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OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
Single Audit Report for the
State of Alaska Department of
Environmental Conservation
for the Year Ended June 30, 2004
Report No. 2006-3-00168
July 26, 2006
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Report Contributors: LeahNikaidoh
Robert Adachi
Janet Lister
Eileen Collins
Abbreviations
CFDA
Catalog of Federal Domestic Assistance
CFR
Code of Federal Regulations
Consortium
Alaska Native Tribal Health Consortium
CPA
Certified Public Accountant
EPA
U.S. Environmental Protection Agency
IHS
Indian Health Service
MBE/WBE
Program for the Utilization of Small, Minority, and Women's Business Enterprises
OIG
Office of Inspector General
OMB
Office of Management and Budget
Single Auditor
State of Alaska Division of Legislative Audit
State
Alaska Department of Environmental Conservation
USD A
U.S. Department of Agriculture
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tftD STA^
U.S. Environmental Protection Agency 2006-3-00168
% \ Office of Inspector General July 26,2006
/ fi
%; At a Glance
Catalyst for Improving the Environment
Why We Did This Review
During our review of the single
audit of the State of Alaska, the
single auditor raised issues that
potentially impact the
allowability of expenditures
incurred by the State of Alaska
Department of Environmental
Conservation (State).
Background
The Single Audit Act of 1984
established uniform entity-wide
audit requirements for State and
local governments receiving
Federal financial assistance. The
State's Division of Legislative
Audit performed the single audit
for the year ended June 30, 2004.
In fulfilling the requirements of
the Single Audit Act, the Office
of Inspector General reviews and
disseminates the results of single
audits to responsible U.S.
Environmental Protection
Agency (EPA) officials.
The State identified $32,976,401
in Federal expenditures for EPA
grants under the Alaska Village
Safe Water program.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2006/
20060726-2006-3-00168.pdf
Single Audit Report for the State of Alaska
Department of Environmental Conservation
for the Year Ended June 30, 2004
What We Found
The single audit questioned $1,115,721 in labor costs because State employees
did not account for their activities in accordance with Federal requirements. We
have questioned the balance of the EPA grant amounts of $31,860,680 because:
• The State claimed disbursements that were advances and not actual costs.
• The State did not correctly report assets and expenditures.
• The State did not follow procurement procedures.
We also found that the State did not adequately monitor its subrecipients. While
the State contracted for a third-party certified public accountant firm to assess a
subrccipient's compliance with managing State funds, the State did not follow up
with problems identified with this subrecipient. This subrecipient also earned
interest and dividend income, contrary to EPA regulations. We estimate that the
potential amount of Federal interest earned on the over $100 million in investments
from 2001 to 2004 would be over $8 million.
The State had not corrected findings from the prior year single audit. In particular,
disbursements made by the State were advances and not actual costs. The State
also had not correctly reported assets and expenditures.
What We Recommend
We recommend that the Acting Regional Administrator, EPA Region 10:
Implement the single audit recommendations and disallow $1,115,721 of labor
costs.
Require the State to prepare and submit an indirect cost rate proposal for
indirect costs related to direct labor costs.
Disallow the remaining $31,860,680 of costs associated with EPA funds until
the State can provide actual cost data.
Require the subrecipient to remit dividend and interest earned on EPA funds.
Require the State to enter into an agreement with the Consortium to recognize
and support (1) the direct transfer of EPA grant funds from the State to the
Consortium, and (2) the Consortium's responsibility to comply with all EPA
grant requirements.
Place the State on a reimbursable payment basis until EPA determines the
State's cash management, labor, and financial reporting systems meet Federal
requirements, and the recommendations of this report are fully satisfied.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
July 26, 2006
MEMORANDUM
SUBJECT: Single Audit Report for the State of Alaska Department of Environmental
Conservation for the Year Ended June 30, 2004
Report No. 2006-3-00168
This is the final report on the State of Alaska Department of Environmental Conservation's
single audit for the fiscal year ended June 30, 2004. This report contains findings that describe
issues the Office of Inspector General (OIG) and the single auditor have identified and the
actions necessary to correct the deficiencies. We discussed these findings with representatives
from the State of Alaska Department of Environmental Conservation and U.S. Environmental
Protection Agency (EPA) Region 10, and issued a draft report to the State for its comments. We
have summarized the State comments in this final report and included the complete response in
Appendix A. This report represents the opinion of the OIG and the findings do not necessarily
represent the final EPA position. Final determinations on matters in this report will be made by
EPA managers in accordance with established audit resolution procedures.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $60,882.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to
provide us your proposed management decision for resolution of the findings contained
in this report before any formal resolution can be completed with the State of Alaska
Department of Environmental Conservation. Your proposed decision is due on
November 13, 2006. To expedite the resolution process, please email an electronic
version of your proposed management decision to nikaidoh.leah@epa.gov.
TO:
Ronald Kreizenbeck
Acting Regional Administrator
EPA Region 10
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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 and
the State of Alaska Department of Environmental Conservation during our review. If you
have any questions about this report, please contact me at (202) 566-0847, or Melissa
Heist at (202) 566-0899.
Sincerely,
Bill A. Roderick
Acting Inspector General
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Single Audit Report for the State of Alaska Department of Environmental
Conservation for the Year Ended June 30, 2004
Table of Contents
Purpose of Audit 1
Background 1
Results of Single Audit 1
Timekeeping Not Compliant with OMB Circular A-87
(Single Audit Report Recommendation No. 22) 2
State Procurement Procedures Not Consistently Followed
(Single Audit Report Recommendation No. 23) 4
State Not Compliant with MBE/WBE Requirements
(Single Audit Report Recommendation No. 24) 5
State Oversight of Consortium Insufficient
(Single Audit Report Recommendation No. 25) 5
Unresolved Issues from the 2003 Single Audit 7
Additional Issue - Dividend and Interest Income 8
Recommendations 9
Summary of State Response and OIG Comment 9
Scope and Methodology 10
Status of Recommendations and Potential Monetary Benefits 11
Exhibit
1 Single Audit Report Findings and Recommendations
and Schedule of Federal Expenditures 12
Appendices
A Auditee Response 21
B Distribution 44
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Purpose of Audit
During our review of the single audit of the State of Alaska, the single auditor identified issues
that potentially impact the allowability of expenditures incurred by the State's Department of
Environmental Conservation (State). We are issuing the single audit for the fiscal year ended
June 30, 2004, and have provided our comments on specific areas noted in prior audit reports
issued by the U.S. Environmental Protection Agency (EPA) Office of Inspector General (OIG)
and other Governmental agencies. Based on our review of the single audit, we identified
additional issues relating to the State's timekeeping process and subrecipient monitoring that
impact the State's managing of grants funded by EPA.
Background
The Single Audit Act of 1984 established uniform entity-wide audit requirements for State and
local governments receiving Federal financial assistance. Single audits are a key control for
overseeing and monitoring recipient use of Federal awards. Federal agency actions to ensure
that award recipients address audit findings in single audit reports are a critical element in the
Federal Government's ability to efficiently and effectively administer its awards. These findings
can include internal control weaknesses; material noncompliance with the provisions of laws,
regulations, or grant agreements; and fraud affecting a Federal award. In fulfilling requirements
under Office of Management and Budget (OMB) Circular A-133, Audits of States, Local
Governments, andNon-Profit Organizations, the EPA OIG reviews and disseminates the results
of single audits to responsible EPA officials. The State of Alaska Division of Legislative Audit
performed the single audit for Alaska.
The State of Alaska recognized the need for adequate water and sewer systems through passage
of the Village Safe Water Act in 1970. The purpose of the Village Safe Water program was to
"establish a program designed to provide safe water and hygienic disposal facilities in the state."
The program receives funds from three primary sources: EPA, the U.S. Department of
Agriculture (USD A), and the State of Alaska.
In 1996, Congress amended Section 303 of the Safe Drinking Water Act to authorize grants to
the State of Alaska for the benefit of rural (non-Native) and Native villages for: (1) developing
and constructing public water systems and wastewater systems to improve the health and
sanitation conditions in the villages; and (2) training, technical assistance, and educational
programs relating to operating and maintaining sanitation services in rural Native villages. EPA
awards these grant funds to Alaska to support the Village Safe Water program. Since 1995, EPA
has awarded $259,535,500 to the State to fund these various projects. For the year ended June
30, 2004, the State expended $32,976,401 under its Village Safe Water program.
Results of Single Audit
The State of Alaska Division of Legislative Audit (single auditor) performed the single audit
pursuant to the provisions of OMB Circular A-133. The U.S. Department of Health and Human
Services, as the cognizant agency for the audit, was required to review the work of the single
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auditor.1 The single auditor issued an unqualified opinion on the financial statement report for
the entire State of Alaska and a qualified report on major program compliance.
The single audit disclosed four findings and related recommendations (recommendations nos.
22-25) that pertain to EPA assistance agreements, per the Catalogue of Federal Domestic
Assistance (CFDA) 66.606, Surveys, Studies, Investigations and Special Purpose Grants. These
findings pertain to grants awarded to the State to fund construction projects, training and
technical assistance as part of the State's Village Safe Water program. The four findings
represent internal control and noncompliance areas. The single auditor questioned labor costs of
$1,115,721.
Additionally, the EPA OIG has questioned the balance of the grant amounts of $31,860,680
(total questioned costs of $32,976,401) listed under CFDA 66.606 due to the magnitude of the
findings presented in the single audit, in conjunction with findings and recommendations made
by our office in prior reports.
In accordance with 40 Code of Federal Regulations (CFR) 31.12, EPA can institute special
conditions or restrictions in grant awards, including payment on a reimbursable basis. Because
of the magnitude of the findings noted, we have recommended that EPA place the State on a
reimbursable payment basis until the cash management, financial reporting, labor accounting,
and procurement systems fully meet Federal requirements, and the recommendations in this
report have been fully satisfied.
A summary of the single auditor's recommendations (nos. 22-25) and the OIG comments are
presented below. The full text of the single auditor's results and recommendations (nos. 22-25),
along with the Schedule of Federal Expenditures, are included in Exhibit 1 of this report. The
entire single audit report is available upon request.
Timekeeping Not Compliant with OMB Circular A-87
(Single Audit Report Recommendation No. 22)
This a continuing issue from the June 30, 2003, single audit. The single auditor questioned labor
costs of $1,115,721 because labor charged to EPA's infrastructure grants did not comply with the
provisions of OMB Circular A-87. The single auditor specifically questioned labor for two
reasons.
First, for seven employees who split-fund their time, the State developed annual estimates at the
beginning of the year and used those percentages to allocate labor charges to various grants
throughout the year, regardless of the projects on which employees actually worked. OMB
Circular A-87 states the use of budget estimates does not qualify as adequate support for labor
charging.
1 Recipients expending more than $50 million a year in Federal awards shall have a cognizant agency for audit.
The designated cognizant agency for audit shall be the Federal awarding agency that provides the predominant
amount of direct funding.
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Second, 17 employees charged 100 percent of their time to the Village Safe Water reimbursable
service agreement; we question whether the employees worked solely on projects funded by
EPA Grant No. XP97056901. The single auditor noted that:
• The State used EPA infrastructure grant number XP97056901 as a funding source for
recovering labor costs charged to the reimbursable service agreement. Although
employees prepared time sheets, those time sheets only identified the reimbursable
service agreement and not the actual final cost objectives.
• The State did not prepare required certifications. OMB Circular A-87, Attachment B,
states that where employees work solely on a single Federal award or cost objective, their
charges for salaries and wages will be supported by periodic certifications (at least
semiannually) that they worked solely on that program for the period certified.
However, since the Village Safe Water program had 10 active EPA grants, and also receives
funds from other Federal agencies and the State, we question whether the employees actually
worked solely on EPA infrastructure grant number XP97056901 during the year ended June 30,
2004. Further, if the employees worked on more than one Federal award or cost objective, using
certifications would be inappropriate. When employees work on multiple activities or cost
objectives, the Circular provides that a distribution of their salaries or wages will be supported by
personnel activity reports or equivalent documentation that must: (a) reflect an after-the-fact
distribution of actual activity, (b) account for the total activity for which each employee is
compensated, (c) be prepared at least monthly and coincide with one or more pay periods, and
(d) be signed by the employee. Budget estimates or other distribution percentages determined
before the services are performed do not qualify as sufficient support.
