FINDING 2024-003 Subject: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds - Activities Allowed or Unallowed and Allowable Costs/Cost Principles Federal Agency: Department of the Treasury Federal Program: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Assistance Listings Number: 21.027 Federal Award Number and Year (or Other Identifying Number): FY2023 Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles Audit Findings: Material Weakness, Modified Opinion Condition and Context Prior to receipt of the COVID-19 - Coronavirus State and Local Fiscal Recovery Funds (SLFRF), all eligible entities were required to execute a Financial Assistance Agreement (Agreement), which included the Award Terms and Conditions that recipients must comply within carrying out the objectives of their award. Per the Agreement, the County was responsible for the effective administration of the federal award, as well as the application of sound management practices and administration of the federal funds in a manner consistent with the program objectives and the terms and conditions of the award. Recipients may use SLFRF funds for any eligible expenses subject to the restrictions set forth in sections 602 and 603 of the Social Security Act, as added by section 9901 of the American Rescue Plan Act of 2021. The SLFRF program provides substantial flexibility for each recipient to meet local needs within four separate eligible use categories. Recipients may use SLFRF funds to: • Respond to the COVID-19 public health emergency and its negative economic impacts; • Respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers of eligible employers that have eligible workers who are performing essential work; • Provide government services, to the extent COVID-19 caused a reduction in revenues collected in the most recent full fiscal year of the recipient; and • Make necessary investments in water, sewer, or broadband infrastructure. Throughout its fleet procurement program, the City has relied on lease-to-own agreements to acquire police vehicles, structuring payments so that title transfers upon final lease settlement. During the recent audit period, staff applied $72,435 of SLFRF funds toward the early payoff of one such vehicle lease, aiming both to eliminate future interest costs and to ensure full obligation of grant resources by year end. This transaction was undertaken under a misapprehension of the SLFRF eligibility criteria. The SLFRF Final Rule expressly prohibits the use of grant funds for debt service, which the buyout of the police vehicle lease falls squarely within the definition of debt service, and it constitutes an unallowable expenditure under federal requirements. The City had a system of internal controls over the compliance requirement; however, it was not properly implemented to prevent noncompliance. INDIANA STATE BOARD OF ACCOUNTS 18 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 31 CFR 35.9 states in part: "A recipient must comply with all other applicable Federal statutes, regulations, and executive orders, and a recipient shall provide for compliance with the American Rescue Plan Act, . . ." Federal Register, Vol. 87, No.18, page 4340, January 27, 2022, states in part: ". . . For all recipients, funds may not be used for debt service or replenishing financial reserves. . . ." Federal Register, Vol. 87, No.18, page 4430, January 27, 2022, states in part: ". . . The final rule maintains the restriction on the use of funds for debt service . . . First, debt service and reserve replenishment costs do not constitute the provision of services to constituents. As noted in the interim final rule, financing expenses - such as issuance of debt or payment of debt service - do not provide services or aid to citizens. . . . With SLFRF resources available, recipients have less need to incur debt for otherwise-eligible SLFRF uses. . . ." Cause The City applied its SLFRF award toward the payoff of an existing lease to ensure that all grant funds would be legally obligated or expended by year end and to eliminate any future interest charges. At the time, staff was not aware that paying off a preexisting lease constitutes debt service, which is expressly unallowable under the SLFRF Final Rule. Effect Due to a misunderstanding of SLFRF requirements, the City inadvertently allocated federal grant funds to an unallowable expenditure. Questioned Costs We identified $72,435 in known questioned costs as noted above in the Condition and Context. Recommendation We recommended that management of the City design and implement a proper system of internal controls, including policies and procedures that would provide segregation of duties, to ensure appropriate reviews, approvals, and oversight are taking place prior to payment of funds from the SLFRF award. We also recommended City officials review and become familiar with the grant requirements. INDIANA STATE BOARD OF ACCOUNTS 19 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.
