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Report Contributors: Robert Adachi
Madeline Mullen
Jennifer Hutkoff
Janet Kasper
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
2005-P-00015
June 16, 2005
Catalyst for Improving the Environment
Why We Did This Review
As a followup to a prior audit
on the Alaska Village Safe
Water Program, we sought to
answer the following question:
Did Environmental Protection
Agency (EPA) Region 10
meet EPA guidelines before
awarding the program grant of
$34 million in 2004?
Background
In 1996, Congress amended
Section 303 of the Safe
Drinking Water Act to
authorize grants to fund
mostly infrastructure under
Alaska's Village Safe Water
Program. Prior to August
2004, Region 10 had awarded
$232 million to Alaska to fund
the Village Safe Water
Program. On August 18,
2004, the Region awarded an
additional $34 million.
Region 10's Grant for Alaska Village Safe Water
Program Did Not Meet EPA Guidelines
What We Found
Region 10 did not meet EPA guidelines before awarding the Village Safe Water
Program grant to the State of Alaska Department of Environmental Conservation.
The Region did not ensure that specific environmental objectives and the scope of
the work were clear, or assess whether there was a reasonable chance that overall
environmental objectives could be achieved.
Further, the Region did not complete the cost review of the individual projects
until 3 months after awarding the grant. After the grant award, the Region
recommended eliminating six ineligible projects valued at almost $4.8 million, so
the Region needs to amend the grant to exclude the ineligible projects. Timely
cost reviews could have prevented inclusion of these ineligible projects.
The Region needs to modify the grant to remove approval for advance draws that
are contrary to Federal cash management requirements. Also, the Region needs to
document the cost review of $1.6 million in administrative costs, and clarify the
period they cover. While the grant has project and budget periods of 5 years, the
Region stated that the administrative costs only covered a 1-year period. The
Region needs to clarify this matter to ensure sufficient administrative support for
the entire 5-year budget period and compliance with Congressional limitations.
The conditions noted occurred even though Region 10 was aware of the findings
and recommendations in our previous report that identified improvements were
needed in the award and oversight of Village Safe Water Program grants. The
Region stated that it made the 2004 grant award because of financial concerns
over the State's program. However, without performing the necessary steps, there
were no assurances that the proposed projects met technical and programmatic
guidelines and achieved maximum value.
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/2005/
20050616-2005-P-00015.pdf
What We Recommend
We recommend that Region 10 suspend work under the grant until all pre-award
steps are completed, and establish controls to ensure that Region 10 fulfills all
EPA requirements before awarding grants. The Region believed that it had
already taken the action needed to fulfill all pre-award steps and that it was
unnecessary to suspend the grant.
Based on the Region's response to the draft report, we revised our
recommendations to have Region 10 assure that the State's accounting of
administrative costs meet regulatory and statutory requirements. We also
recommend that Region 10 place the State on a reimbursement payment basis until
compliance with cash management requirements are verified.
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I W 1 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
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OFFICE OF
INSPECTOR GENERAL
June 16, 2005
MEMORANDUM
SUBJECT: Region 10's Grant for Alaska Village Safe Water Program
Did Not Meet EPA Guidelines
Report No. 2005-P-00015
/s/ 'TtticAaei /I. IRfc&eq
FROM: Michael A. Rickey
Director of Assistance Agreement Audits
TO: Ron Kreizenbeck
Acting Regional Administrator
EPA Region 10
This is our final report on the subject audit conducted by the Office of Inspector General (OIG)
of the U.S. Environmental Protection Agency (EPA). This report contains findings that describe
problems the OIG has identified and corrective actions the OIG recommends. We discussed our
findings with your staff and issued a draft report. We have summarized your comments in this
final report and included your 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.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 calendar days of the date of this report. Please e-mail an electronic version of
your response to adachi.robert@epamail.epa.gov. You should include a corrective actions plan
for agreed upon actions, including milestone dates. 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.
We want to express our appreciation for the cooperation and support from your staff during this
audit. If you or your staff have any questions about this report, please contact me at (312) 886-
3037, or Robert Adachi, Assignment Manager, at (415) 947-4537.
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Table of Contents
At a Glance
Purpose of Audit 1
Background 1
Region 10 Did Not Comply With EPA Guidelines 2
Grant Application Did Not Include Objectives 2
Cost Review Was Not Timely or Adequate 3
Unauthorized Cash Management Terms Were in Grant 4
Authorized Period for Administrative Costs Unclear 5
Recommendations 6
Summary of Region 10 Response and OIG Comment 6
Scope and Methodology 6
Appendices
A - Region 10 Response and OIG Comment 8
B - Distribution 21
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Purpose of Audit
The audit objective was to answer the following question: Did Environmental Protection Agency (EPA)
Region 10 (Region) meet EPA guidelines in awarding the Village Safe Water Program grant in 2004 to
the Alaska Department of Environmental Conservation (State)?
Background
The State of Alaska recognized the need for adequate water and sewer systems through the passage of the
Village Safe Water Act in 1970. The State of Alaska established the Village Safe Water Program to
"establish a program designed to provide safe water and hygienic disposal facilities in the state." The
program is funded from three primary sources: grants from EPA, grants from the U.S. Department of
Agriculture, and funds from 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 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. For the State fiscal year ending June 30, 2005, the Village
Safe Water Program has a budget of $78 million, of which: EPA is providing $32 million, U.S.
