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OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Attestation Report
Ozone Transport Commission
Incurred Costs Under EPA Assistance
Agreements XA98379901, OT83098301,
XA97318101, and OT83264901
Report No. 2007-4-00068
July 31, 2007
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Report Contributors:
Leah Nikaidoh
Bill Spinazzola
Rich Howard
Abbreviations
CFR Code of Federal Regulations
EPA U.S. Environmental Protection Agency
FSR Financial Status Report
OIG Office of Inspector General
OMB Office of Management and Budget
Recipient/OTC Ozone Transport Commission
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{&}
U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
2007-4-00068
July 31, 2007
Catalyst for Improving the Environment
Why We Did This Review
We conducted this examination
to determine whether (1) the
incurred costs of $9,042,706
fairly present the allowable costs
under the U.S. Environmental
Protection Agency (EPA)
assistance agreements audited;
(2) the amounts claimed by the
recipient under EPA grants were
reasonable, allocable, and
allowable in accordance with the
terms of the agreements and
applicable regulations; and
(3) the recipient achieved the
intended results of the grants.
Background
EPA awarded four assistance
agreements to the recipient for
the following purposes: to
coordinate Northeastern States"
efforts to assess the degree of
ozone transport, and strategies
for mitigating interstate
pollution; and to develop State
implementation plans for
reducing regional haze.
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.aov/oia/reports/2007/
20070731-2007-4-00068.pdf
Ozone Transport Commission incurred Costs Under
EPA Assistance Agreements XA98379901, OT83098301,
XA97318101, and OT83264901
What We Found
In our opinion, with the exception of the questioned costs discussed below, the
outlays reported in the Financial Status Reports present fairly, in all material
respects, the allowable outlays incurred in accordance with the terms and
conditions of the agreements and applicable laws and regulations. We questioned
$2,723,706 of the $9,042,706 in reported outlays because the recipient claimed
unallowable outlays for contractual services, indirect costs, and in-kind costs.
Specifically, the recipient:
• Did not compete contracts, justify sole-source procurements, or perform cost
analysis of contracts;
• Claimed indirect costs without approved indirect rates; and
• Did not maintain adequate documentation for in-kind costs used as recipient
match.
We did not identify any concerns with the deliverables required by the grants.
What We Recommend
We recommend that EPA recover questioned outlays of $2,723,706 unless the
recipient provides sufficient documentation to support the related claimed costs in
accordance with Federal regulations. We also recommend that EPA direct the
recipient to implement procedures to address issues relating to procurement of
contracts, indirect cost rates, and documentation of in-kind costs, and monitor the
recipient's subrecipient and procurement activities until EPA is assured that the
recipient is consistently meeting Federal requirements.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
July 31, 2007
MEMORANDUM
SUBJECT: Ozone Transport Commission Incurred Costs Under EPA Assistance Agreements
XA98379901, OT83098301, XA97318101, and OT83264901
Report No. 2007-4-00068
This is our 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 the
problems the OIG has identified and corrective actions the OIG recommends. This report
represents the opinion of the OIG and does not necessarily represent the final EPA position.
EPA managers in accordance with established audit resolution procedures will make final
determination on matters in this report.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $200,644.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us
your proposed management decision for resolution of the findings contained in this report before
any formal resolution can be completed with the recipient. Your proposed decision is due on
November 28, 2007. To expedite the resolution process, please email an electronic version of
your proposed management decision to kasper.ianet@epa.gov.
FROM: for Melissa M. Heist
Assistant Inspector General for Audit
TO:
Richard Kuhlman
Director, Grants and Interagency Agreements Management Division
Donald S. Welsh
Regional Administrator
Region 3
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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 our review. If you have any questions, please
contact Janet Kasper, Director, Assistance Agreement Audits, at (312) 886-3059.
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Ozone Transport Commission Incurred Costs Under EPA Assistance Agreements
XA98379901, OT83098301, XA97318101, and OT83264901
Table of C
Background 1
Independent Auditor's Report 3
Results of Examination 5
Improper Procurements 5
Unallowable Indirect Costs 8
Unallowable and Unsupported In-Kind Costs 9
Recommendations 12
Schedules
Schedules of Reported Outlays and Results of Examination 13
1 Assistance Agreement XA98379901 13
2 Assistance Agreement OT83098301 14
3 Assistance Agreement XA97318101 15
4 Assistance Agreement OT83264901 16
Status of Recommendations and Potential Monetary Benefits 17
Appendices
A Scope and Methodology 18
B Recipient Response 19
C Distribution 25
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Background
We audited four assistance agreements awarded to the Ozone Transport Commission
(recipient/OTC) totaling $9,042,706. The recipient is a multi-state organization formed
under Sections 176A and 184 of the Clean Air Act to advise EPA on transport issues and
to develop and implement regional solutions to the ground level ozone problem in the
Northeast and Mid-Atlantic regions. The recipient is an interstate government entity
located in Washington, DC. OTC's members include the Northeastern States and the
District of Columbia. The following table provides some basic information about the
authorized project periods and funds awarded under each of the four agreements:
Assistance
Award
EPA
Recipient's
Total
Agreement
Date
Share
Share
Costs
Project Period
XA98379901
03/12/2003
$3470410
$0
$3,470,410
02/01/2003-01/31/2005
OT83098301
06/24/2003
1,297,763
1,086,333
2,384,096
06/13/2003 - 06/30/2005
XA97318101
12/29/2004
1,936,316
0
1,936,316
02/01/2005-06/30/2006
OT83264901
07/21/2005
633,592
618,292
1,251,884
06/01/2005-06/30/2006
Total
$7,338,081
$1,704,625
$9,042,706
Sources: The cost amounts shown were from the recipient's Financial Status Reports/Federal Cash
Transaction Reports. The assistance agreements' information is from the recipient's grants documentation.
EPA awarded all four grants under the Clean Air Act.