Through discussions with the single auditor and information from the previous OIG audits, we
identified additional problems regarding the acceptability of the State's labor practices:
• The State appears to be treating the Village Safe Water program as a final cost objective
without considering which EPA infrastructure grants are funding individual projects, and
without considering specific projects as the final cost objective. The purpose of the EPA
infrastructure grants is to fund specific projects identified in the grant application, not a
continuing environmental program. Therefore, the administrative allocation used by the
State to pay personal service costs (i.e., employee labor charges) should coincide with the
effort performed by these employees. We found that the State drew funds from the 10
active EPA infrastructure grants in FY 2004 to pay for individual infrastructure projects.
• Some State employees are project engineers and work on specific Village Safe Water
projects, and thus should account for their time directly to these projects. However, they
charge to a single, general account number. OMB Circular A-87 defines a direct cost as
any cost that can be identified specifically with a particular final cost objective (in the
case of the engineers, the particular project, since each project has a distinct funding
source). By charging the one EPA grant that is awarded in the current fiscal year, the
engineers are not recording their time to reflect final cost objectives (a variety of EPA
grants that fund individual projects).
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• The Village Safe Water program also has State employees who do not manage specific
projects (non-engineering employees), but instead perform support and oversight duties.
The single auditor provided examples of timesheets for a grants administrator, an analyst,
and the Division Director. OMB Circular A-87 defines indirect costs as those incurred
for a common or joint purpose benefiting more than one cost objective, and not readily
assignable to the cost objectives specifically benefited, without effort disproportionate to
the results achieved. The time spent by these State employees who do not manage
specific projects under the Village Safe Water program meet the definition of an indirect
cost under OMB Circular A-87 and must be recovered through a federally approved
indirect cost rate.
Recently, the State acknowledged that it had deficiencies in its labor charging practices. In
response to prior EPA OIG Report No. 2005-P-00015, Region 10 stated that starting with the
Fiscal Year 2005 Village Safe Water grant, the State will begin direct billing all Engineering,
Management, and Travel expenses to the appropriate projects, and the balance will be included
in the State's federally approved indirect cost rate.
As discussed in the State's response to the single audit report, and through subsequent
discussions with the State (see Appendix A for the State's response and our analysis), the State
has revised its timekeeping system to identify labor charges by the engineers to individual
projects. The State has proposed to distribute all related charges under the Village Safe Water
program to individual projects based upon the engineer's direct time charged to the projects. The
State views all of these charges as direct project costs. We have identified two issues with this
practice:
1. Any costs not specifically identifiable to a final cost objective are, by definition, an
indirect cost. By distributing non-engineering costs using engineering costs as the base,
the State has created an indirect cost pool. Therefore, the State will need to prepare an
indirect cost rate proposal for approval by EPA.
2. Federal law limits the State's total administrative costs to 4 percent. Until the State
correctly allocates all of its direct and indirect costs to the proper grants, there are no
assurances that the 4 percent statutory limitation has been met.
Until the State addresses these two issues, all labor charges incurred by the State remain
unsupported.
State Procurement Procedures Not Consistently Followed
(Single Audit Report Recommendation No. 23)
This is a continuing issue from the June 30, 2003 single audit. The single auditor reported that
the State did not consistently follow procurement procedures. The single auditor reviewed 25
procurement transactions from the Village Safe Water program and found that 6 transactions did
not follow program procedures, as follows:
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• One transaction failed to document a rent/purchase analysis or receive Federal agency
approval for an equipment purchase, as required by State policy.
• Three transactions failed to maintain all copies of vendor bids and quotations in the
procurement files.
• A project onsite manager verbally agreed to pay for $172,673 in rental services and
materials without following procurement procedures.
• One transaction failed to use a necessary Village Safe Water purchase order.
The single auditor determined that there is a weakness in the procurement process, and
recommended that the Village Safe Water program manager work with the program's engineers
to ensure that program procurement procedures are followed.
In a separate report, the single auditor corroborated this single audit finding. That report2
questioned the State's spending practices and oversight of construction of water and sewer
systems through the program. There is no assurance that the procurements made under the
program comply with Federal requirements and are allowable. As a result of the procurement
weaknesses noted, procurements under EPA grants are unsupported and unallowable.
State Not Compliant with MBE/WBE Requirements
(Single Audit Report Recommendation No. 24)
The single auditor reported that the State is not in compliance with EPA grant conditions
pertaining to EPA's Program for the Utilization of Small, Minority, and Women's Business
Enterprises (MBE/WBE), The State did not include in its bid documents the required
MBE/WBE percentage and did not require subrecipients and prime contractors to report to the
State the actual amount of expenditures from MBE/WBE procurements. The single auditor
recommended that the State finance officer and Division of Water facility programs manager
modify EPA-related bid and grant documents and establish reporting procedures with
subrecipients and prime contractors to ensure compliance with EPA MBE/WBE requirements.
In its response, the State concurred with the single auditor's recommendation and has made
corrections to comply with the MBE/WBE requirements. The State's actions are acceptable and
no additional recommendation or actions are needed.
State Oversight of Consortium Insufficient
(Single Audit Report Recommendation No. 25)
The State's oversight of infrastructure funds transferred to Alaska Native Tribal Health
Consortium (Consortium) is insufficient to ensure compliance with Federal requirements. The
State transfers EPA and USD A funds to the Consortium on behalf of Alaska villages for Village
Safe Water projects. In July 2000, the Indian Health Service (IHS) entered into an agreement
with the Consortium (a nonprofit organization) to manage IHS projects in Alaska. Because the
Consortium works under an agreement with IHS, the State believes that its current oversight of
2 Special Report on the Department of Environmental Conservation, Village Safe Water Program, Selected Projects,
Report No. 18-30028-04, issued November 19, 2003.
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funds passed through to the Consortium is sufficient. This oversight includes reviewing
quarterly reports and contracting for an annual review by a third-party CPA firm.
The current scope of the third-party CPA review includes (1) examining expenditures to
determine if they are supported and in accordance with Village Safe Water requirements; (2)
determining if the Consortium is meeting State, EPA, and USDA grant requirements; (3)
evaluating Consortium procurement practices; and (4) suggesting recommendations for
improving managing the grant funds.
However, for oversight to be complete and effective, it must have three components: collecting
information, reviewing information collected, and following up on identified problems.
According to the single auditor, the third-party CPA firm reviews - as currently implemented by
the State - accomplish the oversight components of collecting and reviewing information, but do
not provide for followup on identified problems. The most current review identified duplicate
administrative expense billing and a frequent inability to reconcile actual expenditures to
reported expenditures. The State does not have an agreement with the Consortium requiring a
followup corrective action plan on findings and recommendations.
The single auditor recommended the State finance officer and Division of Water facility
programs manager improve oversight of Federal funds. They also recommended that the State
sign an agreement with the Consortium to require a followup corrective action plan on findings
and recommendations, and require the State to follow up on corrective action in a timely manner.
The State disagreed with the single auditor's finding stating that the IHS, a Federal agency under
the U.S. Department of Health and Human Services, had oversight responsibilities for the
Consortium, not the State. The State said that IHS contracts with the Consortium to manage IHS
projects and is the cognizant Federal agency for the Consortium. The State specifically stated
that:
All agreements related to IHS projects funded by EPA and USDA monies granted
to the State are between [the State] and the IHS. The [Consortium] is not a party,
and is in no way a subrecipient of the [State] subject to its oversight. As
questions frequently arise due to the unique nature of the relationship between the
[State], the IHS, and the [Consortium], a legal review is underway to confirm
relationships and responsibilities to the satisfaction of all interested parties.
The single auditor did not accept the State's response to the finding. We also disagree with the
State's position that the State is not responsible for overseeing the Consortium. According to 40
CFR 31.40(a), grantees are responsible for managing the day-to-day operations of grant and
subgrant supported activities. Grantees must monitor grant and subgrant supported activities to
assure compliance with applicable Federal requirements and that performance goals are being
achieved. Grantee monitoring must cover each program, function, or activity. Therefore,
regardless of how the funds pass through to the Consortium, the funds are EPA funds, and the
State is solely responsible for ensuring that the funds are managed in compliance with EPA grant
requirements.
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Unresolved Issues from the 2003 Single Audit
In addition to the recommendations addressed directly in the June 30, 2004, single audit report,
two unresolved recommendations remain from the prior year single audit as of June 30, 2003.
In Recommendation 32, the single auditor reported that the State's cash draws and subsequent
disbursements for the Village Safe Water program are not conducted in the best interest of the
State. Disbursements from the State to the accounting firm3 and the Consortium were advances
and do not represent actual EPA grant costs. The State has historically drawn funds, in advance,
to meet cash needs for the construction season, which runs from April to October of each year.
The State is required, under 40 CFR 31.22 and OMB Circular A-87, to claim actual costs under
EPA grants. The amounts claimed under CFDA 66.606 of the single audit were for advances
and not actual costs. As a result, there was no assurance that the advances were expended on
allowable projects and not accumulated. Therefore, all expenditures claimed under CFDA
66.606 are considered to be unsupported. As discussed in the State's response to the single audit
report (see Appendix A for the State's response and our analysis), the State indicated that it has
adopted a new financial management system, and is drawing grant funds on a fully reimbursable
basis. The State's actions, pending EPA's review and approval of the State's financial
management system, should address this matter.
In Recommendation 33, the single auditor reported that the State's financial statements do not
correctly report assets and expenditures for the Consortium. The single audit report stated that
the State does not have any information on the Consortium's actual expenditures. The State
reported the cash advances as expenditures, which is not in accordance with Generally Accepted
Accounting Principles. The single auditor recommended that the State obtain expenditure
information for projects administered by the Consortium. Since the expenditures claimed by the
State represent advances, and not actual costs, these expenditures are unsupported. The single
auditor reported that the accounting firm does provide the State with actual expenditure
information. However, the accounting firm had cash balances of $13.2 million and $11.5 million
as of June 30, 2002 and 2003 respectively. That the accounting firm had a cash balance suggests
that the State is disbursing excess cash to the accounting firm and may not be reporting actual
costs under the EPA grants. Therefore, we recommend that the State provide expenditure
information from the accounting firm handling State-led projects by EPA grant and by project
and repay the EPA any cash in excess of actual costs. As discussed in the State's response to the
single audit report (see Appendix A for the State's response and our analysis), the State indicated
that the Consortium performed project reconciliations and would be placed on a reimbursable
basis for requesting grant funds. The State also informed us that the Consortium performed its
reconciliation internally and that the State did not review the Consortium's reconciliations. Until
the Consortium's reconciliations and supporting documentation are reviewed and determined to
meet applicable EPA regulations, these funds remain unsupported.
3 The accounting firm handles payments for State-managed Village Safe Water program projects.
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Additional Issue - Dividend and Interest Income
The recommendations made by the single auditor raised questions concerning the role of the
Consortium in the Village Safe Water program and whether the Consortium was complying with
EPA regulations. We reviewed the Consortium's single audits and Form 990 tax returns to
understand how the Consortium treated EPA funds received. When we reviewed the
Consortium's single audit and tax returns, we identified one additional issue involving dividend
and interest income.
Specifically, due to the State's cash draw practices and payment of advances to the Consortium
(as described in Unresolved Issues from the 2003 Single Audit section, Recommendation 32),
the Consortium earned dividend and interest income on Federal funds and accumulated cash and
security investments. In its Form 990 Federal tax return, the Consortium reported the following:
Fiscal Year Ended
Dividend and
Interest
Income
Cash and
Security
Investments
Percentage of
Revenue from
Federal Funds
Potential Dividend
and Interest Income
from Federal Funds
September 30, 2001
$6,339,965
$101,599,947
63%
$3,994,178
September 30, 2002
2,522,234
115,882,148
64%
1,614,230
September 30, 2003
2,519,611
105,586,530
72%
1,814,120
September 30, 2004
1,151,593
102,939,359
68%
783,083
Total
$12,533,403
$8,205,611
On June 29, 2005, Region 10 determined that the Consortium, as a subrecipient of Federal funds,
is not subject to the Cash Management Improvement Act. Thus, the provisions of 40 CFR
30.22(1) applies. The CFR requires that nonprofits not subject to the Act must repay interest
income earned on Federal funds. As a result, the Consortium is required to repay any dividend
and interest income earned on EPA funds. Because the majority of the reported revenues are
from Federal sources (averaging 67 percent for the 4 years in the table above), it is reasonable to
conclude that the majority of the cash and security investment accumulated and the resulting
dividend and interest income come from Federal funds.
