Audit 327686

Finding 2021-001 Federal Program Title – Airport Improvement Program and COVID-19 Airport Improvement Program Assistance Listing No. – 20.106 Federal Agency – U.S. Department of Transportation – Direct Program Federal Award Number – 30601270472020 Grant Award Periods – May 7, 2020 to May 6, 2024 Compliance Requirement – Reporting Criteria: As set forth in 2 CFR 200.328, the Federal Financial Report, SF 425, must be collected with the frequency required by the terms and conditions of the federal award, but no less frequently than annually nor more frequently than quarterly except in unusual circumstances. In addition, 2 CFR 200.303 requires nonfederal entities to, among other things, establish and maintain effective internal control over the federal award that provides reasonable assurance that the nonfederal entity is managing the federal award in compliance with federal statutes, regulations, and the terms and conditions of the federal award. Conditions Found: The City did not have an effective system of internal control in place to ensure the reports that are required to be submitted to the U.S. Department of Transportation were accurate. We selected a sample of nine reports and determined that one report omitted $18.4 million in payroll and payroll-related costs of which $3.6 million are costs incurred during the fiscal year ended September 30, 2021. Questioned Costs: There are no questioned costs. Context: The City is required to submit annual federal financial reports related to the Airport Improvement Program that include all disbursements for direct charges for property and services; the amount of indirect expense incurred; and the net increase or decrease in the amounts owed by the recipient for (1) goods and other property received; (2) services performed by employees, contractors, subrecipients, and other payees; and (3) programs for which no current services or performance are required. Cause and Effect: City management indicated that interpretation of the reporting requirements was that payments made to employees for services provided were required to be omitted from the SF 425 report. As a result, the reports submitted omitted $18.4 million in payroll and payroll-related costs. Repeat Finding: A similar finding was not reported in the prior-year audit. Statistical Sampling: The sample was not intended to be, and was not, a statistically valid sample. Recommendations: We recommend the City strengthen processes and internal controls to ensure the City has an effective internal control in place to ensure that reports are complete and accurate prior to submitting to the U.S. Department of Transportation as required. View of Responsible Official: The subject Airport Improvement Program (AIP) grant for COVID-19 related funding was used solely for internal City payroll-related expenditures and debt service payments, which is different from other previous AIP grants received by the Airport Department. The misinterpretation of reporting requirements for the new grant led to an error on the Federal Financial Report SF 425. The Airport Department will be providing more training to staff that are involved with the preparation, review and approval of the reports to reduce the risk of misinterpreting reporting requirements. The Airport Department will also strengthen internal controls by requiring at least two levels of review for Federal Financial Report SF 425, prior to submission. These improvements to the process will ensure that reports are complete and accurate.

Finding 2021-002 Federal Program: Transportation Infrastructure Finance and Innovation Act (TIFIA) Program ALN Number: 20.223 Federal Agency: U.S. Department of Transportation – Direct Program Federal Award Year: 2021 Grant number: N/A Compliance Requirement: Other – Inaccurate reporting of the Schedule of Expenditures of Federal Awards Criteria: According to 2 CFR 200.510(b), a recipient of federal awards is required to prepare a schedule of expenditures of Federal awards (SEFA) for the period covered by the auditee’s financial statements which must include the total Federal awards expended as determined in accordance with 2 CFR 200.502. Additionally, 2 CFR 200.303 requires non-Federal entities receiving Federal awards to establish and maintain internal controls designated to reasonably ensure compliance with Federal laws, regulations and program compliance requirements. Effective internal controls should include procedures to ensure federal expenditures are accurately and completely reported on the SEFA. Conditions Found: The City did not have adequate internal controls related to the reporting of expenditures on the SEFA for the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program. In 2007, the City completed plans for the reconstruction of the Gerald Desmond Bridge (Harbor Bridge), which was a $1.6 billion design, development, and construction project that included multiple funding sources, including federal, state, and private funds. During fiscal year 2014, the City entered into a loan agreement with the U.S. Department of Transportation for $325,000,000 of TIFIA Program funds. During fiscal year 2020, the loan agreement was modified for $500,000,000 of TIFIA Program funds. The executed loan agreement contained a clause that the TIFIA Program loan funds were not available to be drawn until the Harbor Bridge was certified as substantially complete. In January 2021 (fiscal year 2021) the Harbor Bridge was certified as substantially complete and the TIFIA