Grants XA983 79901 and XA97318101: These grants provide funds to OTC to assess
and design strategies to reduce regional haze in the Northeastern United States. The
recipient works with States and tribes to provide model State Implementation Plans for
Regional Haze.
Grants QT83098301 and OT83264901: These grants provide funds for OTC's ongoing
operations. The recipient coordinates the efforts of member States to assess the degree of
ozone transport throughout the region and to assess strategies for mitigating interstate
pollution. OTC also makes recommendations to EPA on measures that the States need to
include in their plans to meet health-based standards. The grants support OTC's effort to
provide member States with air quality related expertise and support ranging from
monitoring, developing implementation strategies and model rules, and education and
outreach.
We reviewed deliverables under these grants and discussed the recipient's performance
with EPA project officers. The project officers reported that all deliverables were
completed and the recipient's work was acceptable.
We issued a draft report to OTC on May 11, 2007. OTC responded to our report on June
25, 2007. OTC's response is included as Appendix B.
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To assist the reader in obtaining an understanding of the report, key terms are defined
below:
Reported Outlays:
Questioned Outlays:
Program expenses or disbursements reported by the
recipient on the Federal Financial Status Reports.
Outlays that are (1) contrary to a provision of a law,
regulation, agreement, or other documents
governing the expenditures of funds; or (2) not
supported by adequate documentation.
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Independent Auditor's Report
We have examined the total outlays reported by the Ozone Transport Commission
(recipient/OTC) under the EPA assistance agreements, as shown below:
Assistance
Agreement
Financial Status Reports
Date
Submitted
Period
Ending
Total
Outlays
Reported
Federal Share
of Outlays
Reported
XA98379901
09/09/2005
01/31/2005
$3,470,410
$3,470,410
OT83098301
03/15/2007
06/30/2005
2,384,096
1,297,763
XA97318101
12/29/2006
06/30/2006
1,936,316
1,936,316
OT83264901
03/28/200
06/30/2006
1,251,884*
633,592
Total
$9,042,706
$7,338,081
Source: The total amounts claimed and Federal share amounts were from the
recipient's Financial Status Reports/Federal Cash Transaction Reports.
This amount is net of $16,551 of program income.
The recipient certified that the outlays reported on the Financial Status Reports, Standard
Form 269, were correct and for the purposes set forth in the agreements. Preparing and
certifying the claims were the responsibility of the recipient. Our responsibility is to
express an opinion on the reported outlays based on our examination.
We conducted our examination in accordance with the Government Auditing Standards
issued by the Comptroller General of the United States, and the attestation standards
established for the United States by the American Institute of Certified Public
Accountants. We examined, on a test basis, evidence supporting the reported outlays,
and performed such other procedures as we considered necessary under the
circumstances. We believe that our examination provides a reasonable basis for our
opinion.
We questioned $2,723,706 of the $9,042,706 in reported outlays because the recipient
claimed unallowable outlays for contractual services, indirect costs, and in-kind costs.
Specifically, the recipient:
• Did not compete contracts, justify sole-source procurements, or perform cost analysis
of contracts;
• Claimed indirect costs without approved indirect rates; and,
• Did not maintain adequate documentation for in-kind costs used as recipient match.
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In our opinion, with the exception of the questioned outlays discussed in the preceding
paragraph, the outlays reported in the Financial Status Reports present fairly, in all
material respects, the allowable outlays incurred in accordance with the terms and
conditions of the agreements and applicable laws and regulations. Details of our
examination are included in the Schedule of Reported Outlays and Results of
Examination that follows.
Janet Kasper
Office of Inspector General
U.S. Environmental Protection Agency
March 22, 2007
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Results of Examination
We questioned outlays of $2,723,706 because the recipient claimed unallowable outlays
for contractual services, indirect costs, and in-kind costs. The questioned outlays are
summarized below and detailed in the supporting schedules.
Assistance
Agreement
Total
Reported
Outlays
Questioned
Outlays
Amount Due
EPA
Schedule
XA98379901
$3,470,410
$192,572
$192,572
1
OT83098301
2,384,096
1,583,158
817,200
2
XA97318101
1,936,316
145,854
145,854
3
OT83264901
1,251,884
802,122
363,735
4
Total
$9,042,706
$2,723,706
$1,519,361
Sources: The reported outlay amounts shown were from the recipient's Financial
Status Reports/Federal Cash Transaction Reports. The amounts questioned were
based upon OIG analysis.
The recipient's internal controls were not sufficient to ensure that reported outlays
complied with Federal regulations, as required. These weaknesses and the resulting
questioned costs are described in the following paragraphs; details on costs questioned
for each agreement are included in Schedules 1 through 4.
Improper Procurements
OTC could not demonstrate that it had obtained fair and reasonable prices when
obtaining contractual and consulting services. Consequently, we questioned contract
outlays of $150,263 as unallowable.
Under 40 CFR Part 31.36 (d)(1), small purchase procedures are those relatively simple
and informal procurement methods for securing services, supplies, or other property that
do not cost more than $100,000. If small purchase procedures are used, price or rate
quotations shall be obtained from an adequate number of qualified sources. In cases
where sole source awards are made, a cost analysis is required for noncompetitive
proposals in accordance with 40 CFR 31.36(d)(4).
According to 40 CFR 31.36 (b)(9), grantees will maintain records sufficient to detail the
significant history of a procurement. These records will include, but are not necessarily
limited to, the following: rationale for the method of procurement, selection of contract
type, contractor selection or rejection, and the basis for the contract price.
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The OTC Procurement Policy Manual Section III.D states that OTC will obtain
competitive bids to the extent it is practical and in accordance with good business
practices. In procurements from $1,000 to $14,999, verbal quotes from two vendors are
required. Written quotes from at least three vendors are required for procurements
ranging from $15,000 to $49,999. Amounts in excess of $50,000 require a formal closed
solicitation, where bid documents are forwarded to potential bidders.
