American Recovery and Reinvestment Act Site Visit of Water System Improvement Project


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Catalyst for Improving the Environment
Site Visit Report
American Recovery and
Reinvestment Act Site Visit
of Water System Improvement
Project, Waleska, Georgia
Report No. 11-R-0193
March 29, 2011

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Report Contributors:
Jean Bloom
Iantha Maness
Snehal Nanavati
Abbreviations
CFR	Code of Federal Regulations
DWSRF Drinking Water State Revolving Fund
EPA	U.S. Environmental Protection Agency
GEFA	Georgia Environmental Facilities Authority
OIG	Office of Inspector General
Cover photo: Water system improvement site, Waleska, Georgia. (EPA OIG photo)

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At a Glance
Catalyst for Improving the Environment
Why We Did This Review
The U.S. Environmental
Protection Agency, Office of
Inspector General, conducts
site visits of American
Recovery and Reinvestment
Act of 2009 (Recovery Act)
clean water and drinking water
projects. We selected the
project in the City of Waleska,
Georgia, for review.
Background
The city received loans
totaling $615,000 from the
Georgia Environmental
Facilities Authority. These
loans included $386,610 of
Recovery Act funds
distributed through the
Drinking Water State
Revolving Fund program
($246,000 for principal
forgiveness and a $140,610
loan).
American Recovery and Reinvestment Act Site
Visit of Water System Improvement Project,
Waleska, Georgia
What We Found
We conducted an unannounced site visit of the water system improvement project
in the City of Waleska, Georgia, in March 2010. As part of our visit, we toured the
project site; interviewed city representatives, representatives of the city's
engineering firm, and prime and subcontractor personnel; and reviewed
documentation related to Recovery Act requirements.
We found no ongoing construction activity during our site visit. Prior to our visit,
the city and the State of Georgia determined that the prime contractor was
violating contract terms and issued a stop-work order. Therefore, we were unable
to perform all of the required procedures necessary to determine compliance with
the requirements for subrecipients of Recovery Act funds.
During our review, we found the city did not execute written contracts for
engineering, inspection, and legal services, and did not prepare a cost or price
analysis for its engineering services. However, we found no applicable federal,
state, or local requirements that require the city to execute written contracts or
prepare a cost or price analysis. Without federal, state, and local cost principles
and procurement standards, we do not have reasonable assurance that Recovery
Act funds are awarded and distributed in a prompt, fair, and reasonable manner,
and that funds are used for purposes of the act. We plan to address this issue in a
separate report to the Agency.
Based upon our review, we found no other problems that would require action
from the city, the State of Georgia, or the U.S. Environmental Protection Agency.
For further information, contact
our Office of Congressional,
Public Affairs and Management
at (202) 566-2391.
The full report is at:
www.epa.aov/oia/reports/2011/
20110329-11 -R-0193.pdf

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American Recovery and Reinvestment Act Site Visit of	11 -R-0193
Water System Improvement Project, Waleska, Georgia
	 Table of C	
Purpose		1
Background		1
Scope and Methodology		1
Noteworthy Achievements		2
Results of Site Visit		2
Buy American Requirements		2
Wage Rate Requirements		3
Financial Management and Reporting		3
Contract Procurement		3
Other Matters		3
Agency and Recipient Comments		4
OIG Response		4
Status of Recommendations and Potential Monetary Benefits		6
Appendices
A Region 4 Comments on the Draft Report		7
B State of Georgia Comments on the Draft Report		8
C Distribution		12

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Purpose
The purpose of our unannounced site visit was to determine the City of Waleska,
Georgia's, compliance with the requirements for subrecipients of American
Recovery and Reinvestment Act of 2009 (Recovery Act) funds under the
Drinking Water State Revolving Fund (DWSRF) program.
Background
The city entered into a loan agreement under the DWSRF program for water
system improvements along the Georgia Highway 140 water line. The city
received loans totaling $615,000 from the Georgia Environmental Facilities
Authority (GEFA). These loans included $386,610 of Recovery Act funds
distributed through the DWSRF program—$246,000 for principal forgiveness and
a $140,610 loan.
Construction at the site began on February 22, 2010. The city issued a stop-work
order on March 2, 2010, because the prime contractor had not obtained prior
approval for a subcontractor as required by its contract and the State of Georgia.
