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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Ensuring clean and safe water
Partnering with states and other stakeholders
City of Houston Complied with
Clean Water State Revolving
Fund Requirements
Report No. 19-P-0041
December 4, 2018
V' •• *"

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Report Contributors:	Angela Bennett
Jan Lister
John Trefry
Abbreviations
CFR
Code of Federal Regulations
CWSRF
Clean Water State Revolving Fund
EPA
U.S. Environmental Protection Agency
FY
Fiscal Year
MWBE
Minority and Women Business Enterprises
OIG
Office of Inspector General
TWDB
Texas Water Development Board
Cover Photos: At left, sewer line cleaning in Houston. At right, repairs to a steel sanitary sewer
force main in Houston. (Photos from city of Houston website)
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tfED srA/.
U.S. Environmental Protection Agency	19-P-0041
f AA \ Office of Inspector General	December 4,2018
* "P s
" At a Glance
Why We Did This Project
The Office of Inspector General
(OIG) of the U.S. Environmental
Protection Agency (EPA) initiated
this audit of the city of Houston's
use of funds and contracting
practices under the Clean Water
State Revolving Fund (CWSRF)
to determine whether:
•	The CWSRF funds are being
properly used to fund eligible
projects.
•	Contracts awarded for
CWSRF projects are in
compliance with applicable
eligibility requirements.
•	The city adequately monitors
and appropriately reports the
results of its prime
contractor's use of Minority
and Women Business
Enterprises.
Eligible CWSRF uses include
constructing publicly owned
wastewater treatment works,
implementing a nonpoint source
pollution control management
program, and developing and
implementing an estuary
conservation/management plan.
This report addresses the
following:
•	Ensuring clean and safe
water.
•	Partnering with states and
other stakeholders.
Send all inquiries to our public
affairs office at (202) 566-2391
or visit www.epa.gov/oiq.
Listing of OIG reports.
City of Houston Complied with Clean Water
State Revolving Fund Requirements
What We Found
We found that the procurement practices
followed by the city of Houston in the award of
contracts for its sanitary sewer and collection
system rehabilitation projects complied with
CWSRF requirements. Also, the city adequately
monitored its prime contractor's use of Minority
and Women Business Enterprises. The city has
no requirement for reporting Minority and Women
Business Enterprises utilization to the EPA;
rather, the Texas Water Development Board is required to submit annual
utilization reports of its loan recipients to the EPA based on 40 CFR Part 33.
Regarding project eligibility, we found that certain work orders for point repairs
issued under contracts for the collection system rehabilitation project may not
be considered eligible under the CWSRF. The point repair work resulting from
customer complaints could be considered operation and maintenance and, as
such, would not be eligible for funding under the CWSRF. The city issued
several point repair contracts to help address the high volume of customer
complaints throughout the city. We were told by the city that similar repair work
performed by city crews is usually considered operation and maintenance work
while the work performed by the contractors is considered a capital
improvement. If the contractors and city crews are doing similar work, the OIG
sees no basis for the city to treat the work differently.
Of the six contracts sampled, the OIG determined that only two of the
contracts, totaling $6,908,318, for the sanitary sewer rehabilitation project,
were eligible under the CWSRF. The four remaining contracts, totaling
$10,049,971, for the collection system rehabilitation project, include point
repair work to address customer complaints. The OIG was unable to draw a
definitive conclusion on the eligibility of the work performed under these
contracts.
Recommendation and Agency Response
We recommended that the Regional Administrator, EPA Region 6, determine
whether the point repair work performed is eligible under the CWSRF and
recoup any expenses for work determined not eligible. EPA Region 6 has
addressed the recommendation and has determined that the work is eligible.
The region's determination meets the intent of the recommendation. The OIG
considers the corrective action complete.
We questioned whether
point repairs to address
customer complaints
under four Houston
contracts were eligible
under the CWSRF, and
EPA Region 6 concluded
that they were.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
December 4, 2018
MEMORANDUM
SUBJECT: City of Houston Complied with Clean Water State Revolving Fund Requirements
Report No. 19-P-0041
This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the
U.S. Environmental Protection Agency (EPA). The project number for this audit was OA-FY17-0380.
This report contains findings that describe the problems the OIG has identified and corrective actions the
OIG recommends.
In accordance with EPA Manual 2750, your office completed an acceptable corrective action in response
to the OIG recommendation. The recommendation is resolved and no final response to this report is
required. However, if you submit a response, it will be posted on the OIG's website, along with our
memorandum commenting on your response. Your response should be provided as an Adobe PDF file
that complies with the accessibility requirements of Section 508 of the Rehabilitation Act of 1973, as
amended. The final response should not contain data that you do not want to be released to the public;
if your response contains such data, you should identify the data for redaction or removal along with
corresponding justification.
FROM: Charles J. Sheehan, Acting Inspector General
TO:
Anne L. Idsal, Regional Administrator
Region 6
We will post this report to our website at www.epa.gov/oig.