Based on our review of the Consortium's single audit report, the Consortium did not report in its
single audits the amount of EPA funds expended. Therefore, we cannot reasonably estimate the
amount of dividend and interest income earned on EPA funds versus other Federal sources of
revenue. Based on the percentage of the Consortium's revenue from Federal funds, the potential
dividend and interest income to be repaid on EPA funds would be a portion of the calculated
$8,205,611 as of September 30, 2004. Because we were only able to obtain Form 990 tax
returns for a 4-year period, we were unable to determine how much interest the Consortium
earned on its investments prior to year ended 2001. However, any interest income earned on
EPA funds awarded for Village Safe Water projects since 1995 should be recovered by EPA.
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Recommendations
Along with recommendation nos. 22-25 in the single audit, we recommend that the Acting
Regional Administrator, EPA Region 10:
1. Disallow the unsupported personnel service costs of $1,115,721, until the State
provides sufficient documentation to support labor charges in accordance with
Federal requirements.
2. Require the State to prepare and submit an indirect cost rate proposal for indirect
costs related to direct labor costs under the Village Safe Water program. The indirect
cost rate proposal should be submitted to EPA's Office of Acquisition Management,
Financial Analysis and Rate Negotiation Service Center.
3. Disallow costs of $31,860,680 representing the remaining balance of CFDA 66.606
funds as unsupported until the State provides actual cost data by EPA grant, for all
EPA grants supporting the Village Safe Water program; any costs that remain
unsupported should be recovered. As part of its reconciliation process, the State will
need to review and approve the reconciliations and supporting documentation
prepared by the Consortium. As part of its actual cost data, the State will need to
properly apply and account for the 4 percent administrative cost limitation on a grant-
by-grant basis.
4. Require the State to have the Consortium remit the portion of interest, representing
dividends from EPA-invested funds from the inception of the Village Safe Water
program, through year ended 2003, to the U.S. Department of Health and Human
Services, Payment Management System, Rockville, Maryland 20852.
5. Require the State to enter into an agreement with the Consortium, in accordance with
40 CFR Part 31.37, to recognize and support (1) the direct transfer of EPA grant
funds from the State to the Consortium, and (2) the Consortium's responsibility to
comply with all EPA grant requirements. This recommendation will address, in part,
the single auditor's recommendation to require the State to perform sufficient
oversight of the Consortium.
6. Formally place the State on a reimbursable payment basis under the authority of 40
CFR 31.12 until the cash management, financial reporting, labor accounting, and
procurement systems fully meet Federal requirements, and the recommendations of
this report have been fully satisfied.
Summary of State Response and OIG Comment
We issued our draft report to the State on April 27, 2006. Based upon the State's response, we
deleted the draft's recommendation three, due to the State's steps to improve its procurement
process. The State's full response is provided in Appendix A of this report. Appendix A also
includes our comments on the State's response in shaded areas.
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Scope and Methodology
The single auditor conducted the audit in accordance with Government Auditing Standards,
issued by the Comptroller General of the United States. These standards require that the auditor
obtain an understanding of the program to be audited. The understanding of the program was
obtained through analyzing the laws, regulations, and guidance pertaining to grants awarded to
the State for the Village Safe Water program and evaluating internal controls over the grants.
Internal controls include the processes for planning, organizing, directing, and controlling
program operations. Internal controls also include the systems for measuring, reporting, and
monitoring program performance.
We performed our field work from August 1 to September 30, 2005. In addition to the single
auditor's assessment, we gained an understanding of the internal controls through the
performance of the procedures outlined below. To meet the audit objective, we reviewed the
following documents:
• Single Audit of the State of Alaska for the Fiscal Year Ended June 30, 2004, issued on
May 5, 2005, performed by the State of Alaska Division of Legislative Audit.
• Single Audit of the State of Alaska for the Fiscal Year Ended June 30, 2003, issued on
July 6, 2004, performed by the State of Alaska Division of Legislative Audit.
• EPA Oversight for the Alaska Village Safe Water Program Needs Improvement,
EPA OIG Report No. 2004-P-00029, issued September 21, 2004.
• Region 10's Grant for Alaska Village Safe Water Program Did Not Meet EPA
Guidelines, EPA OIG Report No. 2005-P-00015, issued June 16, 2005.
• Special Report on the Department of Environmental Conservation, Village Safe Water
Program, Selected Projects, ReportNo. 18-30028-04, issued November 19, 2003,
performed by the State of Alaska Division of Legislative Audit.
• Federal Form 990 for the Alaska Native Tribal Health Consortium for the fiscal year
ended June 30, 2004.
• Single Audit Report for the Alaska Native Tribal Health Consortium for the fiscal years
ending June 30, 2002, 2003, and 2004.
• Project Funding Agreements between Indian Health Service and Alaska Native Tribal
Health Consortium for funds received from the Village Safe Water Program.
• EPA Region 10 Determinations concerning the applicability of the Cash Management
Improvement Act to the Alaska Native Tribal Health Consortium.
Instances of noncompliance with laws, regulations, and guidance, and deficiencies in the State's
internal control system have been identified and included in this report. Recommendations have
been made to correct the deficiencies.
10
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Action Official
Planned
Completion
Date
Claimed
Amount
Agreed To
Amount
Disallow the unsupported personnel service costs
of $1,115,721, until the State provides sufficient
documentation to support labor charges in
accordance with Federal requirements.
Require the State to prepare and submit an indirect
cost rate proposal for indirect costs related to direct
labor costs under the Village Safe Water program.
The indirect cost rate proposal should be submitted
to EPA's Office of Acquisition Management,
Financial Analysis and Rate Negotiation Service
Center.
Disallow costs of $31,860,680, representing the
remaining balance of CFDA 66.606 funds as
unsupported until the State provides actual cost
data by EPA grant, for all EPA grants supporting
the Village Safe Water program; any costs that
remain unsupported should be recovered. As part
of its reconciliation process, the State will need to
review and approve the reconciliations and
supporting documentation prepared by the
Consortium. As part of its actual cost data, the
State will need to properly apply and account for
the 4 percent administrative cost limitation on a
grant-by-grant basis.
Require the State to have the Consortium remit the
portion of interest, representing dividends from
EPA-invested funds from the inception of the
Village Safe Water program, through year ended
2003, to the U.S. Department of Health and Human
Services, Payment Management System,
Rockville, Maryland 20852.
Require the State to enter into an agreement with
the Consortium, in accordance with 40 CFR Part
31.37, to recognize and support (1) the direct
transfer of EPA grant funds from the State to the
Consortium, and (2) the Consortium's responsibility
to comply with all EPA grant requirements. This
recommendation will address, in part, the single
auditor's recommendation to require the State to
perform sufficient oversight of the Consortium.
Place the State on a reimbursable payment basis
under the authority of 40 CFR 31.12 until the cash
management, financial reporting, labor accounting,
and procurement systems fully meet Federal
requirements, and the recommendations of this
report have been fully satisfied.
Acting Regional
Administrator for Region 10
Acting Regional
Administrator for Region 10
$1,116
Acting Regional
Administrator for Region 10
$31,861
Acting Regional
Administrator for Region 10
Acting Regional
Administrator for Region 10
Acting Regional
Administrator for Region 10
1 O = recommendation is open with agreed-to corrective actions pending;
C = recommendation is closed with all agreed-to actions completed;
U = recommendation is undecided with resolution efforts in progress
11
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Exhibit 1
Single Audit Report Findings and Recommendations
and Schedule of Federal Expenditures
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
Four recommendations were made to the Department of Environmental Conservation (DEC) in
the State of Alaska, Single Audit for the Fiscal Year Ended June 30, 2003. Prior year
Recommendation Nos. 32 and 33 have not been resolved; however, DEC has instigated
significant changes which are expected to resolve Recommendation No. 33 in FY 05 and
Recommendation No. 32 in FY 06. Therefore, these recommendations are not reiterated in this
report. Prior Year Recommendation Nos. 34 and 35 have not been resolved and are reiterated in
this report as Recommendation Nos. 22 and 23.
Additionally, two new recommendations have been made and are included as Recommendation
Nos. 24 and 25.
Recommendation No. 22
The DEC finance officer should implement procedures to ensure personal services expenditures
charged to the Environmental Conservation Agency (EPA) infrastructure grants comply with
federal cost principles.
Prior Finding
DEC did not follow applicable federal guidance for the personal services costs charged to the FY
03 EPA infrastructure grant. Village Safe Water (VSW) personal services costs were charged to
the EPA infrastructure grant through a yearly reimbursable service agreement (RSA). During FY
03, 29 DEC employees charged personal services costs to the FY 03 EPA infrastructure grant. Of
those who charged time to the EPA infrastructure grant, 20 charged 100% of their time, and the
remaining nine charged only a portion of their time.
Office of Management and Budget (0MB) Circular A-87 requires that salaries of employees
chargeable to more than one federal grant or other cost objective be supported by appropriate
time distribution records. State agencies, with approval from federal program managers, may
utilize an alternative system. 0MB Circular A-87 states that budget estimates or other distribution
percentages, determined before the services are performed, do not qualify as support for charges
to federal awards. Charges for employees working solely on a program funded by a single
federal award will be supported by periodic (at least semiannual) certifications that the employee
worked solely on that program for the period covered by the certification.
For FY 03, we reviewed time sheets for employees charging time to the EPA infrastructure
grant, and found that DEC was not following 0MB Circular A-87 requirements for charging
12
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personal services costs to federal programs. Split-funded employees' time was being charged to
the EPA infrastructure grant based on annual estimates which are intended to represent the
percent of total time devoted to the programs charged. Further, employees charging 100% of
their time to the EPA infrastructure grant did not prepare certifications stating the employee
worked solely on the program for the period covered by the certification. While the employees
charging 100% of their time to the EPA infrastructure grant maintained timesheets, the
timesheets did not directly indicate that 100% of the time was being charged to the EPA
infrastructure grant, but rather charged to the VSW Administration reimbursable service
agreement (RSA).
Finally, we found that all VSW personal services costs were being charged to the EPA
infrastructure grant, CFDA 66.606. No VSW personal services costs were charged to the U.S.
Department of Agriculture—Rural Development (USDA-RD) CFDA 10.760, even though VSW
activities benefit both programs.
Given the lack of required 0MB Circular A-87 support for the personal services costs charged to
the EPA infrastructure grant, we questioned the federal portion of all personal
service costs charged to CFDA 66.606 through the EPA infrastructure grant in FY 03
($1,166,051).
Legislative Audit's Current Position
In FY 04, DEC's personal services costs charged to EPA infrastructure grants through a RSA are
not adequately supported as allowable costs. The DEC finance officer confirmed that personal
services costs were charged in the same manner as in FY 03 without certifications or detailed
timesheets. Also, all personal services costs were charged to the EPA infrastructure grant even
though VSW activities benefit both the EPA and the USDA-RD programs.
A total of 24 DEC employees charged personal services costs to the FY 04 EPA
infrastructure grant. Of those who charged time to the EPA infrastructure grant, 17 charged
100%) of their time, and the remaining seven charged only a portion of their time. The federal
portion of these costs was $1,115,721.
Given the lack of required 0MB Circular A-87 support for the personal services costs charged to
the EPA infrastructure grant, we again questioned the federal portion of all personal service costs
charged to CFDA 66.606 through the EPA infrastructure grant in
FY 04.
We recommend the DEC finance officer implement procedures to ensure that VSW personal
service costs comply with 0MB Circular A-87 requirements.
CFDA: 66.606 Federal Agency: EPA
Questioned Costs: $1,115,721
Agency Response Department of Environmental Conservation
13
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The Department supports this recommendation, and has implemented processes to ensure the
requirements of OMB Circular A-87 are met. Those employees solely dedicated to a particular
federal grant are required to complete bi-annual certifications. Additionally, for those employees
whose salaries are chargeable to more than one cost objective, actual hours worked on each cost
objective are reflected on the employee timesheet.