FINDING 2024-004 Subject: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds - Reporting Federal Agency: Department of the Treasury Federal Program: COVID-19 - Coronavirus State and Local Fiscal Recovery Fund Assistance Listings Number: 21.027 Federal Award Number and Year (or Other Identifying Number): FY2023 Compliance Requirement: Reporting Audit Finding: Material Weakness Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2023-005. Condition and Context Recipients of the COVID-19 - Coronavirus State and Local Fiscal Recovery Funds (SLFRF) grants are required to quarterly or annually submit Project and Expenditure (P&E) reports to the U.S. Department of the Treasury (Treasury). The reporting periods, as well as the respective due dates, are based upon type of recipient and its population, as well as the recipient's allocation amount. Information to be reported includes projects funded, expenditures, and contracts for the appropriate reporting period. The City was classified as a metropolitan city with a population below 250,000 residents that received an allocation of less than $10 million in SLFRF award funds. As such, the initial P&E report covering the period from April 1, 2022 to March 31, 2023, was required to be submitted to the Treasury by April 30, 2022. The subsequent annual reports are to cover one calendar year and must be submitted to the Treasury by April 30 each year. The City submitted one P&E report during the audit period; however, the Clerk-Treasurer prepared and submitted the P&E report without a review or oversight process in place to prevent, or detect and correct, errors. The lack of internal controls was a systemic issue throughout the audit period. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." INDIANA STATE BOARD OF ACCOUNTS 20 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Cause A proper system of internal controls was not designed by management of the City, to ensure that policies and procedures were in place related to reporting. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the City's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. The City had a process in place whereby there were two people involved in submitting reports with the assistance of a consulting firm. However, Officials were not aware documentation of reviews was necessary to obtain and maintain. Effect Without the proper implementation of an effectively designed system of internal controls, including policies and procedures that provide segregation of duties and additional oversight as needed, the internal control system cannot be capable of effectively preventing, or detecting and correcting, material noncompliance. Questioned Costs There were no questioned costs identified. Recommendation We recommended that management of the City design and implement a proper system of internal controls and develop policies and procedures over the preparation and review of federal reports. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.
FINDING 2024-005 Subject: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds - Suspension and Debarment Federal Agency: Department of the Treasury Federal Program: COVID-19 - Coronavirus State and Local Fiscal Recovery Fund Assistance Listings Number: 21.027 Federal Award Number and Year (or Other Identifying Number): FY2023 Compliance Requirement: Procurement and Suspension and Debarment Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2023-004. INDIANA STATE BOARD OF ACCOUNTS 21 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Condition and Context Suspension and Debarment The City elected to receive the standard revenue loss allowance, allowing it to claim its total SLFRF allocation from the U.S. Department of the Treasury (Treasury) of $3,870,958 as revenue loss to use for government services. As such, all SLFRF program funds were expended under the revenue loss eligible use category. The Treasury determined that there are no subawards under this eligible use category and that recipients' use of revenue loss funds would not give rise to subrecipient relationships given that there is no federal program or purpose to carry out in the case of the revenue loss portion of the award. Prior to entering into subawards and covered transactions with SLFRF award funds, recipients are required to verify that such contractors and subrecipients are not suspended, debarred, or otherwise excluded. "Covered transactions" include, but are not limited to, contracts for goods and services awarded under a nonprocurement transaction (i.e., grant agreement) that are expected to equal or exceed $25,000. The verification is to be done by checking the Excluded Parties List System (EPLS), collecting a certification from that person, or adding a clause or condition to the covered transaction with that person. Upon inquiry of the City in order to review the procedures in place for verifying that an entity with which it plans to enter into a covered transaction is not suspended, debarred, or otherwise excluded, the City divulged that it was unaware of the suspension and debarment requirements related to the SLFRF awards. Seven covered transactions that equaled or exceeded $25,000 were identified. Of the seven transactions, three were selected for testing, totaling $472,540. The City did not verify the vendors' suspension and debarment status prior to payment on any of the covered transactions. The City had policies or procedures in place to verify that contractors were neither suspended nor debarred or otherwise excluded or disqualified from participating in federal assistance programs or activities; however, there was no evidence to suggest that these policies or procedures had been followed. The internal controls and noncompliance were systemic issues throughout the audit period. Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 31 CFR 19.300 states: "When you enter into a covered transaction with another person at the next lower tier, you must verify that the person with whom you do business is not excluded or disqualified. You do this by: INDIANA STATE BOARD OF ACCOUNTS 22 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) (a) Checking the EPLS; or (b) Collecting a certification from that person if allowed by this rule; or (c) Adding a clause or condition to the covered transaction with that person." Cause A proper system of internal controls was not designed by management of the City. Embedded within a properly designed and implemented internal control system should be internal controls consisting of policies and procedures. Policies reflect the City's management statements of what should be done to effect internal controls, and procedures should consist of actions that would implement these policies. The Clerk-Treasurer took office January 1, 2024, and was inexperienced and lacked understanding of requirements for verifying and documenting the verification of the suspension and debarment status of vendors. Effect Without the proper implementation of an effectively designed system of internal controls, the City cannot ensure the contractors paid with federal funds are eligible to participate in federal programs. Any program funds the City used to pay contractors that have been suspended or debarred would be unallowable, and the funding agency could potentially recovery them. Furthermore, noncompliance with the provisions of federal statutes, regulations, and the terms and conditions of the federal award could result in the loss of future federal funding to the City. Questioned Costs There were no questioned costs identified. Recommendation We recommended that the City strengthen its system of internal controls to ensure that all contractors that are paid $25,000 or more, all or in part with federal funds, are not suspended or debarred from participations in federal programs before entering into any contracts. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.