Department of Agriculture $26 million, and the State of Alaska $20 million. From March 1995 through
July 2004, EPA had provided $232 million to the State of Alaska to fund the Village Safe Water Program.
On August 18, 2004, the Region awarded Grant No. XP-970847-01 (grant) to the State for the Village
Safe Water Program for the 5-year period June 30, 2004, through June 29, 2009. The grant provided
$34,555,300 as the Federal share of total costs, as shown in the table below:
Object Class Category
Total Costs
Federal Share
Administrative Costs
Personnel
$ 1,213,377
$ 910,033
Travel
180,000
135,000
Equipment
15,400
11,550
Supplies
14,500
10,875
Contractual
285,100
213,800
Indirect
417.523
313.142
Subtotal Administrative Costs
$ 2,125,900
$ 1,594,400
Other-Construction Projects
43.948.300
32.960.900
Total
$46,074,200
$34,555,300
Approximately $6,911,060 ($34,555,300 ^ 5 years) went toward the $32 million of EPA funds
included in the $78 million budget for the fiscal year ending June 30, 2005. The balance of the
EPA funds were from grants awarded in prior years.
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Region 10 Did Not Comply With EPA Guidelines
Region 10 did not meet EPA guidelines in awarding the grant for the Alaska Village Safe Water
Program. In particular, the Region did not ensure that the grant application contained
environmental or public health objectives for the various projects to be funded, or provided
sufficient information about particular projects being constructed. In addition, the Region's
review of the application prior to awarding the grant did not assess whether there was a
reasonable chance that each project funded would achieve its objective(s), and whether costs
were reasonable. As a result, there are no assurances that the grant money will be used
efficiently and effectively. Also, the grant includes ineligible projects, unauthorized cash
management terms, and ambiguous terms. We had reported most of these same conditions to
Region 10 in the draft of a prior report issued on July 21, 2004,1 almost a month before the
Region awarded the new grant to the State. However, Region 10 officials stated they did not
want to delay the award of the new grant because of concerns about State employees being
dependent upon the Federal funds for salaries, and the potential for delays to ongoing projects.
Grant Application Did Not Include Objectives
Before awarding the grant, the Region was required to determine whether the State would be
successful in meeting proposed environmental or public health objectives. To make this
determination, the grant application must clearly define the scope of work and the expected
environmental and/or public health objectives. EPA Office of Water guidance, Award of Grants
and Cooperative Agreements for the Special Projects and Programs Authorized by the Agency's
FY 2004 Appropriations Act, and the Project Officer Training Manual, state that the Project
Officer must ensure that:
The scope of work is clearly defined.
The environmental or public health objectives are clearly stated.
The project has a reasonable chance of achieving its objectives.
The grant application did not include environmental or public health objectives for projects.
Therefore, Region 10 was unable to assess the likelihood that a project would achieve its
objectives. In most instances, the grant application listed the projects or segments to be
constructed without any mention of the environmental or public health objectives. In some
instances, the application did not clearly define exactly what would be constructed. For
example, the project for the City of Chuathbaluk (EPA funding of $1,875,000) was described as
Sanitation Improvements Phase 3 with an "environmental health objective/outcome":
Provide: onsite sewage system for 15 homes currently self-hauling water and using
honeybuckets; school sewage system and water service; water well development; water
treatment system; and water treatment plant. This project phase will provide only a
1 The final, Report No. 2004-P-00029, EPA Oversight for the Alaska Village Safe Water Program Needs
Improvement, was issued on September 21, 2004.
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portion of the funds needed to meet the sanitation needs of the community. Additional
funds will be needed in the future to fully fund the entire project.
The information in the grant application was insufficient. First, the description did not clearly
describe the infrastructure that would be built with current funds. Secondly, building
infrastructure is not an environmental outcome. There was no mention of the environmental
objective that would be achieved by constructing the Chuathbaluk project. As a result, there was
no assurance that the project would achieve environmental benefits.
Cost Review Was Not Timely or Adequate
The Region did not complete a cost review on the individual projects included in the grant until
3 months after awarding the grant. Following this review, the Region recommended eliminating
six ineligible projects valued at $4,759,500. As a result, the current authorized scope of work
includes ineligible projects, and the Region will need to amend the grant to eliminate these
ineligible projects.
EPA's Cost Review Guidance (Grants Policy Issuance 00-5), dated June 7, 2000, states:
It is EPA policy that a cost review be conductedfor every project selectedfor funding.
Details regarding the reviews conducted should be documented, regardless of the
complexity and depth of the review.
In the funding recommendation, dated August 10, 2004, the Project Officer stated that:
The cost review has been completed only for the Administrative costs portion of the grant
application. The project tasks have not yet received a cost review. This will be done at a
later date prior to awarding the funds for the project portion of the grant application.
In subsequent correspondence, the Project Officer wrote that the State's application did not
provide sufficient information to conduct a proper cost review. Nevertheless, on August 18,
2004, Region 10 awarded the entire $34,555,300 requested by the State in its application.
On November 29, 2004, the Project Officer completed a cost review and recommended that six
projects totaling $4,759,500 be eliminated, and Region 10 will need to amend the grant to
exclude these projects.