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City of Houston Complied with Clean Water
State Revolving Fund Requirements
19-P-0041
Table of C
Chapters
1	Introduction		1
Purpose		1
Background		1
Responsible EPA Offices		4
Scope and Methodology		4
2	Houston Complied with CWSRF Requirements		6
Contract Awards Complied with CWSRF Requirements		6
Monitoring and Reporting of MWBE Use Was Adequate		8
Eligible Projects Funded Under the CWSRF		9
Conclusion		12
Recommendation		13
Agency Comments and OIG Evaluation		13
Status of Recommendations and Potential Monetary Benefits		14
Appendices
A Agency's Comments	 15
B Distribution	 17

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Chapter 1
Introduction
Purpose
The Office of Inspector General (OIG) of the U.S. Environmental Protection Agency
(EPA) conducted an audit of the city of Houston's use of the Clean Water State
Revolving Fund (CWSRF) to determine whether:
•	Federal CWSRFs are being properly used to fund eligible projects.
•	Contracts awarded for CWSRF projects are in compliance with applicable
eligibility requirements.
•	The city adequately monitors and appropriately reports the results of its
prime contractor's utilization of Minority and Women Business Enterprises
(MWBEs).
Background
The State Revolving Fund program, including clean water and drinking water, is the
EPA's largest single grant program, accounting for over 50 percent of all assistance
awards (i.e., grants and cooperative agreements). The EPA provides funds to states
through revolving fund capitalization grants.
The clean water and drinking water programs function like banks by providing low-
interest loans to eligible recipients for wastewater and water infrastructure projects.
When loan recipients repay the loan principal and interest, this money is recycled back
into the fund to finance new projects that allow the funds to "revolve" at the state level
over time. The revolving funds operate with a high degree of flexibility to meet each
state's unique needs. The EPA provides guidance and oversight to the state agencies to
operate their revolving funds in accordance with applicable regulations.
Clean Water State Revolving Fund
Title VI of the Clean Water Act of 1987 established the CWSRF program. As outlined
in 40 CFR Part 35, Subpart K, State Water Pollution Control Revolving Funds, and
EPA guidance, the CWSRF is a federal-state partnership financial assistance program
that enables each state to design and operate its own revolving fund to provide
assistance for water pollution control activities in perpetuity. There are 51 CWSRFs
nationally—for all 50 states and Puerto Rico.
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Each state's CWSRF is funded by a combination of sources: EPA capitalization
grants, state matches, repayments, accrued interest and leveraged funds. The states
have the authority to use the CWSRF to provide various types of assistance to
recipients, including issuing and refinancing loans, purchasing or guaranteeing local
debt, and purchasing bond insurance. States may set specific terms on any loans they
issue using the CWSRF, such as interest rates and repayment periods. Beginning with
the American Recovery and Reinvestment Act of 2009, Congress authorized states to
provide further financial assistance via the CWSRF program, including grants,
principal forgiveness and negative interest rate loans.
Eligible uses of the CWSRF include constructing publicly owned wastewater treatment
works, implementing a nonpoint source pollution control management program, and
developing and implementing an estuary conservation and management plan.
Congress provides the EPA an annual appropriation for funding the CWSRF. The EPA
then awards CWSRF capitalization grants to each state based on its applications and
intended use plans. Intended use plans provide information on the state's proposed use
of CWSRF funds. Each plan includes details on key aspects of the state's CWSRF,
including the long- and short-term goals, priority-setting criteria, a fundable projects
list, and the expected project funding schedule. States are required to provide funding
that is equal to at least 20 percent of federal funds.
State of Texas' Clean Water State Revolving Fund
The purpose of the Texas CWSRF is to provide affordable financing to assist
applicants in meeting the wastewater needs of their communities. Funding through the
CWSRF goes toward addressing needs in the areas of primary, secondary and
advanced treatments; recycled water distribution; new collector sewers; and sewer
system rehabilitation, consistent with the Clean Water Act. The overall goals of the
Texas CWSRF program are to prevent the discharge of pollutants from point and
nonpoint sources; identify and provide funding for maintaining and/or bringing
publicly owned treatment works into compliance with EPA clean water standards;
support affordable and sustainable wastewater treatment processes; manage, reduce
and/or treat stormwater; and maintain the long-term financial health of the program.
The Texas Water Development Board (TWDB) administers Texas' CWSRF program.
City of Houston's Wastewater Program
The city of Houston operates 40 wastewater treatment plants that collect and treat an
average of 239 million gallons of wastewater per day. The city's collection system
includes over 6,100 miles of sewer pipe lines and 382 lift stations designed to move
wastewater from lower to higher elevation. On November 9, 2005, the Texas
Commission for Environmental Quality issued an Agreed Order assessing
administrative penalties and requiring certain actions by the city. The order related to
an enforcement action for unauthorized discharges from the city's collection system.
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The city's Collection Systems Analysis Section, within the Department of Public
Works and Engineering, Wastewater Operations Branch, is responsible for
implementing the plan to meet the requirements of the Agreed Order. The city's
Wastewater Collection System Sanitary Sewer Overflow Plan and Schedule contains
the steps to comply with the requirements of the Agreed Order. The plan is focused on
reducing the environmental impacts of sewer overflows in 29 of the 40 service areas
within the city for both structural and non-structural components.
The structural component of the plan involves rehabilitating over 950,000 linear feet
of sewer lines per year for a 10-year period, or 3 percent of the collection systems per
year. Rehabilitation methods include point repair, removal and replacement of
manholes, slip-lining, pipe bursting, and cured-in-place lining. The non-structural
component of the plan involves cleaning the collection system and improving the
information management system. This component involves the cleaning and televised
visual inspection of 20 million linear feet of sewer lines during the life of the order.
According to the city's Wastewater Operations Branch, work under the Agreed Order
was completed in 2017, making it the largest rehabilitation project in the United
States. It took 12 years to complete the plan and included rehabilitation or replacement
of over 10 million linear feet of sewer lines. Since completion of the Agreed Order, the
city has continued with the rehabilitation of the remaining service areas.
As shown in Table 1, for fiscal years (FYs) 2014 through 2017 (the period of our
review), the TWDB awarded four CWSRF loans totaling $249.1 million to the city for
rehabilitation of its collection systems.
Table 1: CWSRF loan awards by fiscal year
Loan number
Award date
Award amount
2834-28 (FY 2014)
2/12/14
$65,000,000
2834-29 (FY 2015)
1/29/15
55,005,000
2834-31 (FY 2016)
1/20/16
63,435,000
2834-33 (FY 2017)
2/15/17
65,750,000
Total