We reviewed five contracts valued at $164,453. One, M.J. Bradley, was for consulting
services. The remaining four were for various other technical services. All of these
contracts were under the small purchase threshold of $100,000. We questioned $150,263
because the recipient did not adhere to Federal regulations or its own procurement
procedures.
Total Amount
Amount
Contractor/Consultant
Claimed
Questioned
Bruce Carhart
$ 9,220
$ 9,220
EarthTech
74,885
74,885
Environ
36,456
36,456
ICF
29,702
29,702
M.J. Bradley
14,190
0
Total
$164,453
$150,263
Sources: The total amounts claimed were from the recipient's
books and records. The amounts questioned were based upon the
OIG analysis.
Under two separate procurements (EarthTech and Environ), OTC awarded sole source
contracts because the contractors were the only firms that responded to its requests for
proposals. Forty CFR 31.36(d)(1) requires OTC to perform and document a cost analysis
for each contract when competition is lacking. However, the recipient could not provide
any such documentation. We, therefore, questioned claimed amounts for EarthTech and
Environ.
OTC did not follow Federal procurement requirements or its own procurement
procedures when awarding a sole source, small purchase time and materials contract to
ICF. OTC did not perform a required cost analysis to determine if the contracted rates
proposed by ICF were reasonable. Also, in accordance with OMB Circular A-87(c)(2),
OTC is required to ensure that all costs charged under its grants are reasonable.
However, the invoice provided by ICF was a one-line charge that did not break down the
rates charged for its services. ICF did not submit sufficient detail or support for OTC to
properly review the charges. Therefore, OTC could not determine if costs billed were
reasonable and met the terms and conditions of the contract.
A fourth contractor, Bruce Carhart, was OTC's former Executive Director. OTC
contracted with Carhart to perform consulting services. The current Executive Director
stated that he performed a limited cost analysis of comparable consulting rates prior to
negotiating a contract with Carhart. However, OTC was unable to provide the OIG with
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any documentation to support this analysis. OTC did not comply with 40 CFR 31.36 (d)
(1) which requires a cost analysis when competition is lacking. Because OTC could not
provide documentation to support the required cost analysis, we questioned total costs for
the contract of $9,220.
Auditee Response
OTC disagreed with the conclusion that it has not consistently complied with the
procurement requirements of 40 CFR Part 31 and OMB Circular A-87. It acknowledged
difficulty in providing some of the information requested during our review, but said that
it has full management systems in place that are consistent with, and more stringent than,
Federal requirements.
OTC stated that it followed its internal procedures for procuring these contracts but good
documentation of that was not readily evident in its files and OTC no longer employed
the staff that managed the process. OTC's analysis showed the costs paid for the
Environ, EarthTech, and ICF contracts were reasonable. The analyses consisted of
comparing the proposed labor costs to the costs of two other firms who were capable of
doing the work but who did not respond to the original contract proposal. OTC said the
reasonableness of the Bruce Carhart contract was determined by comparing Carhart's
proposed hourly rate to a rate listed in a GSA database for comparable work.
To resolve the reported findings, OTC said that it:
• reviewed and supplemented its procurement files to assure that they meet the
requirements of 40 CFR Part 31 and OMB Circular A-87,
• prepared cost analyses for each of the contracts and included them as an attachment to
its response,
• revised its procurement policies to add statements from 40 CFR Part 31 and OMB
Circular A-87,
• will ensure that cost analyses are performed for all procurements,
• will provide new employees with contracts and grants management training, and
will restructure its procurement filing system to provide more detail.
OIG Analysis
We have not revised our questioned costs or recommendations on procurement practices.
OTC has not provided evidence that it performed the cost analyses required by 40 CFR
31.36(d)(4) for sole source contracts. This section defines a cost analysis as verifying the
proposed cost data, the projections of the data, and the evaluation of the specific elements
of costs and profit. OTC's comparisons of proposed labor rates to labor rates of other
firms meet the requirements of a price analysis (comparing price quotes submitted), not a
cost analysis. OTC compared prices, but did not verify the proposed data and evaluate
the elements of cost and profit. Since the contracts were awarded without competition,
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OTC could not perform a cost analysis, as required. OTC can improve its compliance
with the procurement requirements of 40 CFR 31 and OMB Circular A-87 by following
the procedures it listed in its response to our findings.
Unallowable Indirect Costs
We questioned unallowable indirect costs of $868,818, as follows:
Assistance
Total Amount
Amount
Agreement
Claimed
Questioned
XA98379901
$ 155,120
$ 155,120
OT83098301
402,754
402,754
XA97318101
145,854
145,854
OT83264901
214,440
165,090
Total
$918,168
$868,818
Sources: The total amounts claimed were from the recipient's
Financial Status Reports/Federal Cash Transaction Reports.
The amounts questioned were based upon the OIG analysis.
OMB Circular A-87, Attachment E, section D.l.d states that an indirect cost rate proposal
must be developed and, when required, submitted within 6 months after the close of the
governmental unit's fiscal year, unless the cognizant Federal agency approves an
exception. In addition, OTC's grants included a condition requiring annual submission
and approval of indirect cost rates.
OTC submitted an indirect rate proposal to EPA for the fiscal year ended March 31,
2003. EPA did not approve the proposal and OTC did not submit any additional
proposals between 2003 and 2007. The recipient submitted a proposed indirect cost rate
plan for FY 2007, and the Department of the Interior approved the provisional rate under
an agreement with EPA.
Because of OTC's non-compliance with the indirect rate requirements of OMB Circular
A-87 and its grant conditions for Fiscal Years 2003 through 2006, OTC improperly
claimed $868,818 in indirect costs.