Further, for the administrative cost reviews that the Region indicated it had conducted prior to
contract award, the Region was not able to provide support for its review of the nearly
$1.6 million in such costs, as required. The Region's Grants Management Office performed two
application reviews and completed checklists that stated that "there is sufficient supporting
detail" for administrative costs. However, there are discrepancies between this claim of
sufficiency and application information. For example:
Personnel were included in a series of tables in the grant application that did not list
salaries or any explanation of how salaries would be computed.
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The grant application checklist certified that fringe benefits were included, yet the
grant award listed fringe benefits as zero dollars.
Also, Region personnel claimed that categorical cost estimates for administrative expenses in the
grant application could be accurately assessed for validity based on previous years' expenses.
However, Region personnel admitted no administrative expense reports had been submitted for
the past 3 years. Without such reports, it is difficult to determine how an accurate and reliable
evaluation based on previous years' contractual and travel expenses could have been made.
In response to the draft report, the Region stated that it completed a second detailed cost review
after the grant was issued. As discussed in Appendix A, the second review does not meet the
requirements of Grants Policy Issuance 00-5.
Unauthorized Cash Management Terms Were in Grant
The grant award document includes terms that incorrectly authorize the State to draw cash far in
advance of actual need. This practice is not permitted by Federal regulation. The "Forecast of
Federal Cash Needs" schedule included in the grant award document showed that the entire
Federal award of $34,555,300 would be needed by June 30, 2006, even though the authorized
grant project and budget periods went to June 30, 2009. Many of the projects being funded
under the grant are not scheduled to be completed until after June 30, 2006. For example, for the
Stebbins project, which requires $2.5 million ($1,875,000 Federal share and $625,000 State
share), the "Forecast of Federal Cash Needs" shows a funding request of $281,250 by September
30, 2005, and a second funding request for the remaining $1,593,750 by June 30, 2006.
However, construction was not even scheduled to start until June 2006, and is scheduled to end
in November 2007. These schedules clearly show that the State plans to draw all of the Federal
funds at about the time construction begins. This seems to contradict U.S. Treasury and EPA
regulations that limit cash draws under grants to immediate need.
U.S. Treasury Regulations, 31 Code of Federal Regulations (CFR) Part 205, require a State to
minimize the time between the draw of Federal funds from the Federal Government and their
disbursement for Federal program purposes. A Federal program agency must limit a funds
transfer to a State to the minimum amounts needed by the State, and must time the disbursement
to be in accord with the actual, immediate cash requirements of the State in carrying out a
Federal assistance program or project. These U.S. Treasury Regulations are supported further by
EPA's regulations at 40 CFR 31.20 and 31.21.
The State's cash management problem was previously reported in Report No. 2004-P-00029
issued on September 21, 2004. In that report, we identified a $13,168,777 unauthorized cash
balance related to the Village Safe Water Program. In response to the finding, the Region stated
that it had notified the State that it must discontinue drawing construction funds in advance and
follow all U.S. Treasury cash management requirements. Nevertheless, the Region awarded a
grant with terms that permit the State to draw funds significantly in advance of needs, and
directly contradicts EPA and U.S. Treasury Regulations.
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Authorized Period for Administrative Costs Unclear
The Region stated that the administrative costs of nearly $1.6 million were for a 1-year period
ending June 29, 2005. The grant award document authorized project and budget periods for a
5-year period ending June 29, 2009. However, according to the "Forecast of Federal Cash
Needs" included in the award document, all administrative costs would be drawn in the first
year. The inconsistency in the grant document creates confusion. Drawing all administrative
costs in the first year may conflict with U.S. Treasury and EPA requirements for cash
management. Moreover, drawing all administrative funds in the first year raises questions about
the cost for grant management in future years, and the mandated limit on administrative costs.
Under the Award of Grants and Cooperative Agreements for the Special Projects and Programs
Authorized by the Agency's FY 2004 Appropriations Act, the State may use up to 5 percent of the
grant for administrative expenses. According to the grant award, Region 10 authorized
$1,594,400 (see table on page 1 for details) to cover administrative costs for the 5-year period,
June 30, 2004, through June 29, 2009. These administrative costs are about 4.6 percent of the
total grant award and are within the mandated limitation. Based on a 5-year budget period, the
estimated administrative costs for each year should be about $318,880 ($1,594,400 ^ 5 years).
As of November 5, 2004, the State had drawn $484,598 for administrative costs, even though the
grant would seem to authorize annual administrative costs of only $318,880. The draw of
$484,598 exceeded the estimated annual administrative costs by $165,713 and thus appeared to
exceed the State's immediate cash needs.
The Region explained that the draw covered actual expenses for the period from July 1 to
October 31, 2004. The Region also stated that the grant's approved administrative costs of
$1,594,400 were for only a 1-year period ending June 29, 2005. The Region's explanation raises
the question of how the State will support grant activities for the period after June 29, 2005, as
the State will have expended its approved administrative cost budget by that date. Since the
approved administrative costs were almost at the 5-percent maximum allowed in the
Appropriations Act, the State would need to fund most of the future administrative costs to
manage grant-funded activity through June 29, 2009. None of these additional State costs would
be eligible as matching funds because of the limitation in the Appropriations Act.
The Region needs to document its cost review of administrative expenses. During this process,
the Region should clarify the budget period for administrative expenses. If the administrative
costs are for 1 year, the application and budget must clearly show this and address how
administrative support and costs will be provided for the out years. When resolving this
administrative cost issue, the Region must also ensure compliance with the Congressionally
mandated limit on administrative costs. If the intention was to cover the period from June 30,
2004, to June 29, 2009, the Region will need to review the State's cash management practices
and recover any funds in excess of the State's immediate cash needs.