$249,100,000
Source: OIG-generated data based on loan data provided by Houston.
As shown in Table 2, the city used the CWSRF loan funds to award 48 prime contracts
totaling over $155.5 million. In awarding the contracts, the city split the rehabilitation
into two project categories: collection system rehabilitation and sanitary sewer
rehabilitation. As of December 20, 2017, the city had issued 3,702 work orders under
the 48 prime contracts. The city reported 340 subcontract awards totaling over
$36.5 million. At the time of our review, the city had not issued any contracts under
the FY 2017 loan.
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Table 2: Prime contract/subcontract awards under CWSRF loans by fiscal year
Loan no.
No. of
prime
contracts
Prime
contract
totals
No. of
work
orders
No. of
sub-
contracts
Subcontract
totals
2834-28 (FY 2014)
20
$62,724,032
1,337
130
$14,517,364
2834-29 (FY 2015)
16
53,194,766
776
126
13,149,109
2834-31 (FY 2016)
12
39,672,133
1,589
84
8,857,120
2834-33 (FY 2017)
0
0
0
0
0
Total
48
$155,590,931
3,702
340
$36,523,593
Source: OIG-generated data based on loan data provided by Houston.
The city's Office of Business Opportunity, Contract Compliance Division, monitors
all city projects in accordance with laws and regulations mandated by city, state and
federal guidelines and ordinances. The division monitors for compliance with
requirements for Prevailing Wage Rates, the MWBE program and Equal Employment
Opportunity through auditing payrolls and other contract documents, on-site visits, and
interviews with construction workers. The division makes presentations at all
pre-construction conferences and meetings on Prevailing Wage Rates and MWBE
compliance. The division also collaborates with other city departments in the final
evaluation of all city contracts.
Responsible EPA Offices
The EPA's Office of Wastewater Management, within the EPA headquarters' Office
of Water, administers the CWSRF program. EPA Region 6's Water Division provides
funding and oversight of the CWSRF program in the state of Texas.
Scope and Methodology
We conducted this audit from November 7, 2017, to September 6, 2018. We
conducted our audit in accordance with generally accepted government auditing
standards issued by the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
We researched, obtained and reviewed existing agency policies, manuals and
guidelines for the CWSRF program to gain an understanding of the state of Texas' and
city of Houston's procedures and controls over CWSRF funds. We identified
requirements for eligible use of CWSRF funds, procurement and MWBE utilization.
Out of the 48 prime contracts for Houston, totaling over $155 million, we selected a
judgmental sample of six contracts (two contracts per year from FYs 2014 through
2016). At the time of the sample, we selected one contract identified as a collection
system rehabilitation project and one as sanitary sewer rehabilitation for each of the
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3 years. It was not until we performed our testing that we learned the contract selected
in 2016 for the sanitary sewer rehabilitation project was for the collection system
rehabilitation project; the contract type had been mislabeled. As a result, the end
sample included four contracts awarded under the collection system rehabilitation
project and two awarded under the sanitary sewer rehabilitation project, rather than
three of each as intended. We selected different contractors for each year because most
of the contractors had several contracts in each of the 3 years. However, due to the
universe of contractors in 2016, we ended up with one repeat contractor. The six
contracts totaled over $16 million and included over 3,530 work orders. We used the
same six contracts for attribute testing for all three objectives.
To determine whether the city properly used the federal CWSRF to fund eligible
projects, we:
•	Conducted meetings with representatives from the city's Department of Public
Works and Engineering (both the Financial Management Services Division and
the Wastewater Operations Branch) to gain an understanding on how the city
determines eligibility and distinguishes between operation and maintenance
versus emergency repairs (the latter of which may be eligible under the
CWSRF).
•	Selected a judgmental sample of 72 of the 1,504 work orders from the six
contracts in our sample and analyzed them to determine eligibility of the work
performed under CWSRF requirements.
•	Discussed eligibility of work with the EPA Region 6 CWSRF Coordinator and
staff from the EPA's Office of Water.
To determine whether contracts awarded for CWSRF projects were in compliance
with applicable eligibility requirements, we conducted meetings with representatives
from the city's Department of Public Works and Engineering, Wastewater Operations
Branch, to obtain an understanding of the city's requirements and processes for
obtaining the CWSRF loans, contract procurement, issuance of work orders, contract
monitoring and payments, and capitalization of assets.
To determine whether the city adequately monitored and appropriately reported the
results of its prime contractor's utilization of MWBE, we:
•	Conducted meetings with staff from the city's Office of Business Opportunity
to discuss the MWBE program.
•	Obtained and reviewed data available for the subcontracts under the six
sampled prime contracts to determine MWBE utilization and compliance with
CWSRF requirements.
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Chapter 2
Houston Complied with CWSRF Requirements
We found that procurement practices that the city of Houston followed in the award of
six contracts in our sample, for the collection system and sanitary sewer rehabilitation
projects, complied with CWSRF eligibility requirements. Also, the city adequately
monitored the prime contractor's use of MWBEs, although it has no requirement for
reporting MWBE utilization to the EPA; rather, the TWDB is required to submit
annual utilization reports of its loan recipients to the EPA based on 40 CFR Part 33.
Regarding eligibility, the OIG determined that the work completed for two contracts,
totaling $6,908,318, for the sanitary sewer rehabilitation project, were eligible projects
under the CWSRF. However, we found the point repair work conducted to address
customer complaints under the remaining four contracts, totaling $10,049,971, for the
collection system rehabilitation project, may not be eligible under the CWSRF.
Point repair work conducted under these contracts could be considered operation and
maintenance and, as such, would not be eligible for CWSRF funding.
Table 3 provides a summary of the projects and associated costs included in our
sample; details on what we found regarding each objective follows the table.
Table 3: Summary of sampled awards and eligibility of costs
Rehabilitation project
No. of
contracts
Awards for
eligible
projects
Awards with
questionable
eligibility
Total awards
Sanitary Sewer
2
$6,908,318