Auditee Response
OTC stated that it submitted an indirect cost rate proposal for FY 2003 but EPA never
responded to OTC's submission. OTC subsequently assumed the rate had been approved
because it cited the rate and the pending rate proposal in all of its grant applications and
EPA awarded those grants with the proposed rate. OTC also said it had an agreement
with EPA to submit its indirect rate proposals for FY 2005 and FY 2006 whenever its
financial audits for those years were completed. OTC completed these audits and OTC
gave EPA proposals for FYs 2005 and 2006 in May 2007. In addition, the indirect cost
rate for FY 2007 had been submitted and approved previously. To improve the
timeliness of submission in the future, OTC said it has developed formats and worksheets
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to assist with the computation of indirect rates and compliance with documentation
requirements.
OIG Analysis
We continue to question indirect costs of $868,818. OTC claimed indirect costs using
unapproved rates and had not submitted the rates annually as required by OMB Circular
A-87 and the conditions of its grants. OTC prepared indirect cost rate proposals for FY
2006 and FY 2005 and submitted them to EPA. However, the rates remain unapproved.
EPA has not approved OTC's FY 2003 rate. OTC did not address the lack of a submitted
or approved rate for FY 2004. Once all indirect cost rates are submitted to and approved
by EPA, the related indirect costs would be allowable.
OTC did not submit, as part of its response, the indirect cost rate formats and worksheets
that it used to improve its timeliness of future indirect cost rate submissions. Therefore,
we cannot say with certainty that OTC's corrective action will ensure future timeliness.
Unallowable and Unsupported In-Kind Costs
OTC claimed in-kind costs without determining the allowability of the costs. Therefore,
EPA had no assurance that OTC met the matching requirements of its grants.
Consequently, we questioned in-kind outlays of $1,704,625 as unallowable, as follows:
Assistance
Agreement
Total In-Kind
Costs Claimed
Questioned
In-Kind Costs
OT83098301
$1,086,333
$1,086,333
OT83264901
618,292
618,292
Total
$1,704,625
$1,704,625
Sources: The total amounts claimed were from the recipient's
Financial Status Reports/Federal Cash Transaction Reports.
The amounts questioned were based upon the OIG analysis.
Under 40 CFR 31.24, in-kind contributions include allowable costs incurred by a grantee,
sub grantee, or cost-type contractor. This includes the value of third party in-kind
contributions applicable to the grant period. Costs and third party contributions must be
verifiable to grantee records. The records must show how the value placed on third party
in-kind contributions was derived. Third party in-kind contributions count towards a cost
sharing or matching requirement only where, if the party receiving the contributions were
to pay for them, the payments would be allowable.
OMB Circular A-87 Attachment A.l and Attachment B.8 and B.12 state that costs can
only be used for the matching requirement in one Federal award, in either the current or
prior period. The Circular also states that the value of donated services may be used to
meet cost sharing or matching requirements and that donated services will be supported
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by the same methods used by the governmental unit to support the allocability of regular
personnel services.
OTC was unable to determine if in-kind contributions were supported by allowable costs
and complied with the above requirements. Member States submitted the following types
of in-kind contributions: salaries, fringe benefits, travel, supplies, and other costs.
Documentation that each State submitted to OTC differed. Data packages were
incomplete, and detail-supporting documents were not summarized or did not agree to
amounts included on summary sheets. One State did not submit supporting data to OTC
in time for recording in the general ledger. Some States only submitted a one-page letter
summarizing their costs by category. Others submitted combinations of summary reports
and backup documentation (such as employee timesheets and travel vouchers). The
backup documentation either was incomplete or did not trace to cost summaries. None of
the states included statements and signatures that attested to the accuracy and allowability
of the costs.
We also found that OTC does not formally document its review and approval of in-kind
contributions. When States submit their reports of in-kind contributions, OTC
summarizes the costs and records them in its accounting records. OTC informed us that
it reviews the recorded costs but the process is not formally documented, such as with an
approval stamp or with the initials and dates of the reviewer. Lack of a formal
documented review process increases the risk of errors. For example, in four cases we
found that OTC's quarterly summaries did not agree to the States' quarterly reports, once
for Vermont and three times for Massachusetts. OTC should revise its review process for
State contributions to include formal documentation of the review and a clear statement
of the review steps performed.
Because (1) support for in-kind contributions did not meet the requirement of OMB
Circular A-87 and 40 CFR 31.24, and (2) OTC lacks a formal review process for in-kind
contributions, we questioned total in-kind contribution claimed of $1,704,625.
Auditee Response
OTC said that it has been following its procedures for State matching documentation
since 1993. The procedures allowed for various types of documentation from member
States to support their matching contributions. OTC acknowledged that some States do
not use separate project numbers or identifiers to accumulate hours and costs incurred for
OTC work but said that it discussed the contributions with member States and understood
that the States only included time spent on OTC related work in their matching
contributions. In addition, OTC said that the sections of 40 CFR Part 31 and OMB
Circular A-87 cited in our report were not sufficiently detailed and did not provide
sufficient guidance on what constitutes adequate documentation.
OTC included written procedures that it follows when collecting and reviewing State
matching contributions, an outline of how States meet their matching contributions, and a
list of the work and projects that the States have completed.
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To resolve the reported findings OTC said it is:
• reviewing State matching records to supplement and verify that the matching amounts
are allowable in accordance with 40 CFR 31.24 and OMB Circular A-87,
• working with the States to establish time sheet codes for OTC work,
• developing alternative documentation procedures when States are unable to adopt
time sheet coding for OTC work,
• reviewing documents States submitted to support their matching contribution,
indicating approval with the initials of the reviewer and date, and returning
unapproved submissions for additional documentation, and
• updating the OTC Financial Management Policies Manual to include a section on
collecting, documenting, reviewing, and approving State matching contributions.
OIG Analysis
OTC did not provide any additional documents that demonstrate the allowability of
matching costs. Without any further documentation, we have no basis to conclude that
the costs are allowable.