Contact Person: Gary Zepp, Financial Officer
Telephone: 907-465-5289
Recommendation No. 23
The VSW program manager should work with project engineers to strength internal controls
over the VSW procurement process.
Prior Finding
In FY 03, DEC did not consistently follow procurement procedures for VSW projects. VSW
procedures, including procurement, are prescribed in the EPA-approved VSW procedures
manual. DEC engineers, in addition to onsite managers/superintendents hired by the village, are
required to follow the VSW procedures manual.
We reviewed 15 procurement-related transactions from eight projects which were funded by
EPA infrastructure grants. Of the 15 transactions reviewed, five did not follow VSW procedures
in some manner. While no error was significant on its own, the number of errors indicated a
weakness in the internal controls over the VSW procurement process.
Legislative Audit's Current Position
In FY 04, DEC again did not consistently follow procurement procedures for VSW projects. We
reviewed 25 procurement-related transactions from 11 projects which were funded by either EPA
infrastructure or USD A Rural Development grants. Of the 25 transactions reviewed, six did not
follow VSW procedures in some manner:
One transaction failed to document a rent/purchase analysis or receive federal agency
approval for an equipment purchase as required by DEC internal policy.
Three transactions failed to maintain all copies of vendor bids and quotations in the
procurement files.
A project onsite manager verbally agreed to pay for $172,673 in rental services and
materials without following procurement procedures.
One transaction failed to use a necessary VSW purchase order.
These errors continue to indicate a weakness in the internal controls over the VSW procurement
process. We recommend the VSW program manager work with the VSW engineers to ensure
14
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VSW procurement procedures are followed.
CFDA: 66.606 Federal Agency: EPA
Questioned Costs: None
CFDA: 10.760 Federal Agency: USDA
Questioned Costs: None
Agency Response Department of Environmental Conservation
The Department supports this recommendation, and hired a Procurement Specialist III in
September 2004 to support the VSW program. This position is solely dedicated to the VSW
program, and is supervised by the Division of Information and Administrative Service to ensure
appropriate segregation of duties and authorities. The incumbent has been working to strengthen
internal controls and to provide appropriate oversight and guidance for VSW procurement
practices.
Contact Person: Gaiy Zepp, Financial Officer
Telephone: 907-465-5289
Recommendation No. 24
The DEC finance officer and Division of Water facility programs manager should implement
procedures to ensure compliance with EPA grant requirements for small and disadvantaged
business utilization.
DEC is not in compliance with EPA grant conditions pertaining to the U.S. EPA's Program for
the Utilization of Small, Minority, and Women's Business Enterprises (MBE/WBE), DEC does
not include in its bid documents the required MBE/WBE percentage and does not require that
subrecipients and prime contractors report to DEC the actual amount of expenditures from
MBE/WBE procurements.
EPA grants contain an administrative condition regarding small and disadvantaged business
utilization which requires DEC to accept applicable MBE/WBE "fair share" goals. The grant
agreements also state:
(b) The recipient agrees to ensure, to the fullest extent possible, that at least the applicable
fair share " objectives of Federal Funds for prime contracts or subcontracts for supplies,
construction, equipment or services are made available to organizations owned or
controlled by socially and economically disadvantaged individuals, women and
Historically Black Colleges and Universities.
(c) The recipient agrees to include in its bid documents the applicable fair share " objectives
and require all of its prime contractors to include in their bid documents for subcontracts
the negotiated fair share "percentages.
15
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(d) The recipient agrees to follow the six affirmative steps or positive efforts stated in 40
CFR 30.44(b), 40 CFR 31.36(e), or 40 CFR 35.6580, as appropriate, and retain records
documenting compliance.
In addition, the grant agreements require DEC to report, on a quarterly basis, the dollar amount
of actual MBE/WBE procurements by DEC or its subrecipients and prime contractors.
DEC's current position regarding MBE/WBE procurements for EPA infrastructure grants is that
all cash advances to the Alaska Native Tribal Health Consortium (ANTHC) are MBE
procurements due to ANTHC's status as an Alaska Native organization. The cash advances to
ANTHC, however, are on behalf of the Native communities and may not go directly to Native
communities or may not be used to procure products and services from Native companies. Thus,
DEC is required to obtain information from ANTHC regarding actual procurements rather than
reporting 100% of the cash advances as MBE.
DEC does not include the MBE/WBE objectives in any of its bid or grant documents. In order to
be in compliance, DEC must include the MBE/WBE "fair share" objectives in their bid
documents for procurements related to projects managed by VSW engineers, grant documents to
municipalities under the Municipal Grants program, and grant documents for projects managed
by ANTHC. Additionally, DEC must establish reporting procedures to require all subrecipients
and prime contractors to report actual expenditures from MBE/WBE procurements to DEC.
We recommend the DEC finance officer and Division of Water facility programs manager
modify EPA-related bid and grant documents and establish reporting procedures with
subrecipients and prime contractors to ensure compliance with EPA MBE/WBE requirements.
CFDA: 66.606 Federal Agency: EPA
Questioned Costs: None
Agency Response Department of Environmental Conservation
The Department supports this recommendation. The VSW Procurement Specialist is working to
update bid documents and agreements to include Minority Business Enterprise/Women 's
Business Enterprise (MBE/WBE) fair share " objectives, and to require reporting of actual
MBE/WBE procurements.
Contact Person: Gary Zepp, Financial Officer
Telephone: 907-465-5289
Recommendation No. 25
The DEC finance officer and Division of Water facility programs manager should improve
oversight of funds passed through to ANTHC.
16
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DEC's oversight of infrastructure funds transferred to ANTHC is insufficient to ensure
compliance with federal requirements. DEC transfers federal EPA and USDA Rural
Development funds to the ANTHC on behalf of Alaska villages for VSW projects. In July 2000,
the Indian Health Service (IHS) contracted with ANTHC (a nonprofit organization) to manage
IHS projects in Alaska. Because ANTHC is acting on behalf of a federal agency, DEC believes
that their current oversight of funds passed through to ANTHC is sufficient. This oversight
includes reviewing quarterly reports and contracting for an annual review by a third-party CPA
firm. DEC confirmed their position with EPA and USDA officials in FY 03.
The current scope of the third-party CPA review includes: (1) examining expenditures to
determine if they are supported and in accordance with VSW requirements: (2) determining if
ANTHC is meeting VSW, EPA, and USDA grant requirements; (3) evaluating ANTHC
procurement practices; and, (4) suggesting recommendations for improvement of the
management of VSW grant funds.
However, for oversight to be complete and effective, it must have three components:
collecting information; reviewing information collected; and following up on identified
problems. The third-party CPA firm reviews—as currently implemented by DEC— accomplish
the oversight components of collecting and reviewing information, but do not provide for follow-
up on identified problems. The most current review (FY 03) identified duplicate administrative
expense billings and a frequent inability to reconcile actual expenditures to reported
expenditures. DEC does not have an agreement with ANTHC requiring the development of a
follow-up corrective action plan on findings and recommendations. Without such an agreement,
the value of these reviews is questionable.
We recommend the DEC finance officer and Division of Water facility programs manager
improve oversight of federal funds. DEC should sign an agreement with ANTHC requiring a
follow-up corrective action plan on findings and recommendations and DEC following up on
corrective action in a timely manner.
CFDA: 66.606 Federal Agency: EPA
Questioned Costs: None
CFDA: 10.760 Federal Agency: USDA
Questioned Costs: None
Agency Response Department of Environmental Conservation
The Department disagrees with this recommendation, in that the Indian Health Service
(IHS), a federal agency, not the Department, is responsible for oversight of the Alaska Native
Tribal Health Consortium (ANTHC). The INS contracts with the ANTHC to manage INS
projects, and is the cognizant federal agency for the ANTHC. All agreements related to IHS
projects funded by EPA and USDA monies granted to the state are between the Department and
the IHS. The ANTHC is not a party, and is in no way a subrecipient of the Department subject to
its oversight. As questions frequently arise due to the unique nature of the relationship between
17
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the Department, the IHS, and the ANTHC, a legal review is underway to confirm relationships
and responsibilities to the satisfaction of all interested parties, and put the matter to rest.
Contact Person: Gary Zepp, Financial Officer
Telephone: 907-465-5289
Legislative Audit's Additional Comments
We have reviewed DEC's response to this recommendation and nothing contained in the
response has provided sufficient information to persuade us to remove or revise this
recommendation. We agree that the relationship between DEC, ANTHC, and the federal
agencies is confusing and expect a complete legal review should clearly identify the
responsibilities of each party.
18
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II3533B Si
IISI
-------
STATE OF ALASKA
SCHEDULE OF EXPENDITURES fF FEMSAL AVWftOS
Far mta v«r EMM Jm M km
lly state Agancy
Federal CH» wswtwMBW i-t.r.i
•'j'T, i Tifi- -1i ¦itOiijSn .!•¦* ilfis; '»• nil-^jrii! Irk. Eawttwn
u. ww k ».o Pis b'E
r -ii ijm- mii.-f -Hijwinais 215,5«3
05* S6.7B8 fchiikaiftfSBnl»niiCifaifc>«ropiini i.2Efi
EPA mm S-Bte ana TrM Itooworourrt Storage Tanks Program "Mi BSJS
m mm mm
EPA iSMM
S«s ana M-w Trite Cw Pmtn Qmmm Agwwwnts 225,555
EPA 1611? SalB!iMT[BlSSeS!*»B»Pll|««GBBlS 1634®
BR* 66.LU5T Trust Cost R«twerv LUST f«'U5t Cost ftacewv «.«SI
E«EW #' K-C»«B«e» AjkWb i-Mmt fjvmmi Pr^-on «M,M«
PJJE88T11 tt-«iii«MVs3i"B3 Mil i3*esp®SHE7
-------
Appendix A
Auditee Response
i m*m h mmmmm, twtffrm
DfcPT- Oi< EN VIRONMKNTAI. CONSERYAI ICIN /
()KFIC'I:: OF THE njV.MISHlONjRh!
•] I G 'V> , ^Ii
r- Ofhn- r,;«. J 1 l >!?,:¦"t
..llllli .ill , < |\ r'r#SiS
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I'.VX 5' >0-1 itvj.;;-i;vu
ir.lp. I /'*
M.iv 2f,L 20t)£i
Mi. h.u I A, Rlrkcv,
M-sKmncr Af,r*'<"ru>i-nl Audits
US fcuvjriHiirt^Hnl Aj^ncv
Wn^hifit,Xt;u, D C 2-U4tH,l
SE: Slr.pji: AndII RnjKin £nr rhr: Mnn- n! \l i^kn fJL-p.irtra'iil i>i Envtrnnmenirti
s'-i-irisfi'vaufHi l\>i l5ir Yl-.ii Funded 30, '?.{)>H
D>-.ir Mr, Rickey,
Er'Cj^ir.fd plri-ir*. >w»riUf i »t
Alu-dut !>i f-.urlui-rul at" KmirwlnruluJ CtWirrvnUeii IlJKC'l AndH Rcpcuf fo> l)vr-
v %ir '"i ricfl Ju:v: 'iO. 2tMMr us wdi :ls I hi' idfl;!.jun.il timings duel r..:v,ntnK'nd.v.taon?>
prepared In- the Olfrrr nl ihc liispcrlor ficrirrvvl (OKI ot 1 It ' !.S. F. uviror.'.iK nl.il
Pm|, :^uon Afiym:y-
V« i 1 .ttss :i.\ v' Lltf fti tduiiJs n:i •Hiji11r.ikLuli.11- ui tl it: .ir.l»;;t.it-. t.pjT»':*-a!i' tlir «pftfsn«nKy H> fT-spn:i(?. Sjj«.n cvrdpi nf the fiscal year 20t>n Sinrilo
Mifltt riV|"wr;l if 1 ,J»i!v !ft.K)4, (Iw- 1 Imipiil dnVniimivl clmr :* U'.,v«. In d;i
full rv,:di«l;r?ti i>f '.iir Vllla«;i; Salt" Walur pnu-l:: . :l
Ailcr your review o*l ihc mfeirmalion wr prmlcfc wp Lhiab ;iiat you will knd -ill i.*l
*(1ft \-fi, (liCir'f'nt; C:'t K <•••"! Ill fllifc I OfKi5 1 hsi' 3" k „idf! rr fl
rht' Single AudiL Ksport for ?lu* piTunl Juiiv 3(>. 20()5 JiaH j'f-L to br n-ic-isivj.