$6,908,318
Collection system
4

$10,049,971
10,049,971
Total awards
6


$16,958,289
Percent of total

41%
59%
100%
Source: OIG-generated data from Houston's contract award data.
Contract Awards Complied with CWSRF Requirements
Our review of the procurement process for the six contracts in our sample showed that
the awards complied with CWSRF eligibility requirements. As shown in Table 4, the
contracts awarded for the 3-year period totaled over $155 million and included
41 subcontracts totaling over $5 million. Our sample included two contracts from each
year, ranging in value from $2.4 million to just over $3.5 million. The associated
subcontract amounts ranged from $531,191 to approximately $1.8 million.
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Table 4: Sample of prime contracts and subcontracts by loan


Total
Prime

Prime
No. of
Sub-
Loan
Fiscal
prime
contract
Sample
sample
sub-
contract
no.
year
contracts
totals
no.
totals
contracts
totals
2834-28
2014
20
$62,724,032
1
$2,447,775
7
$530,188




2
3,547,129
8
868,302
2834-29
2015
16
53,194,766
3
2,458,928
4
732,544




4
3,361,189
8
1,795,271
2834-31
2016
12
39,672,133
5
2,638,439
7
606,496




6
2,504,828
7
592,642
Total

48
$155,590,931
6
$16,958,288
41
$5,125,443
Source: OIG-generated data from contract and subcontract data provided by Houston.
Under the CWSRF program, loan recipients (e.g., state of Texas) have the flexibility to
operate their programs at their discretion as long as they meet CWSRF requirements.
Contracting activities by the city of Houston must meet Texas' procurement
requirements. The TWDB's CWSRF Program Guidance Manual, dated January 2017,
lists the program requirements and notes that competitive bidding is a widely used
method of obtaining and selecting contractors for construction projects. The TWDB
reviews bidding documents and authorizes awarding of the contracts. After the awards
are made, the TWDB reviews the fully executed contract documents and concurs with
the issuance of the notices to proceed.
Houston has a citywide process used for all procurements. For the six contracts
reviewed, the city advertised for bids, held pre-bid conferences, and awarded contracts
to the lowest bidders. All contracts identified up to eight subcontract awards to mostly
MWBEs. The TWDB authorized the six contract awards and concurred with issuing
the notices to proceed.
As shown in Table 5, most of the core work under the contracts was similar, with
variations on emphasis or quantities in certain categories.
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Table 5: Breakdown of contract type and core work by contractor

Contract
1
Contract
2
Contract
3
Contract
4
Contract
5
Contract
6
Contract type
Collection
system
Sanitary
sewer
Collection
system
Sanitary
sewer
Collection
system
Collection
system
Construction method
Slip-lining
& pipe
bursting*
Cured-in-
place
Slip-lining
& pipe
bursting*
Slip-lining
& pipe
bursting
Slip-lining
& pipe
bursting*
Pipe
Bursting*
No. of point repairs
160
27
160
12
337
265
No. of service reconnects

140

1,500


Additional sewer
replacement (LF)
2,480
270
2,480
1,280
4,470
3,790
Clean/televised visual
inspection (LF)
160,000
21,900
160,000
46,500
216,000
6,250
Slip-line/pipe burst
or cured-in-place (LF)
8,500
31,100
8,500
70,500
8,400
8,000
No. of new manholes
5
11
5
25
5
8
Manhole rehab (VF)
120
1,500
120
950
110
160
Manhole inserts
10





Pavement/concrete (SY)
150

1,500
2,600
1,800
1,900
Asphalt (SY)
1,200

3,000
11,000
2,800
4,000
Ancillary work performed?
Yes
Yes
Yes
Yes
Yes
Yes
Source: OIG-generated data from contract data provided by Houston.
*Collection system contracts also included pipe replacement as a construction method.
LF: Linear feet
VF: Vertical feet
SY: Square yards
The contracts are awarded for a 1.5 to 2-year period that begins with issuance of the
notice to proceed. City officials said that sometimes there is a time lag between the
notice to proceed and the issuance of the first work order. The city will not issue a
work order unless a city inspector is available to oversee the work. If the contract
expires before the funds are expended, the city issues a change order to extend the
timeframe until the contract funds are expended. The contract may also include a
5-percent contingency to allow for change orders; change orders above 5 percent are
not considered because they would require review and approval by the City Council.
Monitoring and Reporting of MWBE Use Was Adequate
The city adequately monitored its contractors' use of MWBEs. The city's Office of
Business Opportunity, responsible for implementing the city's Disadvantaged
Business Enterprise1 program, provides rigorous oversight. Our analysis showed that
the utilization of subcontractors under all six prime contracts closely aligned with the
EPA-negotiated fair-share goals for construction.
1 Includes MWBEs, Disadvantaged Business Enterprise and Small Business Enterprise.
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EPA regulations require recipients of EPA financial assistance agreements (including
loan recipients under the CWSRF) to make "good faith efforts" to award a fair share of
work to contractors who are certified as Minority Business Enterprises and Women
Business Enterprises—referred to in this report as MWBEs—whenever procuring
construction, supplies, services and equipment. The EPA has negotiated fair-share
goals for construction with the state of Texas of 12.94 percent for Minority Business
Enterprises and 8.72 percent for Women Business Enterprises. The city follows Texas'
fair-share goals. Although the TWDB does not require that loan recipients meet the
fair-share goals, the samples reviewed were closely aligned with the goals. Loan
recipients are required to remain in compliance with MWBE requirements throughout
all phases of the proj ect.
Examples of contract progress payments provided by the city showed monitoring of
MWBE use by the city's Department of Public Works and Engineering and by the
Office of Business Opportunity. The Department of Public Works and Engineering
generates an internal report called aM/W/DBE Goal Report, which is an overview of
total MWBE utilization progress. The report tracks the total contract goal and progress
toward the goal by contract payments. The Office of Business Opportunity produces
another internal report, called a Compliance Audit Report, that contains details on
MWBE use and tracks overall use by the prime contractor and individual subcontractor.
The city has no requirement for reporting MWBE utilization to the EPA. Rather, the
TWDB is required to submit annual utilization reports to the EPA based on 40 CFR
Part 33.
Eligible Projects Funded Under the CWSRF
Based on our analysis and discussions with EPA Region 6 and headquarters staff, work
orders issued under the collection system rehabilitation project for point repair work
may not be eligible for CWSRF funding. Point repair is defined as a repair of a failed or
deteriorated section of pipe. This work is often done under emergency conditions. We
identified seven contracts under the collection system rehabilitation project that are used
for point repair work resulting from customer complaints. Our sample of six contracts
included four of these contracts, identified in Table 6 as nos. 1, 3, 5 and 6.
Sample Selection
We selected a judgmental sample of work orders from the six contracts used in our
sample of contract awards. As shown in Table 6, we sampled 72 out of 1,504 work
orders (approximately 5 percent) issued under the six contracts. For those contracts with
a large amount of work orders (sample nos. 1, 3 and 5 in Table 6), we selected every
25th work order for review. To obtain adequate coverage for the contracts with a small
number of work orders (nos. 2, 4 and 6 in Table 6), our selection varied by contract
based on the number of work orders issued. Our sample methodology resulted in the
selection of 65 work orders issued under the contracts for the collection system
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rehabilitation project and seven issued under the contracts for the sanitary sewer
rehabilitation project.
Table 6: Summary of work orders sampled by loan and contract type
No.
Loan no.
Type of prime contract
No. of
work
orders*
No. of
sampled
work
orders
1
2834-28 (FY 2014)
Collection system (point repair work)
401
16
2
2834-28 (FY 2014)
Sanitary sewer
15
3
3
2834-29 (FY 2015)
Collection system (point repair work)
609
24
4
2834-29 (FY 2015)
Sanitary sewer
10
4
5
2834-31 (FY 2016)
Collection system (point repair work)
427
17
6
2834-31 (FY 2016)
Collection system (point repair work)
42
8