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Recommendations
We recommend that the Acting Regional Administrator, EPA Region 10:
1. Establish controls to ensure that Region 10 fulfills all EPA requirements before awarding
grants.
2. Suspend work under Grant No. XP-970847-01 until the State prepares a complete
application, and Region 10 adequately completes its review process following all EPA
requirements.
3. Ensure that a revised or reinstated award clearly addresses ineligible projects and
administrative cost issues, and directly addresses compliance with the Federal cost
principles in Office of Management and Budget Circular A-87 and the statutory limits on
administrative costs.
4. Place the State on a reimbursement payment basis, in accordance with 40 CFR 31.12,
until EPA has verified that the State's cash management system fully complies with the
requirements of 40 CFR 31.21 (b).
Summary of Region 10 Response and OIG Comment
We issued our draft report to Region 10 on March 10, 2005. In its response, the Region
concurred with the first recommendation, but did not concur with the second recommendation or
some of the findings in the draft report. Based on the Region's response to the draft report, we
revised the third recommendation to have the Region assure that the State's accounting of
administrative costs meets regulatory and statutory requirements. We also revised the fourth
recommendation to emphasize the importance of Federal cash management requirements and the
need for immediate change. The Region's full response is provided in Appendix A of this
report. Appendix A also includes our comments on the Region's response, in shaded text.
Scope and Methodology
The audit was conducted in accordance with Government Auditing Standards, issued by the
Comptroller General of the United States. These standards require that we 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. Our understanding of the internal controls was gained
through the performance of the procedures outlined below.
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The audit field work was performed from September 20 to November 5, 2004. Our audit
included site visits to EPA Region 10 in Seattle, Washington, to perform the following steps:
Interview Region 10 managers, including the Office of Water Director and Deputy Director;
Office of Management Programs Deputy Director; and Grants Management Officer.
Interview Region 10 Water Division and Grants Management staff.
Interview EPA Alaska Operations Office staff.
Review the official grant files.
Review project officers' files.
Instances of noncompliance with laws, regulations, and guidance, and deficiencies in the
Region's internal control system, have been identified and included in this report.
Recommendations have been made to correct the deficiencies.
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Appendix A
Region 10 Response and 01G Comment
April 8, 2005
MEMORANDUM
SUBJECT: Region 10's Response to IG's AVSWP Audit Report (Assign. No. 2004-001491)
FROM: Ronald A. Kreizenbeck - signed by Julie M. Hagensen, Acting DRA -
Acting Regional Administrator
TO: Michael A. Rickey
Director of Assistance Agreement Audits
Thank you for the opportunity to provide comments on IG Audit No. 2004-001491,
"Region 10's Grant for Alaska Village Safe Water Program Did Not Meet EPA Guidelines. "
Establishing some relevant context will better frame our response to this particular IG report.
We found the comments and recommendations stemming from last year's IG audit of the Village
Safewater program exceedingly helpful in both validating the need for the program
improvements we were already undertaking and identifying additional areas that could benefit
from greater focus. Further, I know that while the IG audit was underway last year, the Region
carefully considered all of the IG's concerns and recommendations as we worked with the State
of Alaska to process and award the FY2004 grant. As a result, numerous changes were made to
improve both the grant process and, of course, the content of the grant itself. It was with no little
surprise then that we read the statement in your latest report, "The actions noted occurred even
though Region 10 was aware of the findings and recommendations in our previous report that
identified improvements were needed...." The statement suggests that the Region was not
responsive to recommendations reflected in previous findings. We have had more than several
exchanges with IG audit staff in the months intervening the previous report and this latest one
substantiating the fact that indeed we have made and will continue to make a number of process-
related and substantive improvements related to this grant. I have attached for your reference
our response to the original audit report which details what the Region either had done or
proposed to do in addressing the IG's concerns and recommendations detailed in last year's
report.
I am also compelled to observe that the statement in this latest report, "Region 10 did not
comply with EPA guidelines." is overly broad and unequivocal, uninformed by relevant facts
Region 10 staff provided IG auditors. While HQ grant guidance could be more explicit and clear
on topics with which you have expressed concern, we believe our current effort is consistent
with the fundamental intent of the guidance. The report identified four specific issues: grant
application did not include objectives; cost review was not timely or adequate; unauthorized cash
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management terms were in grant; and authorized period for administrative costs unclear. The
Region respectfully disagrees with your conclusions on all of these points, as detailed below.
OIG Comment - In its response to the draft report entitled EPA Oversight for the
Alaska Village Safe Water Program Needs Improvement, the Region agreed to undertake
actions to ensure that the grant program will be adequately managed and that its intended
environmental results will be achieved. However, the Region awarded the current grant
without completing all of the EPA requirements. Also, the Region has the responsibility
to clarify the guidance issued by the Grants Administration Division and ensure
compliance with requirements.
Grant Application Did Not Include Objectives - The objective of the program is to provide
safe water and wastewater systems to homes in rural Alaska Communities. The provision of safe
water and wastewater infrastructure increases the public health protection afforded to a
community as defined in the Technical Report No. 66 by the U.S. Agency for International
Development (US AID) (executive summary attached). OMB (Office of Management and
Budget) has accepted 'houses served' as the objective for the program PART.