Under the contract, all subcontractors must be approved by the city and meet
Minority/Women Business Enterprise requirements. The work was stopped, in
part, to allow time for the subcontractors to be approved so that funding for the
project would not be jeopardized.
The city provided the prime contractor an opportunity to become compliant.
However, both the city and the state believed the contractor failed to make a
good-faith effort to become compliant. In the letter dated April 23, 2010, the city
informed the prime contractor that it was terminating the contract, effective
May 7, 2010.
Scope and Methodology
Due to the time-critical nature of Recovery Act requirements, we did not perform
this assignment in accordance with generally accepted government auditing
standards. Specifically, we did not perform certain steps that would allow us to
obtain information to assess the city's internal controls and any previously
reported audit concerns. As a result, we do not express an opinion on the
adequacy of the city's internal controls or compliance with all federal, state, or
local requirements.
We conducted our site visit during the week of March 22, 2010. During our visit,
we:
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1.	Toured the proj ect
2.	Interviewed city representatives, representatives of the city's
engineering firm, and prime and subcontractor representatives
3.	Reviewed documentation maintained by the city or its contractors on
the following matters:
a.	Buy American requirements under Section 1605 of the
Recovery Act
b.	Wage rate requirements under Section 1606 of the Recovery
Act
c.	Financial Management and Reporting Requirement under
Section 1512 of the Recovery Act
d.	Contract procurement
Because the stop-work order was issued within 2 weeks of construction start,
minimal work had been performed at the site. As of April 28, 2010, no contractor
or subcontractor billings were submitted, and the city had not submitted any
Recovery Act reporting on this project.
Noteworthy Achievements
We acknowledge the action taken by the city and the State of Georgia to issue a
stop-work order when a violation of contract terms was observed. This action
prevented any additional funds from being expended.
Results of Site Visit
Based on the limitations, we were unable to perform all the required procedures
necessary to determine the city's compliance with the requirements for
subrecipients of Recovery Act funds.
The results of our procedures and other matters noted during our site visit are
summarized below.
Buy American Requirements
Buy American requirements were contained in the construction contract and both
the prime contractor and the city were aware of the requirements. During our
visit, we noticed pipes on-site and requested supporting documentation from the
contractor, the city, and the engineering firm to determine whether the pipes were
made in America. We found no evidence to suggest that the pipes were not made
in America. However, since we did not observe the actual pipes installed in the
ground, and the site inspector could not attest that the installed pipes met the Buy
American requirements, we are unable to conclude whether the Buy American
requirement has been satisfied.
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Minimal construction occurred prior to the issuance of the stop-work order. As a
result, no supporting documentation (vendor invoices, site inspector certificates,
or reports to the State of Georgia) was available for review.
Wage Rate Requirements
The prime contractor, the subcontractor, and the city were aware of the wage rate
provisions of the Recovery Act. The prime contractor gave copies of its certified
payroll records to the city to show its compliance. We are unable to conclude
whether the wage rate requirements were met because there was no ongoing
construction at the time of our visit, and we were unable to interview employees
to verify their qualifications and wages.
Financial Management and Reporting
We are unable to conclude whether financial management and reporting
requirements have been met under this project. As of the date of our site visit, no
billings or reimbursement requests had been made.
Contract Procurement
The construction contract was competitively awarded based on public
advertisement. The city received eight bids and, based on the recommendation of
its engineering firm, awarded the contract to the lowest bidder. Unsuccessful
bidders confirmed their participation in the bidding process. We did not identify
any unfair bidding practices.
Other Matters
We found the city did not execute written contracts for engineering, inspection,
and legal services, and did not prepare a cost or price analysis for its engineering
services. Section J of the GEFA Drinking Water State Revolving Loan Fund
Operating Agreement with U.S. EPA Region 4 states that procurement actions are
not subject to EPA procurement regulations of 40 CFR Part 31 but are subject to
procurement requirements of the state or any more stringent requirements of the
local recipient. Based on our review of the loan agreement between the city and
GEFA, and correspondence with the State of Georgia, we found no applicable
federal, state or local requirement for the city to execute written contracts for
professional services or prepare a cost or price analysis for its engineering
services. We requested that the State of Georgia and the city provide their
applicable regulations. The city informed us it does not have any written
procurement regulations, and the state informed us it was not aware of any state
regulation pertaining to the procurement of professional services.