Total

1,504
72

Percent of total


5%
Source: OIG-generated data based on the city of Houston's contract data.
* The work order totals are those issued at the time of our sample selection; as these contracts are
ongoing, the number of work orders has very likely increased.
Testing Methodology
We tested the work orders for eligibility based on the types of eligible projects
identified in CWSRF guidance. Our testing focused on whether the work performed
represented a capital improvement. Capital improvement projects are eligible under
the CWSRF; operational and maintenance activities are not. To determine this, we
considered the city's approach to identifying capital improvements. It is the city's
expectation that if the work performed results in no further breakages, rehabilitates the
infrastructure, and adds to the useful life of the infrastructure, it should be capitalized.
We also considered whether the work was performed on public (right-of-way)
property and if the city capitalized the costs.
Analysis Discussion
Our analysis showed that the work performed under the work orders for the two
contracts for the sanitary sewer rehabilitation project (nos. 2 and 4 in Table 6) were
considered eligible under the CWSRF. However, it was unclear whether the work
performed under the work orders issued for point repairs under the four contracts
(nos. 1,3,5 and 6 in Table 6) for the collection system rehabilitation project are
capital improvements or operation and maintenance activities.
As shown in Table 7, we identified that 17 of the sampled work orders, or 24 percent,
originated from customer complaints, and 11, or 15 percent, originated based on work
identified by the city. It was unclear from the work order documents how the
remaining 44, or 61 percent, originated.
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Table 7: Origination of work orders sampled under collection system
rehabilitation project