The objective of'houses served' is consistent with the EPA 2003-2008 National Strategic Plan
Sub-objective 2.1.1:Water Safe ToDrink: By 2015, in coordination with other Federal agencies,
reduce by 50 percent the number of households on tribal lands lacking access to safe drinking
water.
The grant application included 'houses served' as the objective for the proposed projects. Thus,
the application did include objectives that are in direct support of the 2003-2008 EPA Strategic
Plan (Strategic Plan) and will result in public health protection as defined in the US AID
Technical Report No. 66.
OIG Comment - The Region is faced with a series of challenges in managing and
measuring the effectiveness of its grant program to support the Alaska Village Safe
Water Program. The adequacy of a measure such as "houses served" needs to be
evaluated in the context of the long-term outcome measure for the program. OMB and
OIG have identified the lack of a long-term outcome measure as a weakness for the
program.
In its Program Assessment Rating Tool (PART) review, OMB rated the grant
program as "ineffective," stating that the program has systemic management
deficiencies. For results, the PART review rated the program 7 out of a possible 100,
stating that EPA needed to develop a long-term outcome measure.
• The OIG, in its report entitled EPA Oversight for the Alaska Village Safe Water
Program Needs Improvement, dated September 21, 2004, concluded that the Region
had neither developed goals, objectives, and measures for the grant awarded for the
Village Safe Water Program, nor included the grant program in its regional strategic
plan. As a result, the Region was unable to determine whether grants met legislative
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objectives to improve health and sanitation conditions in Alaska's rural and Native
villages. In response to the audit report, the Region agreed to take corrective action
to improve the deficiencies.
Some of the weaknesses with the fiscal 2004 grant cited in this report are directly
attributable to the deficiencies cited in both the OMB and OIG reports. Until the Region
develops specific outcome goals and measures for the program and builds these measures
into the grant application review and approval process, the program will be unlikely to
demonstrate it effectiveness.
It is unclear how the Village Safe Water Program fits in the Strategic Plan. In its
response, the Region linked the Village Safe Water grant program to the Strategic Plan's
Sub-objective 2.1.1, "Water Safe to Drink." However, the Strategic Plan Crosswalk
included in EPA Order 5700.7, Environmental Results under EPA Assistance
Agreements, linked the program to Sub-objective 2.2.1, "Improve Water Quality on a
Watershed Basis." The Region did not mention Sub-objective 2.2.1 in its response which
seems inconsistent since an EPA order links the Village Safe Water Program to Sub-
objective 2.2.1.
In its response, the Region stated that the program also supported the goal to reduce, by
50 percent, the number of households on tribal lands lacking access to safe drinking
water. The Village Safe Water Program deals with villages other than Alaskan Native
Villages. For example, the Village Safe Water Program funds projects for rural villages
and second class cities. Therefore, it would appear that the sub-objective chosen by the
Region does not address the Village Safe Water Program in its totality.
The fact that there are different thoughts about where the Village Safe Water grant
program fits under the Strategic Plan only highlights the need for the Region to
specifically address this grant program in its strategic plan. This program was
specifically authorized by Congress to address health and sanitation conditions in
Alaska's rural and Native villages, combining under one program the development of
community drinking water and wastewater systems as well as training, technical
assistance, and education relating to the operation and maintenance of sanitation services.
The uniqueness of the program demonstrates the need to establish its own goals and
measures through the regional strategic planning process.
The Region also stated that OMB accepted "houses served" as the objective for the
program. OMB identified "houses served" as an output measure, and not an outcome.
EPA Order 5700.7 defines output and outcome measures as follows:
The term "outcome " means the result, effect or consequence that will occur fi'om
carrying out an environmental program or activity that is related to an
environmental or programmatic goal or objective. Outcomes may be
environmental, behavioral, health-related or programmatic in nature, must be
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quantitative, and may not necessarily be achievable within an assistance
agreement funding period.
The term "output" means an environmental activity, effort, and or associated
work products related to an environmental goal or objective, that will be
produced or provided over a period of time or by a specified date. Outputs may
be quantitative or qualitative but must be measurable daring an assistance
agreement funding period.
Following the definitions within EPA Order 5700.7, the use of "houses served" would
reflect the outputs of the grants to the State but not necessarily the environmental result
or outcome. As stated in the Order, outputs do not by themselves measure the
programmatic or environmental results of an assistance agreement.
In addition, the grant application only provided information on houses served for 13 of
33 projects. The other 20 projects included 13 construction projects with the segments to
be constructed. For example, the project for the City of Shageluk is described as:
Provide a 3.5 acre sewage lagoon, a sewer line extension and access road to the
lagoon, and necessary fencing. This project will provide only a portion of the
funds needed to meet the sanitation needs of the community. Additional funds will
be needed in the future to fully fund the community system.
No mention is made of the "houses served." The other 7 of the 20 projects listed the
study to be prepared and not the proposed environmental or public health objectives to be
achieved. For example, the City of Teller's project is described as:
A completed study regarding "first time" water and sewer service for
non-seasonal residents.
As a result, the grant application does not appear to address the proposed environmental
or public health objectives based upon the Region's criteria.