Under EPA's Recovery Act Plan, recovery act funds must be awarded and
distributed in a prompt, fair, and reasonable manner, and funds must be used for
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purposes of the act. Without applicable federal, state and local cost principles and
procurement standards, reasonable assurance cannot be provided that these
expectations are being met.
Agency and Recipient Comments
The Office of Inspector General (OIG) received comments on the draft report
from Region 4 on November 5, 2010, and from GEFA on November 8, 2010. We
held an exit conference on November 11, 2010. The draft report contained two
recommendations requesting that Region 4 suggest that the city strengthen
internal controls by executing written contracts and preparing cost or price
analysis for engineering and inspectional services on future awards.
EPA Region 4 generally agreed with the report findings, and suggested that our
first recommendation to execute written contracts be directed to GEFA as they do
not have the authority to carry out the recommendation. Region 4 suggested the
elimination of the second recommendation, to prepare a cost or price analysis for
engineering and inspections services on future awards. Although the Agency did
not disagree that a cost and price analysis is a good practice, no applicable statue,
regulation, policy or SRF operating agreement provides the authority to
implement the recommendation.
GEFA generally concurred with the report findings and suggested we clarify the
State of Georgia's involvement in the issuance of the stop-work order. GEFA also
suggested we revise the "Other Matters" section of the report, believing the report
implies that current regulations for the procurement of engineering services
nullifies the state's ability to provide reasonable assurance that funds are used for
the purposes intended by the Recovery Act.
GEFA generally disagreed with our recommendation to execute written contracts
because it does not wish to share responsibility for subrecipients' planning and
management of their projects, and does not wish to interfere in project
management processes. While GEFA supports sound business practices, it
disagreed with the recommendation to prepare a cost price analysis for
engineering and inspectional services because it believes that requiring all state
revolving fund subrecipients to prepare a cost or price analysis for engineering
services could prove a burden for small governments and water utilities.
OIG Response
We modified the report to include the State of Georgia's involvement in the
issuance of the stop-work order. We did not remove the "Other Matters" section
of the report because we are concerned about the absence of state and local
requirements to execute written contracts for professional services or prepare a
cost or price analysis for its engineering services. However, we removed the
recommendations contained in the discussion draft report since there are no city
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or state requirements, and EPA's operating agreement with the State of Georgia
states that procurement actions by the recipients are not subject to the 40 CFR
Part 31.
We disagree with GEFA on certain comments made in response to our draft
report. GEFA stated that it did not wish to share responsibility for subrecipients'
management of their projects. We believe that GEFA has the responsibility to
ensure that recipients of SRF funds are making decisions based upon sound
business practices. To suggest that additional requirements such as preparing a
written contract or ensuring a fair and reasonable price impose additional burdens
on a community, regardless of size contradicts GEFA's support of sound business
practices.
We plan to address the absence of federal, state, and local cost principles and
procurement standards in another report to the Agency.
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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
No recommendations
Claimed
Amount
Ag reed-To
Amount
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
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Appendix A
Region 4 Comments on the Draft Report
November 5, 2010 Email
Thanks for the opportunity to comment on the discussion draft. Your e-mail was referred to me
for comment on behalf of the SRF program.
First, we appreciate the IG's efforts in having a field presence in the review of some of the
ARRA projects at the site location. We believe this is a valuable tool in the oversight of the
massive ARRA program and will also assist EPA in closing any gaps in its SRF training for
states and borrowers.
We are also encouraged that this small community took decisive action to address non-
compliance by the construction contractor.
With respect to the recommendations on page 3 and 4 of the draft report, we would suggest that
recommendation no. 1 be directed to the Georgia Environmental Facilities Authority (GEFA).
EPA's relationship is with GEFA through the ARRA SRF capitalization grant, however EPA
does not have a relationship with GEFA's borrowers and thus has no authority to carry out the
recommendation. I have suggested to GEFA that they discuss the need for written engineering
and legal contracts with Waleska. However, I am not familiar with Georgia procurement codes
and whether they apply to municipalities or whether each municipality generates their own, so I
do not know whether GEFA has the authority to carry out the recommendation either.