City-originated






Critical



Customer
City
Neighborhood
sewer
Total
No.
Unclear
complaints
identified
analysis
repair
sample
1
13
1
2
-
-
16
2
-
-
-
2
1
3
3
21
3
-
-
-
24
4
-
1
-
3
-
4
5
10
7
-
-
-
17
6
-
5
-
-
3
8
Total
44
17
2
5
4
72
%
61%
24%
(Note 1)
(Note 1)
(Note 1)
100%
Source: OIG-generated data based on work orders provided by Houston.
Note 1: City-originated combined for a total of 11 work orders, or 15% of total.
Our analysis of the 17 work orders identified in Table 7 as "customer complaints" and
the 44 identified as "unclear" showed that the work pertained mostly to sewer
problems at residential properties (i.e., overflows, backups, standing water, cave-in).
Our review of work orders showed that the city initially completes an assessment and
determines the type and amount of work required to complete the repair. The
assessment may include line cleaning and a televised visual inspection to determine
the cause and location of the problem. Based on the assessment, the city crew may
recommend issuance of a work order to a point repair contractor for subsequent repair
work. These work orders may involve the repair or replacement of the service line
(public property side) or the connector, and installation of a city cleanout. The work
conducted under the 44 work orders classified as "unclear" were similar in nature to
the 17 work orders classified as "customer complaints." These similar work orders
represent over 85 percent of those sampled.
We were told by city staff that all work orders issued under the contracts for the
collection system rehabilitation project are considered eligible under the CWSRF and
are capitalized as a city asset. We confirmed with staff in the city's asset division that
the costs incurred for the point repairs under the contracts for the collection system
rehabilitation project are being capitalized.
Analysis Results
Based on our testing methodology, the work performed could be considered eligible
capital improvements as it met the city's expectation for capitalization, it was
conducted on public property, and the city capitalized the costs. However, comments
by the city about operation and maintenance and repair work to address customer
complaints raised questions about the eligibility of the work being performed.
We were told by the city that repair work performed by city crews is usually
considered operation and maintenance work, while similar work performed by a
contractor is considered capital improvement work. We were also told that due to the
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high volume of customer complaints throughout the city, the city had issued a few
contracts for point repair work to resolve the customer complaints. The city noted that,
in comparison to a typical rehabilitation contract, the number of work orders under
these point repair contracts are significantly higher. The city also stated that, in the
past, point repair contracts were awarded for approximately $2.5 million, with about
450 work orders issued. If the contractors and city crews are doing similar work, the
OIG sees no basis for the city to treat work performed by the contractors any different
from the work performed by the city crews.
As previously discussed, four of these point repair contracts are included in our sample.
As shown in Table 6, three of the four contracts (nos. 1, 3 and 5) have hundreds of work
orders compared to the contracts under the sanitary sewer rehabilitation project, which
have significantly fewer work orders issued. Contract no. 6 also included point repair
work to address customer complaints; as shown in Table 6, compared to the contract
nos. 1, 3 and 5, it had significantly fewer work orders issued. As shown in Table 4,
under the "Prime sample totals" column, the amount awarded for each of the four
contracts for the collection system (nos. 1,3,5 and 6) fall within the award amount of
$2.5 million discussed by the city. These contracts, along with the city's comments
regarding the use of point repair contracts to support city crews, indicates that the costs
associated with this work may be for operation and maintenance activities rather than
capital improvements. As such, the OIG was unable to draw a definitive conclusion on
the eligibility of the work performed under these contracts.
Concerns over Eligibility Discussed with EPA
On April 2, 2018, the OIG met with the EPA Region 6 CWSRF Coordinator and a
representative from the EPA Office of Water's State Revolving Fund Branch to
discuss our concerns regarding the eligibility of the point repair work under the
CWSRF. At that time, based only on the information provided by the OIG, Region 6
and the Office of Water believed that the point repair work would be considered
eligible as part of the citywide rehabilitation project. In a follow-up to our meeting, on
May 11, 2018, Region 6 informed the OIG that it had sent a request to the TWDB for
additional information on the city's use of contracts for the collection system
rehabilitation project under the CWSRF for point repair work to address customer
complaints. The request stated that the region is unable to determine whether the work
orders for the point repairs are expenses for "Operation & Maintenance" or for