OMB Circular A-87 and 40 CFR Part 31 provides requirements for allowability of State
matching contributions. A general requirement at 40 CFR 31,24(b)(7)(i) states that third
party in-kind contributions count towards satisfying a cost sharing or matching
requirement only where, if the party receiving the contributions were to pay for them, the
payments would be allowable costs. The allowability and documentation requirements
for other cost elements are also provided. Requirements for salary costs, for example, are
listed in 40 CFR 31.24(c) (2). It states that when an employer other than a grantee,
subgrantee, or cost-type contractor furnishes free of charge the services of an employee in
the employee's normal line of work, the services will be valued at the employee's regular
rate of pay exclusive of the employee's fringe benefits and overhead costs. Additional
requirements for salary costs are presented in OMB Circular A-87 Attachment B (8) (h)
(1) and (5).
If OTC follows the procedures it listed in its response, it will improve compliance with
the requirements of 40 CFR Part 31 and OMB Circular A-87.
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Recommendations
We recommend that EPA's Director, Grants and Interagency Agreements Management
Division:
1. Require the recipient to provide adequate support for the questioned contractual
costs, indirect costs, and in-kind costs, totaling $2,385,280 under assistance
agreement nos. OT83098301 and OT83264901, and disallow and recover the
Federal share of any outlays which are not supported.
We recommend that EPA's Region 3 Regional Administrator:
2. Require the recipient to provide adequate support for the questioned contractual
and indirect costs, totaling $338,426 under assistance agreement nos.
XA98379901 and XA97318101, and disallow and recover the Federal share of
any outlays which are not supported.
We recommend that EPA's Director, Grants and Interagency Agreements Management
Division:
3. Require the recipient to implement the proposed procedures that were identified
in the recipient's response to the draft report to ensure that:
a. Procurements are conducted in accordance with Title 40 CFR Part
31.36.
b. Indirect cost proposals are submitted to, and approved by EPA, in
accordance with OMB Circular A-87 and applicable EPA grant
requirements.
c. Documentation for in-kind contributions includes evidence that the
donated services were properly valued in accordance with Title 40 CFR
31.24 and OMB Circular A-87.
4. Periodically monitor the recipient's procedures for reviewing and claiming
subrecipient costs and for awarding and documenting procurements, until EPA
is satisfied that the recipient is complying with Federal requirements.
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Schedules of Reported Outlays and
Results of Examination
Schedule 1
Reported Outlays and Results of Examination for
Assistance Agreement XA98379901
Description
Amount
Questioned
Outlays
Note
Personnel
$ 174,072
$ 0
Fringe Benefits
49,492
0
Travel
48,471
0
Supplies
161
0
Contractual
60,898
37,452
1
Subrecipients
2,945,355
0
Other
36,842
0
Indirect Costs
155,120
155,120
2
In-Kind Costs
0
0
Less: Program Income
0
0
Subtotal
3,470,411
$192,572
Reported Outlays
3,470,411
Less: Questioned Costs
(192,572)
Adjusted Total Outlays
3,277,839
Less: Recipient Share
0
Federal Share
3,277,839
EPA Payments
3,470,411
Due EPA
$ 192,572
Sources: The total reported outlays and amounts claimed were from the
recipient's Financial Status Reports/Federal Cash Transaction Reports. The
amounts questioned were based upon the OIG analysis
Note 1: See discussion of improper procurement in the Results of Examination.
Note 2: See discussion of unallowable indirect costs in the Results of Examination.
13
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Schedule 2
Reported Outlays and Results of Examination for
Assistance Agreement OT83098301
Description
Amount
Questioned
Outlays
Note
Personnel
$356,103
$ 0
Fringe Benefits
104,923
0
Travel
89,042
0
Supplies
22,970
0
Contractual
200,010
94,071
1
Subrecipients
0
0
Other
121,961
0
Indirect Costs
402,754
402,754
2
In-Kind Costs
1,086,333
1,086,333
3
Less: Program Income
0
0
Subtotal
$2,384,096
$1,583,158
Reported Outlays
$2,384,096
Less: Questioned Costs
(1,583,158)
Adjusted Total Outlays
$800,938
Less: Recipient Share- 40%
(320,375)
4
Federal Share
480,563
EPA Payments
$1,297,763
Due EPA
$ 817,200
Sources: The total reported outlays and amounts claimed were from the recipient's
Financial Status Reports/Federal Cash Transaction Reports. The amounts
questioned were based upon the OIG analysis
Note 1: See discussion of improper procurement in the Results of Examination.
Costs questioned were for the following contractors: EarthTech -
$18,693; Environ -$36,456; ICF Consultants - $29,702; and Bruce Carhart
- $9,220.
Note 2: See discussion of unallowable indirect costs in the Results of
Examination.
Note 3: See discussion of unallowable and unsupported in-kind costs in the
Results of Examination.
Note 4: The allowable recipient share was calculated by applying the recipient's
40 percent cost share matching requirement to total allowable outlays.
14
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Schedule 3
Reported Outlays and Results of Examination for
Assistance Agreement XA97318101
Description
Amount
Questioned
Outlays
Note
Personnel
$170,220
$ 0
Fringe Benefits
47,773
0
Travel
30,868
0
Supplies
628
0
Contractual
14,340
0
Subrecipients
1,487,824
0
Other
38,809
0
Indirect Costs
145,854
145,854
1
In-Kind Costs
0
0
Less: Program Income
0
0
Subtotal
$1,936,316
$145,854
Reported Outlays
$1,936,316
Less: Questioned Costs
(145,854)
Adjusted Total Outlays
1,790,462
Less: Recipient Share
0
Federal Share
1,790,462
EPA Payments
1,936,316
Due EPA
$145,854
Sources: The total reported outlays and amounts claimed were from the
recipient's Financial Status Reports/Federal Cash Transaction Reports. The
amounts questioned were based upon the OIG analysis
Note 1: See discussion of unallowable indirect costs in the Results of
Examination.