EPA, in its Long Term Grants Management Plan, emphasized the importance of
including environmental outcomes in grant work plans and to link activities to
measurable outcomes. Before it can incorporate measures into the grant work plan, the
Region needs to determine the long-term goal and measure for the program. Because of
the unique issues and specific geographic area that the Alaska Village Safe Water
Program addresses, the program is not specifically mentioned in the Strategic Plan and
should be addressed in the Region's strategic plan. Once the Region develops the
strategy and measures for addressing health and sanitation conditions in Alaska native
and rural villages, it will be in a position to link activities in the grant work plan to the
goals and to link activities to measurable outcomes.
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Cost Review Was Not Timely or Adequate - As described during the prior audit of the Alaska
Village Safe Water Program, the cost review for the construction portion of the grant was
completed after the award of the grant because the State had not compiled detailed information
about the projects to complete the required cost review at the time of submittal. This level of
information was not required by the Region for previous grant applications. Once notified of the
cost review requirements, the State compiled the required information based on conceptual
designs and submitted the information to the Region for the required cost review. The State has
since modified its own grant application process for FY05 so that the cost review information
will be included at the community level and made available to Region 10 at the time of
application.
As with the construction portion of the grant, the cost review of the administration portion of the
grant was completed after the award of the grant. The Region's cost review compared the
requested budget to what the Federal Government would pay if the Federal Government was to
administer the program directly. The cost review resulted in the determination that the State's
requested budget was less than that estimated for the Federal Government's direct administration
of the program. Thus, the State's request was considered reasonable. Given that the budget
request was based on program expenses from the previous year, the program had, by extension, a
reasonable chance to fulfill its objectives.
OIG Comment - The Region acknowledged that the grant was awarded prematurely
and agreed that six projects recommended by the Project Officer for elimination, totaling
$4,759,500, remain in the grant award. The fact that the Region has never required
construction cost information in prior grants does not relieve the Region from its
responsibility to follow all grant requirements prior to the grant award. In connection
with its review of administrative costs, the Region did not follow the guidelines in Grants
Policy Issuance 00-5, dated June 2000, for performing cost reviews. This policy was
written to establish uniform procedures and guidance for reviewing and evaluating
proposed costs included in grantee's budgets. The policy defined a cost review as a
review of a budget to ensure that costs are necessary, reasonable, allowable, allocable,
and adequately supported. The policy also provided a guide for performing cost reviews,
and included the following steps in the review of personnel costs:
(1) The level of effort or the total amount of time proposed. The proposed effort
should be consistent with the effort required by the work plan.
(2) The labor mix or the labor categories proposed. Labor mix should be
consistent with the caliber of effort - professional nonprofessional clerical -
required by the grant work plan.
(3) The current salary plus a reasonable escalation factor during the
program/project. Generally, the conversion of annual salaries into hourly rates
is accomplished by dividing the annual salary by 2,080 hoars assuming an eight
hour work day.
12
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The Region's review of administrative costs did not meet the requirements of Grants
Policy Issuance 00-5 and would not appear to be adequate.
Unauthorized Cash Management Terms Were in the Grant - The State was notified in 2004
that it must discontinue drawing construction funds in advance and must follow all U.S. Treasury
cash management requirements. Following this notification, the State took significant actions to
implement a new program to draw down Federal funds only as they are needed, consistent with
U.S. Treasury cash management requirements. The expectation that a complex construction
program such as this could make major financial management changes within a very short period
of time is not reasonable. The Region and the State negotiated a one-year time frame to
implement the new cash management requirements. Progress on this score has already been
realized and the projected date for complete implementation of the new system is July 1, 2005.
OIG Comment - The Region is not entitled to waive the U.S. Treasury Regulations and
allow the State to draw funds in excess of its immediate cash needs. To do so would also
contradict the Region's July 14, 2004, letter to the State informing the State that it must
not draw funds in advance of actual immediate cash needs. The reasonableness of a
change in financial management is not relevant when the current practice contradicts
U.S. Treasury Regulations. The State must be required to comply with the U.S. Treasury
Regulations and revise its cash draw down procedures as well as its "Forecast of Federal
Cash Needs."
Authorized Period for Administration Costs Unclear - The statutory authorization language
for the program states that "no more than 5 percent of the funds may be used for administration
and overhead expenses." The language does not indicate that the administration funds are only
for the administration of specific projects funded that fiscal year. As with previous grants, the
State has chosen to use all of the requested administration funds during the 2005 State Fiscal
Year as indicated in their forecast of Federal cash needs. Note that the State requested less than
what it could have been requested (given that five percent of $43 M equates to $2.15 M - the
State requested $1.6 M).
The Region recognizes that providing administrative support funding annually based on specific
ongoing project needs has merit, especially as the individual projects typically run for several
years and the prospects for out-year funding are always uncertain. We will discuss with the
State employing this approach relative in future grants.
Future administration expenses will be covered with future Federal administration funds and
State funding. Administering the program on one fifth of the requested $1.6M annually (or
$320,000) would be almost impossible This approach would have been feasible had the State
chosen to prorate the amount of administration funds based on the length of the grant at the time
the program was developed. For this approach to work at this point in the program, a large
amount of funds would be required to pay for the prorated portion of the administration funds for
the projects funded under previous grants.
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OIG Comment - The Region's response raises concerns about regulatory compliance
regarding the charging of administrative costs. We also believe that the State's practice
of using most of the approved administrative costs during the first year of a 5-year grant
period increases the risk that administrative costs are not limited to the required
5 percent.