"Capital Improvement." The state responded after the draft report was issued as
identified in the Agency Comments and OIG Evaluation section below.
Conclusion
Overall, we found no exceptions with the city's procurement practices or its
monitoring of MWBE utilization. However, we found that the city may have used
CWSRF loan funds for work that would not be eligible expenses under the CWSRF.
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Recommendation
We recommend that the Regional Administrator, EPA Region 6:
1. Determine whether the point repair work performed under the city of
Houston's collection system rehabilitation project is eligible under the Clean
Water State Revolving Fund and recoup any expenses for work determined to
not be eligible.
Agency Comments and OIG Evaluation
We issued a discussion document to Region 6 on September 6, 2018. As noted in the
report, the matter of eligibility was initially discussed with Region 6 and the Office of
Water in April 2018. In May 2018, the region requested that the TWDB address several
questions on the city's use of the CWSRF to fund projects for point repair work to
address customer complaints. On May 16, 2018, the TWDB forwarded the request to
the city of Houston. On August 6, 2018, Houston provided a response to the TWDB that
addressed the region's questions. Houston's letter transmitting its responses to the
questions stated:
As detailed in our attached responses, the "point repair" work order
contracts are consistent with City of Houston capitalization policies and
practices. In addition, by reducing sanitary sewer over flows in the
wastewater collection system these activities are critical to fulfilling our
enforcement action obligations and the pollution control and water
quality objectives of the CWSRF. As such, we believe these contracts
are eligible for CWSRF financing and should remain so.
On September 11, 2018, the TWDB provided Houston's response to Region 6. In the
transmittal letter, the TWDB stated that it had reviewed the city's response and does not
object to its practices as described. The TWDB further stated that it considers all
Houston activities currently funded through the CWSRF program to be eligible and in
conformance with program requirements.
On September 19, 2018, the OIG met with Region 6 to discuss its proposed response to
the discussion document. At that time, the region stated it had reviewed the TWDB's
and Houston's response to its request. Region 6 also stated that it had discussed the
matter with the Office of Water. The region concluded that the projects are eligible for
funding under the CWSRF.
The region's formal comments and corrective actions received on September 20, 2018
(see Appendix A) are consistent with our discussion on September 19, 2018. The
response stated that based on Houston's responses, the TWDB's determination and
conversations with the Office of Water, the region concurs with the TWDB that the
work in question is eligible for CWSRF funding. The region's determination meets the
intent of the recommendation. The OIG considers the corrective action complete.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
Potential
Monetary
Rec. Page	Completion	Benefits
No. No.	Subject	Status1 Action Official	Date	(In $000s)
1 13 Determine whether the point repair work performed under the C Regional Administrator, 9/20/18
city of Houston's collection system rehabilitation project is	EPA Region 6
eligible under the Clean Water State Revolving Fund and recoup
any expenses for work determined to not be eligible.
1 C = Corrective action completed.
R = Recommendation resolved with corrective action pending.
U = Recommendation unresolved with resolution efforts in progress.
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Appendix A
Agency's Comments
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION 6
1445 ROSS AVENUE, SUITE 1200
DALLAS, TEXAS 75202 - 2733
Office of the Regional Administratoi
September 20, 2018
MEMORANDUM
SUBJECT: Response to Office of Inspector General Discussion Document Report No. OA-FY17-0380
"City of Houston Complied with Clean Water State Revolving Fund Requirements, but
Eligibility of Some Work Is Questionable," dated September 6, 2018
FROM: Anne L. Idsal
Thank you for the opportunity to respond to the issues and recommendation in the subject discussion
document. On September 11, 2018, EPA received additional information from the Texas Water
Development Board (TWDB) including responses to EPA questions provided by the City of Houston.
Based on the City of Houston's responses and the TWDB determination provided and conversations
with EPA Office of Water, Region 6 concurs with the TWDB's determination that the work in
question is eligible for Clean Water State Revolving Fund (CWSRF) funding. The work meets the
CWSRF eligibility criteria as part of the capital improvement plan to address Houston's sanitary
sewer overflows. We are attaching the additional information provided by the TWDB. Below is a
summary of the agency's position on the document's recommendation.
AGENCY"S RESPONSE TO DISCUSSION DOCUMENT RECOMMENDATION
EPA Region 6 has addressed the recommendation and has determined that the costs are eligible.
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Regional Administrator
TO:
John Trefry, Director
Forensic Audits