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Schedule 4
Reported Outlays and Results of Examination for
Assistance Agreement OT83264901
Description
Amount
Questioned
Outlays
Note
Personnel
$221,369
$ 0
Fringe Benefits
51,551
0
Travel
28,563
0
Supplies
521
0
Contractual
27,556
18,740
1
Subrecipients
0
0
Other
106,142
0
Indirect Costs
214,441
165,090
2
In-Kind Costs
618,292
618,292
3
Less: Program Income
(16,551)
0
Subtotal
$1,251,884
802,122
Reported Outlays
$1,251,884
Less: Questioned Costs
(802,122)
Adjusted Total Outlays
449,762
Less: Recipient Share- 40%
(179,905)
4
Federal Share
269,857
EPA Payments
633,592
Due EPA
$363,735
Sources: The total reported outlays and amounts claimed were from the recipient's
Financial Status Reports/Federal Cash Transaction Reports. The amounts
questioned were based upon the OIG analysis
Note 1: See discussion of improper procurements in the Results of Examination.
Costs questioned were for the EarthTech contract.
Note 2: See discussion of ineligible indirect costs in the Results of Examination.
Note 3: See discussion of unallowable and unsupported in-kind costs in the
Results of Examination.
Note 4: The allowable recipient share was calculated by applying the recipient's
40 percent cost share matching requirement to total allowable outlays.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Planned
Completion
Action Official Date
12 Require the recipient to provide adequate support
for the questioned contractual costs, indirect costs,
and in-kind costs, totaling $2,385,280 under
assistance agreement nos. OT83098301 and
OT83264901, and disallow and recover the Federal
share of any outlays which are not supported.
12 Require the recipient to provide adequate support
for the questioned contractual and indirect costs,
totaling $338,426 under assistance agreement nos.
XA98379901 and XA97318101, and disallow and
recover the Federal share of any outlays which are
not supported.
12 Require the recipient to implement the proposed
procedures that were identified in the recipient's
response to the draft report to ensure that: (a)
procurements are conducted in accordance with
Title 40 CFR Part 31.36; (b) indirect cost proposals
are submitted to, and approved by EPA, in
accordance with OMB Circular A-87 and applicable
EPA grant requirements; and, (c) documentation
for in-kind contributions includes evidence that the
donated services were properly valued in
accordance with Title 40 CFR 31.24 and OMB
Circular A-87.
12 Periodically monitor the recipient's procedures for
reviewing and claiming subrecipient costs and for
awarding and documenting procurements, until
EPA is satisfied that the recipient is complying with
Federal requirements.
Director, Grants and
Interagency Agreements
Management Division
Region 3 Regional
Administrator
Director, Grants and
Interagency Agreements
Management Division
Director, Grants and
Interagency Agreements
Management Division
Claimed
Amount
Agreed To
Amount
TBD
$2,385
TBD
$338
TBD
TBD
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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Appendix A
Scope and Methodology
We performed our examination in accordance with the Government Auditing Standards,
issued by the Comptroller General of the United States, and the attestation standards
established by the American Institute of Certified Public Accountants. We also followed
the guidelines and procedures established in the Office of Inspector General Project
Management Handbook, dated January 14, 2005.
We conducted this examination to express an opinion on the reported outlays, and
determine whether the recipient complied with all applicable laws and regulations, as
well as with any special requirements under the agreement. We conducted our fieldwork
from November 27, 2006, through March 22, 2007.
In conducting our examination, we performed procedures as detailed below:
• We interviewed EPA personnel, reviewed grants, and project files to obtain
background information on the recipient and the agreements.
• We interviewed recipient personnel to understand the accounting system and the
applicable internal controls as they relate to the reported outlays.
• We reviewed a 2006 EPA contractor's report on OTC's Financial Management
System, and the Fiscal Years 2003, 2004, 2005, and 2006 single audit reports, to
identify issues that may impact our examination.
• We reviewed the recipient's internal controls specifically related to our
objectives.
• We performed tests of the internal controls to determine whether they were in
place and operating effectively.
• We examined the reported outlays on a test basis to determine whether the outlays
were adequately supported and eligible for reimbursement under the terms and
conditions of the agreements and Federal regulations and cost principles.
We verified that the recipient performed all tasks and provided all deliverables required
under the agreement.
The Office of Inspector General has not audited OTC before. Followup of prior findings
was, therefore, not necessary.
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Appendix B
Recipient Response
ra
OZONE
TRANSPORT
COMMISSION
June 25, 2007
Ms. Leah Nikaidoh
US EPA Office of Inspector General
US EPA Facilities
26 West Martin Luther King Drive
Mail Code: NWD
Cincinnati, OH 45268
Connecticut
Delaware
RE: OTC Response to EPA Office of Inspector General Draft Attestation
Report Findings
Dear Ms. Nikaidoh:
District of Columbia
Maine
Maryland
Massachusetts
New Hampshire
New Jersey
New York
Pennsylvania
Rhode Island
Vermont
Virginia
Christopher Recchia
Executive Director
444 N. Capitol St. NW
Suite 638
Washington, DC 20001
(202) 508-3840
FAX (202) 508-3841
Email: o/onor/ otcair.org
On May 11, 2007, the EPA Office of Inspector General (OIG) transmitted its
draft Attestation Audit Report of the Ozone Transport Commission (OTC)
for our review and response. The OTC appreciates this opportunity to
respond to the draft report.
Introduction
The draft report identified three key findings that the OIG, in its opinion,
cites as the reasons for its questioning $2,723,706 of the $9,042,706 in
reported outlays for the period covered by the audit for EPA Assistance
Agreements XA98379901, OT83098301, XA97318101, and OT83264901.
Specifically, the OIG states that OTC claimed unallowable outlays for
contractual services, indirect costs, and in-kind costs because we:
• Did not compete contracts, justify sole source procurements, or
perform cost analysis of contracts; and
• Claimed indirect costs without approved indirect rates; and
• Did not maintain complete, detailed documentation for in-kind costs
used as recipient match.