Program loan was made. As a result, the City should have reported the $500,000,000 TIFIA Program loan on the SEFA for the year ended September 30, 2021. Cause and Effect: In discussing these conditions with the City, they stated the error was primarily due to the TIFIA Program not being a traditional federal award where expenses were reimbursed as incurred. When the City certified the substantial completion of the Harbor Bridge project and the TIFIA Program loan was made during fiscal year 2021, the City was not aware the TIFIA Program loan was reportable on the SEFA. Additionally, the management review controls in place over the completeness and accuracy of the SEFA were not designed to detect the error. Failure to establish effective internal controls regarding financial reporting for the preparation of the Schedule may prevent the City from completing an audit in accordance with the timelines of Uniform Guidance. Questioned Costs: Not applicable. Statistical Sampling: Not applicable. Repeat Finding: A similar finding was reported in the prior year report. Recommendation: We recommend the City implement a system of internal control that is designed and operating at a level of precision to ensure the Schedule is complete and accurate. View of Responsible Official: The Harbor Department was not aware that a TIFIA loan was required to be reported on the SEFA. Our understanding of the SEFA is to report the federal share of expenditures. TIFIA loan expenditures are comprised of the expenses for which no grant reimbursement was sought, therefore, these expenses are the cost share or local share, not the federal share. The Harbor Department now understands that all federal assistance including loans should be reported on the SEFA. KPMG has been the City’s auditor since 2001 and was aware of the TIFIA loan agreement in 2014 and the TIFIA loan draw down in 2021. KPMG did not inform us that the TIFIA loan was required to be reported on the SEFA when they performed the single audit in 2021.

Finding 2021-001 Federal Program Title – Airport Improvement Program and COVID-19 Airport Improvement Program Assistance Listing No. – 20.106 Federal Agency – U.S. Department of Transportation – Direct Program Federal Award Number – 30601270472020 Grant Award Periods – May 7, 2020 to May 6, 2024 Compliance Requirement – Reporting Criteria: As set forth in 2 CFR 200.328, the Federal Financial Report, SF 425, must be collected with the frequency required by the terms and conditions of the federal award, but no less frequently than annually nor more frequently than quarterly except in unusual circumstances. In addition, 2 CFR 200.303 requires nonfederal entities to, among other things, establish and maintain effective internal control over the federal award that provides reasonable assurance that the nonfederal entity is managing the federal award in compliance with federal statutes, regulations, and the terms and conditions of the federal award. Conditions Found: The City did not have an effective system of internal control in place to ensure the reports that are required to be submitted to the U.S. Department of Transportation were accurate. We selected a sample of nine reports and determined that one report omitted $18.4 million in payroll and payroll-related costs of which $3.6 million are costs incurred during the fiscal year ended September 30, 2021. Questioned Costs: There are no questioned costs. Context: The City is required to submit annual federal financial reports related to the Airport Improvement Program that include all disbursements for direct charges for property and services; the amount of indirect expense incurred; and the net increase or decrease in the amounts owed by the recipient for (1) goods and other property received; (2) services performed by employees, contractors, subrecipients, and other payees; and (3) programs for which no current services or performance are required. Cause and Effect: City management indicated that interpretation of the reporting requirements was that payments made to employees for services provided were required to be omitted from the SF 425 report. As a result, the reports submitted omitted $18.4 million in payroll and payroll-related costs. Repeat Finding: A similar finding was not reported in the prior-year audit. Statistical Sampling: The sample was not intended to be, and was not, a statistically valid sample. Recommendations: We recommend the City strengthen processes and internal controls to ensure the City has an effective internal control in place to ensure that reports are complete and accurate prior to submitting to the U.S. Department of Transportation as required. View of Responsible Official: The subject Airport Improvement Program (AIP) grant for COVID-19 related funding was used solely for internal City payroll-related expenditures and debt service payments, which is different from other previous AIP grants received by the Airport Department. The misinterpretation of reporting requirements for the new grant led to an error on the Federal Financial Report SF 425. The Airport Department will be providing more training to staff that are involved with the preparation, review and approval of the reports to reduce the risk of misinterpreting reporting requirements. The Airport Department will also strengthen internal controls by requiring at least two levels of review for Federal Financial Report SF 425, prior to submission. These improvements to the process will ensure that reports are complete and accurate.