With respect to recommendation no. 2, we suggest that this be eliminated. While we do not
disagree that cost or price analysis is a good practice, neither EPA nor GEFA has the authority to
request something that is not required by the applicable statue, regulation, policy or SRF
operating agreement.
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Appendix B
State of Georgia Comments on the Draft Report
Memorandum
To: Robert Adachi, Director of Forensic Audits, US EPA - Office of Inspector General
(OIG)
Jean Bloom, Lead Auditor, US EPA - Office of Inspector General (OIG)
From: Kevin Kelly, Georgia Environmental Finance Authority
Date: November 8, 2010
Re: GEFA and EPD Comments on EPA OIG "American Recovery and Reinvestment Act
Site Inspection of Water System Improvement, Waleska, Georgia (Project No. 2010-
1225)"
CC: Gwen Keyes Fleming, Regional Administrator, US EPA Region 4
Doris Ann Jones, Mayor, City of Waleska
Background
On Thursday, November 4, 2010, the Georgia Environmental Finance Authority (GEFA)
received an electronic copy of the U.S. Environmental Protection Agency Office of Inspector
General's (EPA OIG) draft report entitled, "Site Inspection Report: American Recovery and
Reinvestment Act Site Inspection of Water System Improvement, Waleska, Georgia (Project No.
2010-1225)." EPA OIG conducted the site inspection referenced in the report in March 2010. In
correspondence accompanying the draft report, the EPA OIG provided the city of Waleska and
the State of Georgia two and a half business days to prepare these comments.
GEFA works closely with the Georgia Environmental Protection Division (EPD) in
administering the Drinking Water and Clean State Revolving Fund (SRF) programs.
Specifically, GEFA contracts with EPD to monitor SRF construction projects and to protect the
overall integrity of the projects. In discharging these duties, EPD works closely with SRF sub-
recipients to ensure compliance with procurement rules, Disadvantaged Business Enterprise
regulations, Davis Bacon requirements, the Buy American provision and other applicable federal
and state regulations and requirements.
These comments comprise the input of both GEFA and EPD.
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Concurring Comments
GEFA and EPD concur with the following statements of fact and investigative conclusions in the
EPA OIG's report:
1. Financing Terms. GEFA provided a total of $615,000 of Drinking Water SRF - ARRA
funding to the city of Waleska for water system improvements in the form of a low-
interest loan with 70% principal forgiveness. GEFA concurs with the EPA OIG's
breakdown of funds: $246,000 in principal forgiveness and a $140,601 loan.
2. Stop Work Order. The city of Waleska issued a stop-work order due to a violation of
contract terms. The EPA OIG report acknowledges this as a "Significant Achievement"
in its report. We concur that this stop-work order represents excellent compliance control.
In the wake of the stop work order, the contractor sought approval for the existing
subcontractor. This effort failed and the contractor was allowed to vacate the contract.
All of this was handled legally with the assistance of the City's attorney. Now, Waleska
has properly procured the services of another contractor that appears to be working
successfully to complete the project and comply with the ARRA requirements.
Suggested Revisions and / or Corrections
GEFA and EPD offer the following revisions and/or corrections to the investigative conclusions
in the EPA OIG's report:
1. Reasonable Assurances:
a. On page three of the report, the EPA OIG states "EPA is required under the
Recovery Act to ensure that funds are used for purposes of the act. Without cost
principles and procurement standards, reasonable assurance cannot be provided
that these expectations are being met."
b. While GEFA and EPD strongly support sound business practices, GEFA and EPD
do not agree with EPA OIG's conclusion here. The EPA OIG report implies that
the current regulation of the procurement of engineering services nullifies our
ability to provide reasonable assurances that these funds are used for the purposes
articulated in the recovery act. GEFA and EPD believe that monthly, on-site
verification of construction for the project in accordance with approved
construction contract documents and specific invoices for both construction and
engineering services provide the State with reasonable assurance that funds are
being used for purposes of the Act. EPA Region IV then reviews the state's
process to ensure proper uses of funds.
c. The Waleska project provides a good example of this oversight function. EPD
steadfastly refused to release any funds for work of the unapproved subcontractor
on the Waleska project. We cite this as an example of our ability to provide
"reasonable assurances" that the funds are being utilized for the intended
purposes.