In its draft report the OIG further recommends that EPA (1) recover the
questioned outlays of $2,723,706 unless OTC provides sufficient
documentation to support the related claimed costs in accordance with
Federal regulations; (2) direct OTC to establish procedures to address issues
relating to procurement of contracts, indirect cost rates, and documentation of
in-kind costs; and, (3) monitor OTC's subrecipient and procurement activities
until EPA is assured that we are consistently meeting Federal requirements.
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We respectfully disagree with the OIG's assertion that OTC is not consistently meeting
Federal requirements in its subrecipient and procurement activities, and that we lack
adequate procedures to address issues related to procurement of contracts, indirect cost
rates, and documentation of in-kind costs. While we acknowledge difficulty in providing
some of the information requested during the Audit, OTC has full management systems
in place consistent with, and more stringent than, the 40 CFR Part 31 Requirements and
OMB Circular A-87.
The period covered by the Audit represented a transition from previous management to
current management, during which improvements in our internal controls were
implemented upon recognizing that systems had been lacking. Since 2004, OTC has
been engaged in a process to improve its internal policy and guidance practices,
strengthen its financial management systems, and enhance and update its documentation
of these controls and systems. Our systems are sound, appropriate for an organization of
our size, and generate complete and accurate information. Indeed, we believe it was
evident to the OIG as it conducted the Audit that the later records from the audit period
provided better documentation and comported with Federal requirements.
We will discuss each of the OIG's findings individually to explain the actions we have
taken since the completion of the auditors' visit and will continue to work on during
EPA's 120-day period to respond once they have received the OIG's final report. It is
our goal to provide sufficient documentation, per the recommendations in the draft report,
to support the costs in question to EPA's satisfaction. As you know, OTC is 100 percent
funded by Federal EPA funds; as such we have no other funding available for recovery of
these costs.
Regardless of these difficulties, we are confident that we can resolve these issues by
continuing to work in coordination with our EPA Project Officer, Grants Administration
Division, and EPA/OAR management to assure them that OTC is consistently meeting
Federal requirements. We have viewed this Audit constructively and continue to
improve staff and system capabilities to enhance our internal controls and performance.
We would welcome the opportunity for EPA to return in the near future to revisit these
issues, and hope you will be receptive to this offer and request.
The following sections address the specific areas of concern identified in the OIG draft
report and the actions we are taking.
I. Competition of Contracts
OTC did follow its internal procedures regarding procurements made using its grant
funds; however, good documentation of those procedures was not readily evident in the
records for the procurements the OIG reviewed during its audit. The procurements for
Earth Tech and Environ were done competitively, in accordance with OTC's policy at
that time, but only one response was received for each of these solicitations. The staff
managing the procurement process at that time did engage a group of OTC member state
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staff as a review panel for each of the procurements. Complete documentation of that
review process was not available in the procurement records, however, and the staff that
initiated the procurement actions were no longer with OTC. Therefore, we could not
provide them to the OIG.
Regarding the ICF contract, OTC engaged their services for the purpose of running the
Integrated Planning Model (IPM), to compare alternative OTC policy scenarios to EPA's
own CAIR program, using the same cap and trade framework as provided in the CAIR
program. The goal was to compare the cost of the OTC policy scenarios (using some
different emission reduction and fuel cost parameters and other variables from those in
the EPA's model run) with that of the EPA CAIR program. Since we needed to have a
result that would be comparable to EPA-developed information, it was important to use
the same modeling platform used by EPA, which is IPM. IPM is a proprietary product of
ICF, Inc., and therefore cannot be run by a competing firm. To our knowledge, there are
no other models in the public domain that exactly replicate IPM. Therefore, we
contracted with ICF on a sole-source basis. No cost analysis for the IPM runs quoted in
the statement of work from ICF were performed because (1) we were familiar that ICF
charged costs to other entities for IPM runs that were in the range of $8,000 - 12,000, and
(2) we assumed that since ICF designed IPM in collaboration with EPA that these costs
were "reasonable," since only ICF can set the price for a model run.
In the case of the procurement with Bruce Carhart and Associates, LLC, it was also made
on a sole source basis. Bruce Carhart was Executive Director of OTC during the period
December 16, 1991 to March 15, 2003. In the transition to the new Executive Director,
there were a number of issues that required significant historical knowledge of OTC
records and procedures that no other staff at OTC possessed. During the development of
the contractual agreement with Mr. Carhart's firm, Chris Recchia, the new Executive
Director, had an e-mail dialogue with Mr. Carhart about the proposed agreement in which
he negotiated both the work and the consultant's hourly rate, based on comparisons with
information in the GSA database on comparable firms. These negotiations provide the
basis for a cost analysis and are included in this report as an attachment.
To correct this finding in accordance with the OIG's recommendation, we have reviewed
the procurements cited in the OIG report to supplement and verify that the procurement
documentation includes information that validates their conformance with 40 CFR Part
31 and OMB Circular A-87 requirements. Cost analyses for each of the procurements are
provided as Attachments la-d. In addition, we are also taking the following actions:
• Revising the OTC procurement policy to include more specific citations from 40
CFR Part 31 and OMB Circular A-87 that describe procedures for small
purchases, maintaining details of the procurement history, performing and
documenting a cost analysis for each contract when competition is lacking,
performing a cost analysis to determine if rates are reasonable, and other
applicable procedures; and
• Ensuring that cost analyses are performed for all procurements, including any
which solicit a response only from a single bidder; and
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• Providing new employees with contracts and grants management training; and
• Revamping OTC's filing system for procurements, to provide more detail on
specific documentation categories which will assist OTC staff in maintaining a
proper procurement history for each contract or grant.
II. Indirect Costs
During an April 26, 2006 follow-up meeting with EPA's Grants Administration Division
(GAD) concerning the limited scope review they conducted in 2005 on OTC's
administrative and financial management systems of EPA grant funds, we discussed how
to proceed with our indirect cost proposals for FY 2005 and FY 2006, which had not
previously been submitted. This oversight was due to a difference in perspective between
OTC and EPA with regard to its 2003 indirect cost proposal, which was never responded
to by EPA. From OTC's perspective, the indirect cost rate was presumed approved as we
cited the rate and the pending indirect cost rate application in all our grant applications to
EPA and grants awarded by EPA to OTC utilized and approved that rate.