Finding 2021-002 Federal Program: Transportation Infrastructure Finance and Innovation Act (TIFIA) Program ALN Number: 20.223 Federal Agency: U.S. Department of Transportation – Direct Program Federal Award Year: 2021 Grant number: N/A Compliance Requirement: Other – Inaccurate reporting of the Schedule of Expenditures of Federal Awards Criteria: According to 2 CFR 200.510(b), a recipient of federal awards is required to prepare a schedule of expenditures of Federal awards (SEFA) for the period covered by the auditee’s financial statements which must include the total Federal awards expended as determined in accordance with 2 CFR 200.502. Additionally, 2 CFR 200.303 requires non-Federal entities receiving Federal awards to establish and maintain internal controls designated to reasonably ensure compliance with Federal laws, regulations and program compliance requirements. Effective internal controls should include procedures to ensure federal expenditures are accurately and completely reported on the SEFA. Conditions Found: The City did not have adequate internal controls related to the reporting of expenditures on the SEFA for the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program. In 2007, the City completed plans for the reconstruction of the Gerald Desmond Bridge (Harbor Bridge), which was a $1.6 billion design, development, and construction project that included multiple funding sources, including federal, state, and private funds. During fiscal year 2014, the City entered into a loan agreement with the U.S. Department of Transportation for $325,000,000 of TIFIA Program funds. During fiscal year 2020, the loan agreement was modified for $500,000,000 of TIFIA Program funds. The executed loan agreement contained a clause that the TIFIA Program loan funds were not available to be drawn until the Harbor Bridge was certified as substantially complete. In January 2021 (fiscal year 2021) the Harbor Bridge was certified as substantially complete and the TIFIA Program loan was made. As a result, the City should have reported the $500,000,000 TIFIA Program loan on the SEFA for the year ended September 30, 2021. Cause and Effect: In discussing these conditions with the City, they stated the error was primarily due to the TIFIA Program not being a traditional federal award where expenses were reimbursed as incurred. When the City certified the substantial completion of the Harbor Bridge project and the TIFIA Program loan was made during fiscal year 2021, the City was not aware the TIFIA Program loan was reportable on the SEFA. Additionally, the management review controls in place over the completeness and accuracy of the SEFA were not designed to detect the error. Failure to establish effective internal controls regarding financial reporting for the preparation of the Schedule may prevent the City from completing an audit in accordance with the timelines of Uniform Guidance. Questioned Costs: Not applicable. Statistical Sampling: Not applicable. Repeat Finding: A similar finding was reported in the prior year report. Recommendation: We recommend the City implement a system of internal control that is designed and operating at a level of precision to ensure the Schedule is complete and accurate. View of Responsible Official: The Harbor Department was not aware that a TIFIA loan was required to be reported on the SEFA. Our understanding of the SEFA is to report the federal share of expenditures. TIFIA loan expenditures are comprised of the expenses for which no grant reimbursement was sought, therefore, these expenses are the cost share or local share, not the federal share. The Harbor Department now understands that all federal assistance including loans should be reported on the SEFA. KPMG has been the City’s auditor since 2001 and was aware of the TIFIA loan agreement in 2014 and the TIFIA loan draw down in 2021. KPMG did not inform us that the TIFIA loan was required to be reported on the SEFA when they performed the single audit in 2021.