] :uflltofs' .ii5^':cwiiEii wS.rh §hf: Hilhmntl-jn vrntJlni d
in Use StuRmary •>! Piloi AuiJH Finding supp-jjit^ a ccudtisioji iliat ivl i i''.c^.iiy
TOmtntivi: itctt^n h«-> bw-n t'tmirjlfM,
III din fra;*1«W'-4 dr.v Mitirui carl 1 i-.su>" raimc^S Jn |Uc OECj n,uiiif 1 cpoi; ^ -.tabnl and
f^lhiwt'd by f.mr < inniiirnts. Th.infc you, lor prnvifhru'. I liK oppisnMnivy Id erniintnnl, an
¦-| -
-------
Michael A. Rickey
2
May 26, 2006
your findings and recommendations. If you have questions or need additional
information regarding onr response, please contact Laura Beason at 907-465-5273.
Enclosures
ce: Lynn Kent. Director, Division oi" Water
Mike Malier, Director, Division of Information & Administrative Services
Pat Davidson, Legislative Audit
Nikki Rougcl, Legislative Audit
Sincerely,
Kurt Fredriksson
Commissioner
22
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Department of Environmental Conservation Response to the Office of the
Inspector General (OIG) Draft Report Dated April 27, 2006
[Note: The State included excerpted portions of the single audit report. We deleted these excerpts from
Appendix A because it duplicated information already contained in this report.]
Timekeeping Not Compliant with OMB Circular A-87
(Single Audit Report Recommendation No. 22)
STATE OF ALASKA COMMENT #1:
The statement that employees performing administrative and oversight duties would "normally
be considered indirect" is not accurate and we would recommend that this statement be removed
or restated. The following are excerpts from A-87 and a clarification memorandum produced by
the U.S. Department of Health and Human Services that illustrate this point.
• OMB Circular A-87 Attachment A, D.2 Classification of Costs, "There is no universal
rule for classifying certain costs as either direct or indirect under every accounting
system."
• Another federal agency has produced a clarification memorandum outlining direct costs
versus indirect, or "administrative," costs. Per U.S. Department of Health and Human
Services CSBG Memorandum 27 Definition and Allowability of Direct and
Administrative Costs, December 10, 1999: "Direct program costs are incurred for the
service delivery and management components within a particular program or project.
Therefore, direct costs include expenditures on some activities with administrative
qualities, including salaries and benefits of program staff and managers, equipment,
training, conferences, travel, and contracts, as long as those expenses relate specifically to
a particular program or activity, not to the general administration of the organization." A
full copy of this memorandum is included as Attachment #1.
In the Department of Environmental Conservation (DEC), the indirect rate incorporates the costs
of providing department-wide centralized general administrative services. Charges for staff
performing administrative functions dedicated to a particular program (not department-wide) are
not included in the department's indirect rate. DEC fulfills the required test of treating "like
costs in like circumstances" the same, and ensures that allowable costs are either direct or are
included in the indirect rate - not both.
OIG Comment: In its response. I he State disagreed with llie l-IW OKi's position thai
costs associated with State employees performing non-engineering functions should he
charged indirectly To support its argument, the State included a portion ol'OMIi
Circular A-S7 and relied upon a definition from another federal agency in support of its
treatment of administrate e functions as direct costs The State helie\es that since the
administratee function benefits the Village Sale W ater as a whole, the administrati\e
functions should he treated as direct costs The Slate s position is dependent on the
premise that the Village Sale W ater program is a final cost ohjccli\e I lowe\er. for the
23
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purpose of the l-l\\ grants aiicl what ihey are funding. the State has ineorreelly defined
the X'illaue Stile Water as ti filial cost ohjcclixc
The single auditor's finding wtis llml the Stale was nol following OMIi Circular A-X7
lor charging costs to federal programs OMIi Circular A-X7 defines direct costs as
those that can he identified specifically with a particular final cost ohjecti\e The
X'illaue Safe W ater is responsible for projects funded through \arious sources, including
!¦ PA. I SI)A. and State of Alaska funds. The project represents the particular final cost
ohjecti\e. not the X'illaue Safe W ater program If the X'illaue Safe W ater was the llnal
cost ohjectixe. the State should ha\e. at a minimum, been allocating acl 111 inistrati\ e costs
to all the \ arious funding sources. Instead, the sinule auditor found that only the I-PA
grant was being charged
The non-eiiuineerinu costs meet OMIi Circular A-K7"s dellnition of indirect costs, which
are defined as costs
fm inciirrciljor a common or /oiiii purpose heiieji/ini* more limn oik- com
oh/cclivc. anil thi nol readily assignable lo llic cosi oh/ccliws specifically
hcncjillcil. 11 illioiil effort i/isproporiionalc lo l/ic rcsii/is achieved.
STATE OF ALASKA COMMENT #2:
The report excerpt above includes the following statement, ".. .the State will begin direct billing
all Engineering, Management and Travel expenses to the appropriate projects and the balance
will be included in the State's federally approved indirect cost rate."
To clarify and ensure there is no misunderstanding, engineers charge time directly to projects.
Supervisors and staff directly supporting the engineers do the following:
1. Separately identify time spent supporting the Village Safe Water engineering staff each
pay period on their activity report (timesheet), and
2. Those charges are then allocated to the projects supported as a direct (not indirect) charge
according to the provisions of Circular A-87 Attachment B, 8.h(6)(b).
This process has been reviewed and approved by staff within EPA and is outlined in Attachment
#2, Memorandum of Understanding between the State of Alaska, Department of Environmental
Conservation, the U.S. Department of Agriculture and the U.S. Environmental Protection
Agency. Also attached is an outline of the procedure followed to appropriately allocate these
costs. See Attachment #3.
OIG Comment: The State's response conflicts with OMIi requirements. The State's
adopted process is not a direct allocation, hut is in fact the accumulation and allocation
of indirect costs
OMIi Circular A-K7. Attachment A. I- (I) defines a direct cost as " those that can be
24
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identified specifically with it piiiliciilar final cost ohjccli\c " It uocs 011 lo identify lhal
t\ piciil di reel costs chargeable to federal awards include "(\>m pensiiti <.>11 of employees
for the time de\oted and identilled speci 11 calI\ to the performance of those awarcls "
Comcrscly. indirect costs are dellned hy OMIi Circular A-S7 as those costs that arc
"incurred for a common or joint purpose bencfilinu more than one cost ohjccli\c. and (h)
not readily assignable to the cost ohjccli\c speci Ileal ly henell tlecl. without effort
disproportionate to the results achie\ed "
The process that the Slate describes is the accumulation of costs into a separate cost pool
prior to allocation to projects, which are the final cost centers The State's process meets
the definition as an indirect cost, described in OMIi Circular A-K7. Attachment A.
Paragraph l '( I) as
Io facilitate cc/mlab/e distribution oj until ed expenses to the cost ob/eclives
served. // may he necessary lo establish a number oj pools oj indirect costs within
a governmental mm department or in other agencies providing services to a
governmental mm ileparimeni. Indirect cost pools should he distributed to
hcncfillcil cost ob/eclives on bases ilial will produce an ei/iiilah/e result in
consideration oj relative benefits derived.
The State is also misinterpretinu the use of OMIi Circular A-X7. Attachment li.
S h((->)(b) Paragraph N is entitled "Compensation for personal ser\ices." and discusses
the composition of personal ser\ices. including Irinue benefits and pension costs
Paragraph X h discusses the standards reuardinu support for salaries and waues.
includinu time distribution and related documentation Paragraph N h(O) slates the
Ibllowinu
<(>) Snbsiiiiiie systems for allocating salaries ami wages lo lederal awards may
be used in place oj activity reports. /hese systems are snb/ecl to approval if
required by the cognizant agency t(>Kh). lllocaling charges for the sampled
employees' snjK'rvisors. clerical and support staffs, based on the res/ills of the
sampled employees, will be acceptable.
This pro\ ision does not authorize the allocation of labor charues as a direct cost This
pro\ision simply allows a urant recipient to allocate personnel ser\ice compensation
when acli\ily reports (i e . adequate documentation, timesheets. etc ) are not a\ailable
This fact is supported by Paragraph N h(4). which states.
Where employees work on multiple activities or cost objectives, a disiribmion oj
their salaries will be supported /emphasis added/ by personnel activity reports
or equivalent documentation which meets the standards in subsection (?) mi/ess a
statistical sampling system or other snbsiiiiiie system has been approved by the
l ¦( >gi mam l ederal agency.
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The State is also incorrect in slating ihi.il l-IW slallcan appro\ e lliis Iahi>i" distribution
process liecause the allocated labor method proposed creates an indirect cost pool, the
new indirect cost pools can only he appro\ed hy the cognizant Cio\ernnient agency
responsible lor negotiating final indirect cost rate lor the Stale Since l-IW is the
cognizant agency for the Alaska Department of l-n\ironmenlal Conser\ alion. then the
appro\al would need to come from I-IW's Office of Acquisition Management. financial
Analysis and Rale Negotiation Ser\ ice Center Therefore. in order to properly account
lor and allocate the non-engineering support stall"charges, the State will need to de\elop
and submit an indirect cost rate proposal to l-IW lor appro\al
STATE OF ALASKA COMMENT #3:
The report excerpt above includes the following statement. "The purpose of the EPA
infrastructure grants is to fund specific projects identified in the grant application, not a
continuing environmental program." It has been clearly understood by DEC staff as well as EPA
Region 10 staff that from the time the administrative funding was added to this program, that this
funding (if any was requested by DEC) would be used to cover the administrative costs for
managing all EPA funded infrastructure grants during each state fiscal year regardless of which
projects were being worked on during that year.
To further support our position we reviewed P.L. 104-[182], which amended Section 303 of the
Safe Drinking Water Act and added the administrative component. Section 303 reads as follows:
"(a) IN GENERAL- The Administrator of the Environmental Protection Agency may make
grants to the State of Alaska for the benefit of rural and Native villages in Alaska to pay the
Federal share of the cost of—
(1) the development and construction of public water systems and wastewater systems
to improve the health and sanitation conditions in the villages; and
(2) training, technical assistance, and educational programs relating to the operation
and management of sanitation services in rural and Native villages...
(c) ADMINISTRATIVE EXPENSES- The State of Alaska may use an amount not to exceed 4
percent of any grant made available under this subsection for administrative expenses
necessary to carry out the activities described in subsection (a)."
The Administrative component of each grant year was used in accordance with the above - for
administrative activities necessary to carry out the activities described above. There is no
stipulation that this administrative component may only be used to carry out activities funded
under the same particular grant year.
Additionally, this use of the Administrative component is consistent with the use of the Drinking
Water State Revolving Fund program's administrative set-aside, which is also authorized under
the Safe Drinking Water Act. Under this program, up to 4% of an individual grant's funding may
be used to administer loans made from the loan fund. Similarly, there is no stipulation that this
administrative set-aside only be used to administer loans made from the same grant year's funds.
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OIG Comment: We do noi agree with the Suite's response in connection with the
cillowiihle period lor administratee costs or what constitutes aclniinistriiti\e costs subject
to the 4 percent limitation OMIJ Circular A-S7. which estahiishes applicable cost
principles.1 slates that the Circular is intended to assure the "efficient administration of
federal awards " While it uses hut does not directly define the term "administrati\e
costs. " as it does other cost terms, such as "direct" and "indirect" costs, the most
explicit treatment about administratee costs is seen in Attachment I), wherein OMIJ
states "All administratee costs (direct and indirect) are normally charged to federal
awards by implementing the public assistance cost allocation plan " Again. OMIJ does
not say precisely what is or is not included in administratee costs, though it seems clear
that there are or can be both direct and indirect cost components to administrate e costs
In addition, while Circular A-X7 separately discusses certain categories of cost items,
such as ad\ertising and tra\el. there is 110 specific category for "administrate e " If
administrate e costs were considered as a specific subset category of costs, it is
reasonable to assume that OMIJ would ha\e treated it in similar fashion.