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No.
Recommendation
Agency Explanation/Response
Proposed Alternative
1
We recommend that the
Regional Administrator,
EPA Region 6, determine
whether the point repair
work performed under the
city of Houston's collection
system rehabilitation
project is eligible under the
CWSRF and recoup any
expenses for work
determined not eligible.
This recommendation has been
implemented. The Texas Water
Development Board has provided
additional information to EPA
Region 6. This information
supports a determination of
eligibility and conformance with
CWSRF program requirements.
EPA concurs with the TWDB's
determination that the work in
question is eligible under the
CWSRF requirements.
The city confirmed that capital
work order improvements are
capitalized and are budgeted in
the Capital Improvement Plan.
In addition, the city responded
that in-house city crews and/or
separate work order contracts are
funded using operating funds.
Capital improvements such as
those funded using CWSRF
loans, are performed under
separate contracts and
documented to support the
capitalization of the work
consistent with the Unified Grant
Guidance (2 CFR 200.13).
Delete the
recommendation.
CONTACT INFORMATION
If you have any questions regarding this response, please contact Charles W. Maguire, Director of the
Water Division, at (214) 665-7101 or Claudia Hosch, Associate Director of the Assistance Programs
Branch at (214) 665-6464.
Attachments
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Distribution
The Administrator
Deputy Administrator
Special Advisor, Office of the Administrator
Chief of Staff
Chief of Operations
Agency Follow-Up Official (the CFO)
Agency Follow-Up Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Director, Office of Continuous Improvement, Office of the Administrator
Assistant Administrator for Water
Regional Administrator, Region 6
Director, Office of Wastewater Management, Office of Water
Deputy Regional Administrator, Region 6
Director, Water Division, Region 6
Associate Director, Assistance Programs Branch, Region 6
Audit Follow-Up Coordinator, Office of the Administrator
Audit Follow-Up Coordinator, Office of Water
Audit Follow-Up Coordinator, Region 6
Public Affairs Officer, Region 6
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