Title 40 CFR 31.22 requires the State to follow the cost principles in OMB Circular A-
87, Cost Principles for State, Local and Indian Tribal Governments. These principles
define a direct cost as any cost that can be identified specifically with a particular final
cost objective, which in this case is the grant. This definition would prohibit charging
one grant directly while working on the activities included in and authorized by another
grant. Therefore, the State can only use the administrative costs in Grant No. XP-
970847-01 for the projects and activities authorized in the same grant. Using the
administrative costs in Grant No. XP-970847-01 to manage or oversee activities and
projects approved in prior grants is unallowable and could result in the forfeiture of
claimed costs. Further, if the State uses all the approved administrative costs during the
first year of the 5-year grant period, there will be no Federal funds available to manage
and oversee the projects authorized by the grant, which the Region acknowledges takes
several years to complete. EPA runs the risk of poor or no project oversight by the State
unless the State is able to fund the oversight activity with its own money.
Our second concern is the vulnerability Region 10 has for ensuring that administrative
costs are limited to the required 5 percent. As the Region noted in its response, the fiscal
2004 appropriation for the Village Safe Water Program grants, Public Law 108-199,
states that "no more than 5 percent of the funds may be used for administration and
overhead expenses." However, the authorizing legislation, Public Law 104-182, Section
303 (33 U.S. Code 1263a), states:
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 authorizing legislation clearly limits the administrative costs for each grant. Using
administrative cost authorized under one grant to manage and oversee projects and
activities authorized under a different grant reduces the accountability of funds for each
grant. This lack of accountability weakens the Region's ability to ensure that
expenditures meet the statutory limitation on administrative expenses.
Finally, with respect to recommendations reflected in the subject IG report, please note
our responses below.
1. Costs reviews were not performed prior to the award of the FY04 grant for reasons
already detailed. Costs reviews will be performed prior to the award for the FY05 grant.
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2. EPA does not believe that sufficient justification exists to suspend work under Grant
No. XP-970847-01 at this time. The Agency believes that the application is complete as it
contains environmental outcomes that directly support the EPA 2003-2008 Strategic Plan and
that have been accepted by the OMB PART review process.
3. The Region will revise the FY04 award to incorporate the results of the completed cost
review and define the administrative costs for the July 1, 2004 to June 31, 2005 time frame.
4. The Region will modify the grant terms to indicate that the state will meet the U.S.
Treasury cash management requirements.
OIG Comment - In its response, the Region generally concurred with
Recommendation 1.
The Region did not agree with Recommendation 2 and believed that the application is
complete, because it contains environmental outcomes that directly support the Strategic
Plan and have been accepted by the OMB PART review process.
The Region also believed that it had carefully considered all of the OIG's concerns and
recommendations as it worked with the State to process and award the grant. As a result,
numerous changes were made to improve both the grant process and, of course, the
content of the grant itself. The Region referred to its response to the draft report, entitled
EPA Oversight for the Alaska Village Safe Water Program Needs Improvement, to list
the actions that the Region has taken or would take in connection with future grant
awards to the State. The Region also believed that while Headquarters grant guidance
could be more explicit and clear on topics with which the OIG has expressed concern, its
current effort is consistent with the fundamental intent of the guidance.
We do not agree with the Region's conclusion regarding Recommendation 2, and believe
that the grant application does not include environmental outcomes supporting the
Strategic Plan. Also, the grant application contains six projects, totaling $4,759,500, that
the Project Officer recommended for elimination. Therefore, the application is not
accurate or supportive of the entire amount awarded.
With respect to Recommendation 3, the Region did not disagree, but clarified that the
administrative costs were for 1 year. This clarification raises questions concerning
compliance with Federal cost principles and assurances that the statutory limit on
administrative cost would be met. Consequently, we revised the recommendation to have
the Region ensure that the State's accounting of administrative costs fulfill regulatory and
statutory requirements.
We also revised Recommendation 4 to emphasize the importance of Federal cash
management requirements and the need for immediate change.
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Again, thank you for the opportunity to comment. Should you have any questions, please
feel free to contact Marie Jennings of my staff at 206-553-1893.
Attachments: (1) EPA Response to IG Audit Report No. 2004-P-0029-Appendix B
(2) USAID Technical Report No. 66, Executive Summary
cc: Marie Jennings - OWW
Mike Gearheard - OWW
Dennis Wagner - OWW
Jon Schweiss - RAO
Jane Moore - OW/HQ
OIG Comment - In its response, the Region included two attachments. The first was a
copy of OIG Report No. 2004-P-00029. A copy of this report can be obtained at
http://www.epa.gov/oig/reports/2004/20040921-2004-P-00Q29.pdf.
The second attachment was a report prepared by the United States Agency for
International Development entitled: Health Benefits from Improvements in Water Supply
and Sanitation: Survey and Analysis of the Literature on Selected Diseases. A copy of
the attachment is included starting on the next page.