IJased on the abo\e. administrate e costs is a general term that refers to all of the costs of
executing or managing the program. and that it is composed of both direct and indirect
costs Thus, for example, the issue of how the Stale categorizes the cost of its project
engineers as either direct or indirect costs is not rele\ ant as far as .vi I 'S.C $ 12(\?a(c)
is concerned because both fall under administrate costs
The statute pro\ ides that the administrate e percentage cap applies to "any grant" and
does not contain further words of limitation, e g.. to fiscal year Nothing in this
language suggests that the cap only applies to the llseal year in which the uranl is
awarded. Rather, il seems clear that the percentage cap applies 10 administrate
expenses o\er the life of the uranl As such, there is 110 "uranl year" that applies 10 the
administrate costs, as argued by the Slate Instead, the administrate cost cap of 4
percent is meant to apply to administration of the projects funded under the uranl
STATE OF ALASKA COMMENT #4:
We acknowledge that our labor charging practices during this fiscal year did not meet the
requirements outlined in OMB Circular A-87. After a thorough review of the alternative
allocation processes outlined in OMB Circular A-87 Section 8, we have developed several
alternative allocation methods to address this issue. These alternative methods are outline below:
4 Pursuant to 40 CFR Part 31.22, ADEC must follow OMB Circular A-87 cost principles, which "establishes
principles and standards for determining costs for Federal awards carried out through grants, cost reimbursement
contracts, and other agreements with State and local governments and federally recognized Indian tribal
governments."
5 "Direct costs are those that can be identified specifically with a particular final cost objective." OMB Circular
A-87, Section E (1). "Indirect costs are those: (a) incurred for a common or joint purpose benefiting more than one
cost objective, and (b) not readily assignable to the cost objectives specifically benefited, without effort
disproportionate to the results achieved." Ibid., Section F (1).
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1. Over the course of this program the State of Alaska has contributed much more than the
required match necessary to expend these federal funds. Attachment #4 is a report that
shows the amount of administrative funding expended on this particular federal program
over the years. As you can see, the state contribution is 123% of the amount contributed
by EPA. In addition to the extra contributions of administrative funding there have been
significant amounts of state funding contributed for direct project costs above and beyond
the match requirement. Attachment #5 is an example of just one grant, XP-990561-01,
which shows an excess state match amount of $1,799,951. Other grant years will exhibit
a similar over match situation.
With this proposal we would like to simply suggest recognition of the extra
administrative funding contribution and/or a reclassification of the questioned
administrative expenditures to a state funding source and excess direct state project costs
as federal. What this results in is that we would be claiming no reimbursement of
administrative costs for FY04 but only direct project costs.
2. Base the distribution of administrative costs for FY04 on the actual administrative
distribution of costs in FY06. This would result in a pay back of funding to EPA.
3. Allocation of the FY04 administrative costs on actual direct project expenditures for
FY04. This again would result in a pay back of funding to EPA.
With the significant excess state contributions to this program we feel that the proposal outlined
in number 1 above is more than equitable for both DEC and EPA and ask your concurrence with
this proposal.
OIG Comment: The Slate acknowledges that its labor-charging practices did not
comply with OMIJ Circular A-S7 In its response, the Slate pro\ided allcrnali\es lo
address historical costs W e ha\e no comment regarding any of the allcrnali\es
pro\ ided except that the section referred lo In the State is only allowable under certain
circumstances OMIJ Circular A-K7. Attachment IJ. Section S h((->)c states
/.ess l/um full compliance ivilli llic statistical sampling standards noted in
suhscclion la) may he accepted hy the cognizant agency if // concludes thai the
amounts to he allocated to l ederal awards will he minimal, or if u concludes that
the system proposed hy the governmental mill will result in lower costs to
l ei/cral awards than a system which complies with the standards.
As discussed pre\ iously. OMIJ Circular A-N7. S h((->) simply allows lor a means to
allocate personnel ser\ ice costs, in lieu of acli\ ity reports, and does not relate to what
altei nati\ e systems can he used The State has not demonstrated that it is unable to
prepare acti\ ity reports for all personnel: instead, the State is using Section S h as its
basis lor allocating indirect labor costs and treating these costs as direct charges Again,
any cost that is not a direct cost is an indirect cost Indirect costs needs to be
accumulated into pools and allocated as an indirect expense I 'mil the Slate correctly
treats the allocated labor as indirect costs, we ha\e no opinion or basis for accepting any
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allernali\ cs proposed hy the Suue lo allocate prior labor costs lo the \arious I-PA grants
Additionally. the Suite must treat these costs consistently across all of its projects,
including I SDA and Stale-funded projects
In order for any of the alternate es lo he allowable, the Slate will need lo demonstrate
thai the amount allocated lo the grants are minimal or will result in less costs than what
would ha\e been allowed had the Slate s labor charging practices complied with OMIJ
Circular A-X7 In order for this to happen, the State, lor each grant. will need to pro\ ide
appropriate documentation that not only supports the direct project costs charged (as
discussed in the pre\ ions findings). but also correctly identities and applies the 4 percent
administrate e charge to the uranls I 'mil this full reconciliation is performed and
re\iewed. the SI. I I in labor charges remain questioned
State Procurement Procedures Not Consistently Followed
(Single Audit Report Recommendation No. 23)
STATE OF ALASKA COMMENT #1:
The procurement process in place during this fiscal year was a process that had previously been
reviewed and approved by EPA staff. The issue raised in the single audit report was one of
insufficient oversight rather than the process being flawed in some way. We do agree that
staffing levels at the time simply did not allow for the necessary review or the necessary
expertise to provide optimal oversight.
To address this need the VSW program created a new Procurement Specialist position to provide
additional oversight in September 2004. This position is solely dedicated to the VSW program,
and is supervised by the Division of Information and Administrative Services to ensure
appropriate segregation of duties and authorities. The incumbent has worked to strengthen
internal controls and to provide appropriate oversight and guidance for VSW procurement
practices. To further illustrate our commitment to ensure appropriate procurement practices are
followed, we are creating an additional procurement position. We expect have to this position
filled by the end of June 2006.
OIG Comment: The Stale s actions sulTicienily address this finding The single
auditor informed the ()l(i that under the current single audit being performed (for Hseal
year 2<>(»5) there were no problems identified with procurement testing Therefore, no
further action is required by the Slate at this time We will delete our recommendation
that Region I') should re\iew and appro\e all State solicitations and contracts under
I-PA grants and cooperati\e agreements other than small purchases until the State s
procurement system is re\iewed and determined to comply with l-PA requirements The
State s actions do not address historical problems with its procurement process and the
contracts issued under the grants prior to 2<><>5. As such, we do not accept or appro\e
any procurement costs claimed prior to 2<><>5. Such procurement costs may be
unallowable if such costs were not incurred following applicable federal requirements
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State Not Compliant with MBE/WBE Requirements
(Single Audit Report Recommendation No. 24)
STATE OF ALASKA COMMENT #1:
As stated in our response the department did support this recommendation. The VSW bid
documents and agreements have now been updated to include the Minority Business
Enterprise/Women's Business Enterprise (MBE/WBE) fair share objectives and also require
reporting of actual MBE/WBE procurements. For your information we have included the
following documents with this response:
• An example of a Request for Statement of Qualifications - This form is the initial
publication of a procurement. Any responding firm that indicates it or its subcontractors
are eligible for MBE/WBE is granted this preference. See page 2 of 5 on Attachment #6.
• An example of the contract form that communities are required to use when entering into
an agreement with a consultant. See Article 28 on Attachment #7.
• A copy of the format used to quarterly report MBE/WBE procurements. See Attachment
#8.
In addition to the procurements performed by the VSW program we have included provisions in
the agreements with the Indian Health Service (IHS). These provisions are presented in the
following attachments:
• Memorandum of Understanding between the State of Alaska, Department of
Environmental Conservation and the United States Indian Health Service. See page 7 on
Attachment #9
• Funding Transfer Agreement between the State of Alaska, Department of Environmental
Conservation and the United State Indian Health Service. This document contains three
attachments please see Section 12 of attachment 1. This section requires the comply with
all the requirements outlined in 15 C.F.R. Part 24 which includes the MBE/WBE
requirements. See Attachment #10,
• A copy of a recent quarterly report received from IHS/ANTHC listing MBE/WBE
procurements. See Attachment #11.
OIG Comment: In its response, the State concurred with the single auditor's
recommendation and has made collections to comply with the M151! \\ 1511 requirements
The State s actions are acceptable and no additional recommendation or actions are
needed
State Oversight of Consortium Insufficient
(Single Audit Report Recommendation No. 25)
STATE OF ALASKA COMMENT #1:
As a result of the this recommendation and other independent audits, the department
implemented a new oversight process for the funds passed through to the Indian Health Service
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(IHS) and the Alaska Native Tribal Health Consortium (ANTHC). The following is an over
view of this new process.
Programs to develop sanitation facilities in rural Alaska are jointly administered by the Alaska
Department of Environmental Conservation (DEC) and the ANTHC, along with the following
federal funding agencies:
• US Environmental Protection Agency (EPA)
• US Department of Agriculture, Rural Development Program (RD)
• Indian Health Service (IHS)
For projects funded by or through the State of Alaska, DEC may elect to transfer sanitation
facility improvement grant funds from EPA and RD to IHS as a contribution toward the
accomplishment of their common objectives to improve water quality, sanitation and public
health for the residents of Alaska Native and rural communities. To avoid duplication of
administrative efforts, when IHS has transferred administration of a project to ANTHC, DEC
may reimburse ANTHC directly for project expenditures. EPA and RD approval of such
transfers will be contingent upon DEC's continued support through programmatic and financial
oversight and assistance to ensure successful project performance and completion.
DEC oversees administration of projects in ANTHC-lead communities through a series of
policies and procedures, many of which are specifically identified in the Memorandum of
Understanding between DEC and IHS (Attachment #9). These policies and procedures begin at
the project planning stage and continue through project close out.
A data system of sanitation facility needs in every rural Alaska community is jointly maintained
by DEC and ANTHC. This data system is updated annually, and is used for state and federal
funding allocation.
Project-specific oversight begins when a funding request is received for a planning project. DEC
and its federal funding partners utilize jointly-developed evaluation criteria to score the request.
If there are any questions about the request, DEC works with ANTHC to have them addressed.
If the funding request scores high enough, the planning project is funded. As work proceeds,
draft sanitation plans are submitted to DEC for comments, and the final draft must be approved
by DEC before it can be published and used for future funding requests.
Once a community has a sanitation plan approved for funding purposes, ANTHC can assist in
preparing a funding request for design and construction. These funding requests are considered
in the same way as requests for planning funds as described above. Once a design and
construction project is funded, DEC utilizes the following oversight tools:
• Funding Transfer Agreement (Attachment #10) - Projects administered by ANTHC are
included in an annual Funding Transfer Agreement (FTA) with IHS, which includes the
following information:
Total funding transfer amount
- Project scope and estimated cost for each community
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General conditions and construction funding conditions
Cash management procedures
- Agency Requirements
Review and approval of Project Cooperative Agreements - A Cooperative Project
Agreement (CPA) (Attachment #12) between ANTHC and the community is executed
for every sanitation project administered by ANTHC. The CPA details the project
schedule, funding contributors, cost estimate table, project schedule, and project
methodology. Once executed, the CPA is used to establish the budget for the project in
the ANTHC accounting system. DEC reviews and approves CPAs for all projects funded
through the State of Alaska.
Written financial and progress reports - Project-specific financial and performance
reports (Attachment #13) are provided to DEC before and after the construction season.
Performance reports include the following:
- Project development milestones, including design, construction, and closeout;
Comparison of current outputs (facilities provided by the project) and outcomes
(increased levels of service to homes and essential community buildings) to targeted
outputs and outcomes (established in any project work plans included in the federal
grant award);
- Reasons for delays, reduced scope, and cost overruns;
- An estimation of the percentage of facilities (outputs) completed;
- Financial information by facility (output), including budgets, expended funds, and
remaining funds; and
- Information regarding problems, delays, or adverse conditions which will materially
impair the ability to meet the objective of the award.
Project specific presentations and discussions - Three months following each financial
and performance report, DEC and Federal funding agencies are provided with the
opportunity to request project specific presentation and discussions. These presentations
include detailed information about expenditures, progress, challenges, and any significant
changes or delays affecting the project.