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2. Recommendation #1 - Written Agreements.
a.	In the report, the EPA OIG states, "We recommend that the Regional
Administrator, Region 4, request the City strengthen its internal controls by: (1.)
Executing written contracts stipulating the services, responsibilities, and fees
payable for the engineering, inspection, and legal services."
b.	GEFA and EPD recognize that EPA OIG has offered this as a recommendation to
the Regional Administrator. With respect to the State's role concerning this issue,
GEFA and EPD are not aware of a legal or regulatory basis for the State to apply
new requirements to Waleska or any other SRF recipient. The EPA OIG report
states, "Specifically, we found no applicable Federal, State, or local requirement
for the City to execute written contracts for professional services or prepare a cost
or price analysis for its engineering services." We concur; we find no such
requirement in the law.
c.	Furthermore, we recognize that engineering consulting services represent part of
an owner's process for planning, administration, and quality control. Project
owners (sub-recipients) have legitimate reasons for maintaining continuity of
services over time and to ensure the coordination of multiple projects. Some
choose to stay with one consultant for long periods of time. Others select and use
multiple consultants in a wide variety of ways to fit their needs. GEFA and EPD
do not wish to share responsibility for sub-recipients' planning and management
of their own projects, so we do not wish to interfere in their project management
processes. We believe it is safe and proper to review the actual project - what the
recipient has a contract to build and what we have a contract to fund. By GEFA
policy and by loan contract, engineering services are only funded as a part of an
actual construction project, and they are invoiced as such.
d.	In the case of Waleska, GEFA and EPD understand that Waleska has a written
contract with the engineer (we have not confirmed that, since it is not part of our
oversight activities). The contract is not specific to the ARRA project and is
several years old. It provides for engineering services on an "as needed" basis.
The consulting engineer has been the City's engineer for many years. This is an
example of the situation described above, in which a City has a long term
relationship with a consulting engineering. While it is not the only way to do
business, we recognize that it offers several advantages: (1) It enables long term
planning and continuity in capital improvements projects for small entities that do
not otherwise have that expertise; (2) It eliminates the costs associated with the
procurement of these services on a project by project basis; (3) It provides for
ready access to these services in urgent-need situations; (4) It provides a resource
for institutional memory regarding City infrastructure in an environment that does
not promote this kind of retention.
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3.	Recommendation #2 - Cost Analyses:
a.	In the report, the EPA OIG states, "We recommend that the Regional
Administrator, Region 4, request the City strengthen its internal controls by: (2.)
Preparing a cost or price analysis for engineering and inspection services on
future awards."
b.	While GEFA and EPD support sound business practices, we believe a
requirement for all SRF sub-recipients to prepare a cost or price analysis for
engineering services could prove a burden for small governments and water
utilities. The end result of such a requirement may be to force such borrowers to
hire a consultant to estimate the cost of hiring a consultant.
4.	Stop Work Order .
a.	The EPA OIG report states that the stop work order prevented the expenditure of
any "additional" ARRA funds. We suggest that the report clarify that the stop
work order succeeded in preventing the expenditure of any ARRA funds for an
unapproved subcontractor.
b.	The state reviewers, particularly Tom Roos and Gaynell Hill, made the correct
determination in this situation under difficult conditions. We suggest that the
report recognize the work the state reviewers did in addressing serious
misbehavior by the sub-recipient's contractor.
c.	EPA OIG concludes that $386,610 of recovery funds may potentially be available
for use on recovery act projects. This project has been re-bid and construction is
currently underway. These funds are not available for some other project. This
contractor appears to be making a good effort to comply with all ARRA
requirements.
Thank you for your consideration of our comments.
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Distribution
Office of the Administrator
Regional Administrator, Region 4
Director, Grants and Interagency Agreements Management Division,
Office of Administration and Resources Management
Agency Followup Official (the CFO)
Agency Followup Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Audit Followup Coordinator, Region 4
Public Affairs Officer, Region 4
Mayor, City of Waleska, Georgia
Senior Program Manager, Georgia Environmental Facilities Authority
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