16
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WASH Technical Report No. 66
HEALTH BENEFITS FROM IMPROVEMENTS
IN WATER SUPPLY AND SANITATION:
SURVEY AND ANALYSIS OF Ti IF 1JTHEAIUKE ~
ON SELECTED DISEASES
Prepared for the Office of Health,
Bureau for Science and Technology,
U.S. Agency for International Development,
under WASH Task No. 035
by
Steven A. Esrey
Jameg B. Polasli
Leslie Roberts
and
Clive dfl
July
Water ani Stsoitalfc® for Metro rrajeet
Contnct No. 5971-7-OMOIl-O), Project No. 836-1249
is spoiuoied tif the OtiR * ut Health, Bissau for Science and Technology
U.S. Agenty for InienMtkmd Development
WMhmgtoo.DC 20523
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I \i »' X'lVl- SUMMARY
j. ins reoort renews and analyzes the findings of a number of studies of the impact of
improved water supply and sanitation facilities on six diseases; diarrheal asis,
dracmculiasis (guinea worm), hookworm, schistosomiasis, and trachoma. The studies were
restricted to those written in the English language, t tmes oarBctiiar diseases were chosen for
review because they are widespread and because they illuminate the variety of mechanisms
through which improved water and sanitation may protect people. For example, providing
safe, potable sources of drinking water blocks the transmission of guinea worm, while using
larger quantities of water for personal hygiene helps to stop the spread of trachoma,
improving domestic hygiene practices and providing excreta disposal facilities are also
Important mechartsrns for interrupting disease transmission.
The following table illustrates the prevalence and the adverse health, consequences of these
diseases in developing count'u's di either widespread in fit dtveloping
world, constitute serious problems wfwre they exist, or both,
tHODSNCS At
in DKlofws CowrrasK
(excuiong Cmm)
Esii**,iio Etwatio
? cass/war demhs/year
OlAHSHEA 876 MIJJOM 4.600,000
Asc/mms 9CB Minem 20000
Gumm worn 4 urnm.
Scmommms 200 mux*.
HOOWOON 800 MiltiOM
Trachoma mo mmm "
• Efffcr is muMLY eatuwffiou raws wk mm
" M*jO# CBAOUtY * BUNONGSS
A total of 144 studies were reviewed for this report When possible, a percentage reduction
in disease attributable to water, sanitation, hygiene, or any combination of these, was
calculated for each study. Only those studies with identifiable reduction rates were further
analyzed. Grouping the studies for eacn disease, a disease-specific mecfian reduction figure
was then calculated, and a second median reduction figure was derived for the more
methodologically rigorous fbstter) studies, These figures are shown In the table below.
vll
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Expecro Reduction m Moosgxrv mo Mourns*
rts-M iwra W/urn Sum* mo sanitation"
Beth# Siuosb
RANGE
NO,
MEDIAN
RANGE
OiAmim. mmms-
- Mommm
49
22*
CK-1tXRi
19
26%
«W8%
, mortauty**
3
65*
43%-7«
_
_
...
ASCASifiAJiS
11
28%
{RMi3%
4
18%-83*
Oumga worm
7
76*
37*^8%
2
75V81*
Hookworm
9
m
OVIOOX
.
-
SCHBIOSOMtASB
i
73%
&9%47%
3
89*87%
Trachoma
13
50%
7
0V79*
Overall mpagt
on cms MOWAUty
9
60%
wwa
6
58%
20%-32%
Foil ADOtflCWi*, INFORMATION SEE Alwww
8, Tame 7,
• thWCMB MOMORV WDUC
HON UMtSSS *
3110 OIWWW&
.. |
i .tie results of the studies selected for analysis show that the impact of water supply and
sanitation is significant. Median reductions in morbidity {I.e., Incidence and prevalence)
calculated from the better studies range from 26 percent for diarrhea to a s'trwlng ?8 percent
for guinea worm and 77 percent, for schistosomiasis. In between tie ascartasis and trachoma
at 29 arid 27 percent respective^. Ail studies of hookworm were flawed with one
exception—which buna a % oexcmt reduction to incidence. For hookworm, aseariasis, and
schistosomiasis, the reduction to egg counts was greater ten the reduction tn incidence or
presence, suggesting that 'there is also a reduction In disease severity which is often
overlooked.
The substantial impact of water and sanitation on chiid survival Is also demonstrated by the
studies imiewci for overall efaid mortality, rim studies fadicaieci a. 60 percent median
reduction, with a figure of 55 percent emerging from the six better studies; unfortunately,
none of the tetter studies specifically addressed diarrheal disease mortality reduction.
in summary, broad, demonstrable health impacts affecting ail age groups in most of the
developing world can be expected from improvements in water supply and sanitation. Tills
review also found that reductions tn disease severity arc? sometimes larger than reductions In
incidence. However, the importance of this impact is often overlooked. To maximize the
health Impacts identified in this review, the following factors should be considered:
• The water supply should be as close to the home as possible—to
increase the quantity of water available for hygiene practices.
viii
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Water supply and health programs should emphasize hygiene
•vsluraSori to encourage people to use more water for persoi.:s) dpi!
domestic purposes.
Sanitation facilities shouta oe culturally appropriate, slice use of the
sanitation facility will affect Its health impact—probably reflecting the
importance of user acceptance.
Use of facilities is essential during critical seasonal transmission
periods for diseases, such as guinea worm, which have such periods.
In achieving broad health impacts, safe excreta disposal and proper
use of water for personal and densest e hygiene appear to be more
important than drinking water quality.
Sanitation facilities shouki m Li^LiAd in conjunction with water
facilities when fetal i d> ,tw-^ Mmi
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Distribution
Appendix B
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
EPA Region 10
Acting Regional Administrator
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
Office of Inspector General
Inspector General
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