Review of engineering plans and specifications - DEC is provided with the opportunity
to review and comment on engineering plans and specifications as they are being
developed.
Review of Department Operating Guidelines - Policies and operating guidelines must be
established and maintained by ANTHC to ensure compliance with state and federal
funding requirements. These operating guidelines include, but are not be limited to,
procurement, accounting, personnel, the use of force account labor, design and
construction processes, and project close-out.
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• Joint use of project expense codes for budgeting and reporting - DEC and ANTHC have
jointly established a financial expenditure and accounting code structure. This structure
is used by both organizations to track project expenses and prepare financial expenditure
reports.
• Special Analysis and Review of ANTHC Project Administration - DEC has also used
contract services to analyze and review the procedures used by ANTHC to administer
projects. Specific procedures reviewed include:
- Review, approval and payment of invoices for materials and services
- Bid documents to procure materials and services
- Project accounting by outside accounting firms
- Force account, equipment and labor costs
Costs associated with administration and indirect administration
- Accuracy of reporting on financial reports
• Joint development of design and construction standards - ANTHC and DEC work
together to jointly establish and maintain design and construction standards for rural
sanitation facilities. These standards are used by both agencies to ensure that design
details and specifications for standard system components have been thoroughly
reviewed and approved for statewide use.
• On-site construction inspections - DEC participates in on-site construction inspections on
specific projects on an as-needed basis. These inspections provide the opportunity to
verify written reports about progress under specific projects, and talk with community
residents and project workers about the project.
• Project close out reports - ANTHC provides a project close out to DEC for each project. The
Final Report summarizes the project's funding sources and expenditures and also describes
events throughout the course of the project.
In addition to these written documents and procedures, DEC works closely with ANTHC on a
continuous basis to administer projects throughout the state. This work includes discussion and
decision making about the numerous projects that are jointly funded through both DEC and
ANTHC in the same communities, and administered by only one agency or the other (depending
on lead-agency assignment). These discussions and decisions are another effective means of
oversight for both agencies. On many occasions, representatives from both ANTHC and DEC
will meet with community representatives or make on-site visits together because of multiple,
jointly-funded project oversight concerns.
With the implementation of the above procedures, the department believes that all deficiencies
identified have been followed up on and corrected.
OIG Comments: ll is e\idenl lhat the State has taken numerous steps to coordinate
and formalize how Village Sale Water projects will he administered hv II IS and the
Consortium While the efforts taken by the State, in concert with the Consortium and
II IS. ha\e helped to define project management, roles, and responsibilities throughout
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project planning ancl execution. we continue to ha\c concerns regarding the defined
relationship between the Suite aiicl the Consortium
Although the State s response makes reference to the transferring of I IP.\ grant funds to
II IS. this does not actuall\ occur The State sends l-IW urant funds directly to the
Consortium to support projects authorized under the l-IW urants Consequently. we
niaintain our position that any l-IW urant funds that the Consortium recci\es from the
State remain l-IW funds l-IW funds are not subject to any II IS regulations, legislation,
opinions, etc The l-IW funds do not become part of an II IS program: therefore, any
agreements between II IS and the Consortium, regarding II IS-funded programs. are not
germane
Agreements among agencies. federal or State, do not o\erride f ederal regulations. and a
federal agency cannot o\erride a federal regulation unless it has the authority to do so
I nless l-IW was a party to an agreement between II IS and the Stale, and wai\ed the
application of l-IW urant requirements (assuming it had the authority to do so), any
agreement between Alaska and the II IS does not o\ erride the application of l-IW"s urant
reuulations to an I-PA-liinded urant
The State recognizes its urant o\ersiuht responsibilities in the Slate f iscal Year
funding Transfer Agreement between the Stale and II IS. which stales
/./'. i...conseni/s/ with such iransjcrs is coiiiin^cnl upon / >/.(' \ coniiniicil
proifiimiiiiaiiL¦ ami financial owrsiifhi to ensure siicccss/nl pro/cci/>crjonnancc.
/ iini/ini: transfer i/ocs not relieve / >/.(' of responsibility for overall ifrani
management anil successful pro/eel completion.
I lowe\er. the Slate did not specifically address how its o\ersiuhl function will ensure
thai deficiencies thai are found at llic Consortium are addressed and corrected Auain. it
seems that llic Stale plans to rely completely 011 II IS to address any uranl deficiencies at
the Consortium Since the Stale did not adequately address this recommendation, it will
remain in the final report
Unresolved Issues from the 2003 Single Audit
State Cash Management Procedures Need Improvement
(Single Audit Report Recommendation No. 32)
STATE OF ALASKA COMMENT #1:
As a result of a complete program review during fiscal year 2005 a new financial management
system was identified and implemented. Full implementation of this new system was completed
in December 2005. As mentioned above the accounting for this program was previously handled
by a contracted accounting firm. The accounting firm was required to maintain individual bank
accounts for each project. Under this system advances were needed to ensure cash was available
within these bank accounts to pay project invoices. Under the new process all accounting for
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each project under the Village Safe Water (VSW) program is now handled by State of Alaska
employees and all project expenditures are recorded in the state's accounting system.
The most significant change in regards to cash management procedures is the method by which
we now request federal funds under the VSW program. With the elimination of the contracted
accounting firm, cash advances are no longer necessary. Requests for federal funds are now
made only after the project expenses have been paid with state general funds through the state's
accounting system. In other words the VSW program is now operating on a fully reimbursable
basis and the cash balance on hand is zero.
OIG Comment: Pending \eri Ilea lion of compliance with OMIJ Circular A N7 and 4<)
(T'R .11 22. the Stale's actions should address the findings raised in the Single Audit
State Needs to Obtain Actual Expenditures from Consortium
(Single Audit Report Recommendation No. 33)
STATE OF ALASKA COMMENT #2:
As part of the transition from the contracted accounting firm to the state's accounting system a
contract was issued that required the reconciliation of all projects being managed by the
contracted accounting firm. This was completed in fiscal year 2005. As a result of this
reconciliation we can now easily identify actual expenditures by project, by federal grant and by
state appropriation. Attachment #14 is a sample of the project reconciliation information
available. All project information is available for review.
The review of the VSW program also included an analysis of our relationship with the Indian
Health Service (IHS) and their representative in Alaska, the Alaska Native Tribal Health
Consortium (ANTHC), and in particular the method of advancing project funds. This review
resulted in eliminating the practice of advancing funds to IHS/ANTHC. They were notified of
this change in fiscal year 2005. As part of the change in process IHS/ANTHC has been required
to reconcile each project to determine actual expenditures to date and to return funds not yet
spent to the State of Alaska. These funds are then returned to the appropriate federal funding
agency.
IHS/ANTHC contracted with an accounting firm to perform this reconciliation, which is now
substantially complete. However, there are still eight community accounts in which the
reconciliations have not been completed. The last advance payment made to the IHS/ANTHC
occurred in October 2005. Since that date only payments for reimbursement of actual
expenditures have been made. These payments have been for only those projects in which
certified reports detailing expenses by project and by funding source have been received. For the
projects managed by IHS/ANTHC, the project reconciliations have taken longer than expected.
To ensure a timely completion of this process the VSW discontinued reimbursable payments to
IHS/ANTHC for all requests received after March 1, 2006. Attachment #15 is a copy of the
directive given to IHS/ANTHC on this issue.
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The amount of cash on hand at IHS/ANTHC was far less than the amount of funding actually
owed to them for their project expenses already incurred. As a result of their desire to get this
resolved and to reinstate the expense reimbursement process they returned 100% of the funding
for those projects in which they could not provide a certified detailed expenditure report.
IHS/ANTHC now has no cash balances on hand and will of course be allowed to request
reimbursement for the additional project upon completion of the reconciliations.
The final step in both the reconciliation processes outlined above was the repayment of the
federal funds to the appropriate federal agency. What this means is that neither the third party
accounting firm, IHS/ANTHC nor the State of Alaska have any cash balances on hand for this
program.
With the implementation of our new accounting process and the project reconciliation
performed, the VSW program has complete documentation to support all project costs under
these federal infrastructure grants. Any additional documentation required is available for
review.
OIG Comment: The changes made by the Stale are significant and show a concerted
effort to correct longstanding internal control and financial management weaknesses
(ii\en the magnitude of changes made, the States accounting process will need to be
re\ iewed and appix">\ eel by l-IW Therefore, the costs will remain questioned until such
a re\iew is completed and any related issues are resoKed
The project reconciliation pro\ided by the Stale in Attachment 14 showed a
reconciliation of expenditures to the funded amount It is unclear if the funded amount
reflects the cash drawn lor the project or isjust a budgeted figure. In order lor the
reconciliation to address the finding, the State will need to compare expenditures against
the amount of cash drawn for the project to determine whether any excess cash exists.
The State will also need to ensure that the expenditures ha\e adequate supporting
documentation, and are allowable under applicable I'ederal regulations
The reconciliation performed by the Consortium will need to be re\ iewed for adequacy
and allowability The State has informed us that it has not re\ iewed the Consortium's
reconciliation process or examined any related supporting documentation As a result,
any costs allocable to the Consortium will remain questioned
Additional Issue - Dividend and Interest Income
STATE OF ALASKA COMMENT #1:
To address this issue we must first clarify our relationship with the Alaska Native Tribal Health
Consortium (ANTHC). In order to prevent duplication of effort and to make the most of the
funds available for rural sanitation projects, the State of Alaska, Department of Environmental
and the Indian Health Service (IHS) have executed an agreement to transfer the management of
certain sanitation project funding between the two agencies. Attachment #9 is a copy of this
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agreement. As you can see the IHS has stated that ANTHC would manage these projects on
their behalf in some situations. DEC does not have any direct relationship with ANTHC.
In attempting to address the interest income issue presented above we asked for IHS/ANTHC to
provide documentation supporting their position on this interest income. What follows is their
response.
"The Alaska Native Tribal Health Consortium (ANTHC) stands in the shoes of the U.S. Indian
Health Service (IHS) and is entitled to receive additional funding on the same terms and
conditions as the IHS statewide health programs in Alaska under the terms and conditions of the
Compact and Funding Agreement. The ANTHC Compact and Funding Agreement are
implemented through the authority of Title V of P L. 106-260; both the agreements and the
statute authorize ANTHC to receive advance payments and earn interest on all funds received
through those instruments. All sanitation facilities construction project funding was received as
cooperative project agreements through the IHS and are therefore included in ANTHC's funding
agreement. Thus, the authorities of P L. 106-260 apply, including its very specific statutory
provisions that supersede any potentially contrary general regulations."
To further support their position IHS/ANTHC provided the following detail information.
"Enclosed is a copy of PL 106-260, Title V, (Attachment #16) and a 1996 letter from the GAO
(Attachment #17) that IHS received regarding advance payment of construction funds and the
propriety of earning interest on such funds when they are transferred to us through our compact
and funding agreement with the IHS.
While Title V needs to be read in its entirety, I see 4 passages as particularly key in establishing
the basis for ANTHC receiving advance payments and generating interest from project funds,
given the following:
• The program operating environment of rural Alaska which is 90%+ Alaska Native,
• The State being encouraged by the US Gov to work with Indian Tribes as previously
cited, and
• All funds provided by the State to IHS were distributed to ANTHC through our Compact
and funding Agreement (FA) as each cooperative project agreement entered into between
the IHS and ANTHC is an addendum to our FA
PL 106-260 CITES:
1 - Section 505(b)(2) indicates that Programs, functions, services and activities administered by
the IHS may be included in a Compact or FA (Projects are considered an activity). VSW
projects have been administered by IHS since the early 1980's - so the State was utilizing an
established process of long standing and saved the EPA the expense of creating/expanding the
state capacity when the infrastructure grants were first funded.
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SEC.505. FUNDING AGREEMENTS.
(b) CONTENTS.-
(2) INCLUSION OF CERTAIN PROGRAMS, SERVICES, FUNCTIONS, AND
ACTIVITIES.- Such programs, services, functions, or activities (or portions thereof)
include all programs, services, functions, activities (portions thereof), including grants
(which may be added to a funding agreement after an award of such grants), with respect
to which Indian tribes or Indians are primary or significant beneficiaries, administered by
the Department of Health and Human Services through the Indian Health Service and all
local, field, service unit, area, regional, and central headquarters or national office
functions so administered under the authority of-
2 - Section 505(c) indicates that funding may be included in the compact/FA even if it is not
specifically designated for Indian programs.