We came to the agreement that OTC would submit its indirect cost proposals for FY
2005 and FY 2006 as soon as we completed our financial audits for those years. Those
financial audits are now completed, and we have submitted our proposals for indirect cost
rates for FY 2005 and FY 2006 to EPA. They are currently in review by the U.S.
Department of Interior's National Business Center. We previously submitted and
received approval of our indirect cost rate for FY 2007, and are working to submit our
proposal for FY 2008 as soon as possible. As part of this work, our new accountant has
developed appropriate formats and worksheets to assist with the computation of the rate
and compliance with other documentation requirements for indirect cost proposals so that
we can be timely with our submissions in the future. Copies of the correspondence
submitting our FY 2005 and FY 2006 indirect cost proposals to EPA are provided as
Attachments 2a and 2b to this document.
III. State Match Documentation
OTC has been following the state match documentation procedures that have been in
place since the first grant match was required in 1993. These procedures allowed for
various types of documentation from the OTC member states in support of to their
individual state match contributions.
At the end of each quarter of OTC's fiscal year, which begins in April, we send to our
state member administrative contacts (see Attachment 3a, Administrative Contacts for
State Match) detailed listings of the conference calls and a listing of meetings that
occurred during that quarter (see Attachment 3b, State Match Instructions). The level of
detail on the conference call reports has varied depending on the provider OTC was
using, but generally at least the individual callers' telephone numbers were included as
part of the record for each call, along with the duration of the call and its subject
matter/group. The states use these records to help track and verify their participation on
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OTC Committees, workgroups, and other work projects (see Attachment 3c, Sample
Submission Packages, from April 2003 and January 2001).
It is our understanding from discussions with our members regarding their contributions
that only time spent on OTC-related work is included in their state match documentation
(see Attachment 3d, Qualifying Expenditures for State Match, dated May 15, 2003). This
is true even though a number of OTC member states did not have a timesheet code
corresponding to time spent on OTC work in their timekeeping systems (which the OIG
indicated as their preferred form of documentation for in-kind contributions for regular
state personnel services). Thus they were not reporting time spent doing work paid for by
Section 105 grants or other federal funds. Both Rhode Island and the District of
Columbia do not report state match for OTC because their air staff positions are fully
funded from Section 105 grants.
From our conversations with the OIG and with EPA Grants Administration personnel and
our EPA Grants Project Officers, we understand that there are no written EPA procedures
or guidance for what constitutes acceptable documentation for state match purposes. The
references we were cited for this purpose are the sections of the 40 CFR and OMB
Circular A-87 that pertain to the subject of state match requirements, which are not
particularly detailed. We were under the assumption that we were following a well-tested
set of procedures that had been established and agreed to with EPA from the inception of
the OTC. As we now understand that these procedures may not satisfy the OIG's
requirements for documentation of state match, we are taking the following actions:
• Reviewing state match records for EPA Assistance Agreements OT8398301 and
OT83264901 to supplement and verify that the match amounts are allowable in
accordance with 40 CFR 31.24 and OMB Circular A-87; and
• Establishing with states, where possible, timesheet coding corresponding to
OTC work and projects (note that this will not be possible for all OTC states to
do); and
• Developing alternative documentation protocols for in-kind state personnel
services for states unable to adopt timesheet codes, and for other types of in-kind
contributions in collaboration with our state members, subject to the acceptance
of EPA GAD and our EPA Grant Project Officer; and
• Reviewing state match contribution submissions and updates when they are
submitted, acknowledging approval with the initials of the reviewer and date,
and returning unapproved submissions to states for additional documentation;
and
• Updating our OTC Financial Management Policies Manual to include a section
on procedures for collecting information for, documenting and reviewing and
approving state match contributions.
We are also providing a written estimate outlining, in general, how the OTC states meet
their match contribution for the EPA grant that supports OTC's basic operations. In
addition, we are including a specific list of the work and projects that OTC produced
from 2003 through 2006 that member states were engaged in substantively, devoting
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numerous hours of their time performing analyses, developing inputs to models and
performing model runs, composing documents and presentations, preparing reports,
reviewing reports and other documents, co-managing contractual work, and providing
policy perspectives, among other efforts (see Attachment 3e, Estimate for OTC State
Match Contributions). More specific reports on state member contributions are provided
in the quarterly reports that the state administrative contacts provide to OTC during the
course of the grant year. It should be noted that OTC has always managed to meet or
exceed its state match goals because of the significant work hours that member states
spend to ensure that OTC accomplish its mission.
We hope that the information we have provided in this response to the draft OIG
Attestation Report will assure you that we are proactively taking the proper actions to
resolve the findings you outlined, and to ensure that the OTC continues to manage its
federal EPA grant funds responsibly. We will also request a meeting between our OTC
officers and appropriate representatives of EPA's Office of Air and Radiation and Grants
and Debarment to discuss our comments and other OTC issues.
Please contact me if you have any questions or need further information.
Sincerely,
Anna Garcia
Enclosures
cc: Bill Spinazzola
Rich Howard
Pat Childers
Marcia Spink
24
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Appendix C
Distribution
EPA Headquarters
Office of the Administrator
Director, Grants and Interagency Agreements Management Division (Action Official)
Director, Office of Grants and Debarment
Audit Followup Coordinator, Office of Grants and Debarment
Assistant Administrator for Air and Radiation
Assistant Administrator for Enforcement and Compliance Assurance
Agency Followup Official (the CFO)
Agency Audit Followup Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
General Counsel
Acting Inspector General
EPA Region 3
Regional Administrator (Action Official)
Audit Followup Coordinator, Region 3
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