A schedule of cash, investments, and
related earnings per the State Treasurer should be
properly reconciled with supporting documents and
the DWSRF general ledger on a recurring basis.
DWSRF program management should gain an
understanding of the reconciliation process and
review and assess the reconciliations on a periodic
basis.
18 Properly reconcile its subsidiary schedule(s) for
loans and interest receivable with the DWSRF
general ledger on a recurring basis. DWSRF
program management should gain an
understanding of the reconciliation process and
review the reconciliations on a periodic basis.
18 Develop and implement procedures for appropriate
review and approval of accounting entries and
reporting from the DWSRF-specific accounting
system, including year-end closing and reporting.
18 Develop training on the DWSRF-specific
accounting system for all appropriate staff and
management, including the accountants,
accounting manager, and program manager.
21 Deposit $228,436 to correct the underfunded State
matching funds, and calculate future matching
contributions according to the appropriate formula.
21 Establish subcodes for each set-aside so that
employees, not the Program accountant, identify
and charge set-aside activities on their timesheets.
21 Implement a Single Audit report review and
corrective action policy consistent with OMB
Circular A-133 and EPA regulations.
EPA Regional Administrator,
Region 1
0 EPA Regional Administrator,
Region 1
0 EPA Regional Administrator,
Region 1
0 EPA Regional Administrator,
Region 1
C EPA Regional Administrator, State
Region 1 Fiscal Year
2006
C EPA Regional Administrator, 04/06/06
Region 1
U EPA Regional Administrator,
Region 1
$228
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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Distribution
EPA Region 1
Regional Administrator
Director of Office of Ecosystem Protection
Manager of Municipal Assistance Unit
Audit Liaison
DWSRF Coordinator
EPA Headquarters
Director, Grants Administration Division
Agency Followup Coordinator
Infrastructure Branch Chief
DWSRF Coordinator
DWSRF Audit Manager
New Hampshire Department of Environmental Services
Commissioner
Chief Operating Officer
DWSRF Administrator
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