(c) INCLUSION IN COMPACT OF FUNDING AGREEMENT. - It shall not be a
requirement that an Indian tribe or Indians be identified in the authorizing statute for a
program or element of a program to be eligible for inclusion in a compact or funding
agreement under this title.
3 - Section 508(a) authorizes annual, semiannual or periodic advance transfer of funding.
SEC.508. TRANSFER OF FUNDS.
(a) IN GENERAL. - Pursuant to the terms of any compact or funding agreement entered
into under this title, the Secretary shall transfer to the Indian tribe all funds provided for
in the funding agreement, pursuant to subsection (c), and provide funding for periods
covered by joint resolution adopted by Congress making continuing appropriations, to the
extent permitted by such resolutions. In any instance where a funding agreement requires
an annual transfer of funding to be made at the beginning of a fiscal year, or requires
semiannual or other periodic transfers of funding to be made commencing at the
beginning of a fiscal year, the first such transfer shall be made not later than 10 days after
the apportionment of such funds by the Office of Management and Budget to the
Department, unless the funding agreement provides otherwise.
4 - Section 508(h) authorizes the collection of interest on all funds received through the Compact
or FA.
(h) INTEREST OR OTHER INCOME OF TRANSFERS. - An Indian tribe is entitled to
retain interest earned on any funds paid under a compact or funding agreement to carry
out governmental or health purposes and such interest shall not diminish the amount of
funds the Indian tribe is authorized to receive under its funding agreement in the year the
interest is earned or in any subsequent fiscal year. Funds transferred under this title shall
be managed using the prudent investment standard.
The GAO letter is of particular interest because it specifically addresses the advance transfer of
funds for construction projects and specifically states that treasury regulations do not apply..."
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DEC has taken no position on this particular issue as it seems to come down to a difference in
the interpretation of law between two federal agencies. We will await further guidance on this
from the various agencies involved.
OIG Comment: We maintain our position that any funds that the Consortium obtains
from l-PA remain l-PA funds, regardless of how the Consortium ultimately recei\es
these funds I'PA funds are not subject to any II IS regulations, legislation, opinions, etc
The l-PA funds do not become part of an II IS program, therefore, any agreements
between II IS and the Consortium, regarding II IS-funded programs, are not germane.
Agreements among agencies, federal or Stale, do not o\erride f ederal regulations, and a
federal agency cannot o\crride a federal regulation unless it has the authority to do so
I nless I-IPA was a party to an agreement between II IS and the State, and wai\ed the
treatment of program income (assuming it had the authority to do so), any agreement
between Alaska and the II IS does not o\erride the application of l-PA"s grant
regulations to an I- l\\-fundcd grant.
The State cites the Title V Tribal Sell-(io\ ernance law as the basis for allowing the
Consortium to keep any interest earned 011 l-IW funds. I lowe\er. section 5<>5 of this law
makes clear that this pro\ ision only pertains to grants made by the Indian I leallh
Ser\ ice. not grants made by other federal agencies for other purposes Section 5'>5
pro\ ides that the Department of Health and I luman Ser\ ices shall negotiate "written
funding agreement!s| with each Indian tribe" to carry out the \arious programs
"administered by the Department of I leal l h and I luman Scr\ices through the |ll IS |""
Accordingly, this law does not affect I-PA-lunded grants and does not pro\ide the
authority to retain program income from I-PA-funded grants
Recommendations
"1. Disallow the $1,115,721 for personnel services because the State did not maintain the
documentation required by Federal regulations to fully support the reported costs, until the State
provides sufficient documentation to support labor charges."
STATE OF ALASKA RESPONSE:
We acknowledge that our labor charging practices during this fiscal year did not meet the
requirements outlined in OMB Circular A-87. After a thorough review of the alternative
allocation processes outlined in OMB Circular A-87 Section 8, we have developed several
alternative allocation methods to address this issue. These alternative methods are outline below:
1. Over the course of this program the State of Alaska has contributed much more than the
required match necessary to expend these federal funds. Attachment #4 is a report that
shows the amount of administrative funding expended on this particular federal program
over the years. As you can see the state contribution is 123% of the amount contributed
by EPA. In addition to the extra contributions of administrative funding there have been
significant amounts of state funding contributed for direct project costs above and beyond
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the match requirement. Attachment #5 is an example of just one grant, XP-990561-01,
which shows an excess state match amount of $1,799,951. Other grant years will exhibit
a similar over match situation.
With this proposal we would like to simply suggest recognition of the extra
administrative funding contribution and/or a reclassification of the questioned
administrative expenditures to a state funding source and excess direct state project costs
as federal. What this results in is that we would be claiming no reimbursement of
administrative costs for FY04 but only direct project costs.
2. Base the distribution of administrative costs for FY04 on the actual administrative
distribution of costs in FY06. This would result in a pay back of funding to EPA.
3. Allocation of the FY04 administrative costs on actual direct project expenditures for
FY04. This again would result in a pay back of funding to EPA.
With the significant excess state contributions to this program we feel that the proposal outlined
in number 1 above is more than equitable for both DEC and EPA and ask your concurrence with
this proposal.
OIG Comment: The Slate acknowledges that its labor charging practices did not
comply with OMIJ Circular A-X7 I lo\\e\er. the Slate s response deals with collecting
future labor charging in order to correct the problem, and not how the historical costs
will be treated Two issues need to be addressed regarding the unsupported personnel
ser\ ice charges
I l-IW will need to determine what is included in the definition of administrate e
expenses under the Village Sale Water grants. Once this definition is
determined, the State will need to apply this definition accordingly, in order to
ascertain how labor charges will be treated lor reimbursement to l-l\\.
2. The State will ha\ e to de\elop and submit an indirect cost rale proposal for non-
direct personnel costs for l-l'.Vs re\iew and appro\al
Once these two issues are addressed, the Stale will need to fully reconcile all costs under
the \arious NW grants, both direct project costs and administrate e project costs to the
best of its ability As a result, these labor charges remain questioned.
Recommendations
"2. Disallow costs of $31,860,680 representing the remaining balance of CFDA 66.606 funds as
unsupported until the State provides actual cost data by EPA grant, by project, for all EPA grants
supporting the Village Safe Water Program; any costs that remain unsupported should be
recovered. "
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STATE OF ALASKA RESPONSE:
In January 2005, the VSW program contracted with an independent accounting firm, to provide a
detailed project-by-project reconciliation of actual project expenses by funding source. In doing
this reconciliation, the contractor compared the actual scope of work completed to the scope of
work allowed under the federal award and state appropriation in assigning expenditures to the
appropriate funding source. This was done for all expenses through December 31, 2004. VSW's
in-house accounting staff then updated the reconciliations provided by the contractor for activity
between January 1, 2005 and the transition to the State accounting system. Attachment #13 is an
example showing the "Job Report" (expenditures by actual scope of work completed), and the
"Funding Report" (expenditures applied to funding sources according to the allowable timeframe
and scope of work for the funding source matched to the actual scope of work and timeframe of
expenses). Attachment #14 is an example of a report by project by federal award.
The final step in the reconciliation process outlined above was the repayment of the federal funds
to the appropriate federal agency. What this means is that neither the third party accounting
firm, IHS/ANTHC nor the State of Alaska have any cash balances on hand for this program.
With the implementation of our new accounting process and the project reconciliation
performed, the VSW program has complete documentation to support all project costs under
these federal infrastructure grants. Any additional documentation required is available for
review.
OIG Comment: l-IW will need lo resohe llie definition and application of the 4
percent administrate e expense for the Stale to fully account for all costs under the
\arious l-IW giants Additionally, the State has not re\ie\\ed any of the reconciliations
prepared by the Consortium, therefore, these costs cannot he accepted
Recommendations
"3. Review and approve all State solicitations and contracts under EPA grants and cooperative
agreements, other than small purchases, until the State's procurement system is reviewed and
determined to comply with EPA requirements."
STATE OF ALASKA RESPONSE:
The procurement process in place during this fiscal year was a process that had previously been
reviewed and approved by EPA staff. The issue raised in the single audit report was one of
insufficient oversight rather than the process being flawed in some way. We do agree that
staffing levels at the time simply did not allow for the necessary review or the necessary
expertise to provide optimal oversight.
To address this need the VSW program created a new Procurement Specialist position to provide
additional oversight in September 2004. This position is solely dedicated to the VSW program,
and is supervised by the Division of Information and Administrative Services to ensure
appropriate segregation of duties and authorities. The incumbent has worked to strengthen
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internal controls and to provide appropriate oversight and guidance for VSW procurement
practices. To further illustrate our commitment to ensure appropriate procurement practices are
followed, we are creating an additional procurement position also dedicated solely to the VSW
program. We expect have to this position filled by the end of June 2006.
OIG Comment: As stilled pre\ iously. the Suite s correcli\ e actions ha\ e effecli\ ely
addressed this finding. Therefore, we ha\e deleted our recommendation in the final
report. I lo\\e\ er. In deleting this recommendation we are not appro\ ing any
procurement costs inclined prior to 2<><>5. There may he historical procurement costs
incurred by the Slate that do not meet f ederal requirements lor allowability As such,
these costs could be determined to be unallowable under future grant re\ iews
Recommendations
"4. Require the State to have the Consortium remit the portion of interest, representing dividends
from EPA-invested funds from the inception of the Village Safe Water Program, through year
end 2004, to the U.S. Department of Health and Human Services, Payment Management System,
Rockville, Maryland 20852."
STATE OF ALASKA RESPONSE:
As explained on pages 16 through 19 of this response DEC has taken no position on this
particular issue as it seems to come down to a difference in the interpretation of law between two
federal agencies. We will await further guidance on this from the various agencies involved.
OIG Comment: The State funds passed through II IS to the Consortium are I-PA fluids
Therefore, the Consortium is required to comply with all l-l\\ regulations and policies in
the administration of these funds As such, the pro\ isions of 4<) CIR .>'• 22(1) apply
ThcCTR reqiiires that nonprofits not subject to the Cash Management lmpro\ement Act
must repay interest income earned on federal funds Therefore, we ha\e made no
changes to this recommendation.
Recommendations
"5. Require the State to perform sufficient oversight of the Consortium, to ensure that
deficiencies identified, as part of the third-party CPA reviews, are follow up on and corrected."
STATE OF ALASKA RESPONSE:
As explained in detail on pages 8 through 12 of this response the department has determined that
all deficiencies identified have been followed up on and corrected.
OIG Comment: The State still needs to address, as part of its o\ersight process, how it
will ensure that grant deficiencies identified at the Consortium are addressed and
corrected.
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Recommendations
"6. Place the State on a reimbursable payment basis under the authority of 40 CFR 31.12 until
the cash management, financial reporting, labor accounting, and procurement systems fully meet
Federal requirements."
STATE OF ALASKA RESPONSE:
The VSW program is now on an entirely reimbursable payment basis and will remain so under
our new accounting procedures.
OIG Comment: In order lo comply with federal procedures lo draw down funds on a
timely hasis. the Slate lias chosen lo request funds from l-IW on a reimbursement type
basis I lowe\er. Region I') has not formally placed the State on a reimbursable payment
basis, in accordance with 4') (T'R 31 12 While the State has made progress in the areas
of cash management and procurements, issues regarding financial reporting, labor
accounting, and applicable administration expenses still remain unresoKed. I 'mil these
matters are resoKed. we continue to recommend that the Slate be formally placed upon a
reimbursable payment basis
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Appendix B
Distribution
EPA Headquarters
Office of the Administrator
Assistant Administrator for Water
Agency Followup Official (the CFO)
Agency Followup Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Director, Office of Regional Operations
Director, Office of Grants and Debarment
Director, Grants Administration Division
Acting Inspector General
EPA Region 10
Acting Regional Administrator
Acting Deputy Regional Administrator
Director, Office of Water Quality
Director, Office of Management Programs
Director, Office of Ecosystems, Tribal and Public Affairs
Director, Alaska Operations Office
Audit Followup Coordinator
State of Alaska
Director, Alaska Department of Environmental Conservation
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