2023-006 The Employment Security Department made improper payments to ineligible beneficiaries of the Unemployment Insurance program. Assistance Listing Number and Title: 17.225 Unemployment Insurance 17.225 COVID-19 Unemployment Insurance Federal Grantor Name: U.S. Department of Labor Federal Award/Contract Number: UI-34528-20-60-A-53; UI-34748-20-55-A-53; UI-35682-21-55-A-53; UI-35977-21-60-A-53; UI-37098-21-55-A-53; UI-37256-22-55-A-53; UI-37313-22-55-A-53; UI-38013-22-60-A-53; UI-38163-22-55-A-53; UI-38511-22-55-A-53; UI-38580-22-75-A-53; UI-39303-23-55-A-53; UI-39355-23-55-A-53; UI-34092-20-55-A-53 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed, Eligibility Known Questioned Cost Amount: $603 Prior Year Audit Finding: No Background The Unemployment Insurance (UI) program was created by the Social Security Act, and provides benefits under the Unemployment Compensation program to people for periods of involuntary unemployment. It provides a stabilizing effect on the economy by maintaining the spending power of eligible workers while they are between jobs. The Employment Security Department administers the state’s UI program. During fiscal year 2023, the Department paid more than $1.1 billion in unemployment insurance benefits to people in Washington. In 2020, the U.S. Department of Labor (DOL) established new unemployment compensation programs, including Pandemic Unemployment Assistance (PUA), to provide additional unemployment assistance benefits to eligible workers affected by the COVID-19 pandemic. These programs were extended and modified through the American Rescue Plan Act of 2021. Under the temporary programs, which expired on September 6, 2021, states must process and pay benefits to eligible people for all weeks of unemployment ending on or before the date of termination or eligibility expiration (whichever comes first). People eligible for PUA included those not eligible for regular unemployment compensation, such as people who have already exhausted their regular UI benefits, are self-employed, seeking part-time employment, or lack sufficient work history. The first week in which claimants were eligible to receive PUA benefits began on January 27, 2020. During the pandemic, people applying for PUA benefits were required to self-certify that they were unemployed, partially unemployed, or unable or unavailable to work due to COVID-19. However, in January 2021, DOL announced a change to federal law through Unemployment Insurance Program Letter (UIPL) 16-20, Change 4. This change required that people receiving PUA benefits on or after December 27, 2020, submit proof of documentation to the state substantiating their employment, self-employment, or planned start of employment or self-employment in order to receive their benefits, regardless of when their benefits are actually paid. This includes people requesting retroactive payments of PUA benefits that are not received until after December 27, 2020. Description of Condition The Department did not ensure that payments were made only to eligible beneficiaries of the UI program. We found the Department had adequate internal controls to ensure it paid UI benefits to eligible people, and it materially complied with the federal requirements. However, we identified questioned costs for benefits awarded to PUA claimants. We used a statistical sampling method to randomly select and examine 78 out of a total population of 20,447 claims for weekly PUA benefits. For these claims, the Department was required to determine the eligibility of each claimant to receive benefits, including verifying proof of employment, self-employment, or planned start of employment or self-employment. We found three instances (5.1 percent) where the Department paid weekly benefits without requesting and reviewing documentation from the claimant substantiating employment, self-employment, or planned start of employment or self-employment, as required by the federal grantor. These three claims resulted in $603 in known overpayments of PUA benefits by the Department, as each claim was paid after December 27, 2020, and during our audit period. Federal regulations require the auditor to issue a finding when the known or estimated questioned costs identified in a single audit exceed $25,000. We are issuing this finding because, as stated in the Effect of Condition and Questioned Costs section of this finding, the estimated questioned costs exceed that threshold. This issue was not reported as a finding in the prior audit. Cause of Condition Department officials did not correctly interpret the guidance outlined in the UIPL change to reflect that claimants were required to provide documentation substantiating proof of employment or self-employment in order to receive payments from the state after December 27, 2020. The Department did not request documentation from PUA claimants to substantiate employment prior to paying the claims. Effect of Condition and Questioned Costs We identified $603 in known federal questioned costs and $208,975 in likely federal questioned costs. We considered these questioned costs because the people receiving the benefit payments did not meet all the program’s eligibility requirements at the time of payment. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflects this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Verify people applying for PUA benefits have met all eligibility requirements before issuing weekly benefit payments • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department does not concur with the finding. The State Auditor’s Office asserts the Department incorrectly interpreted guidance outlined in the UIPL regarding PUA benefit eligibility requirements. However, citing the UIPL below: UIPL 16-20 change 4 2. Requirement to submit documentation substantiating employment or self-employment (Section 241 of the Continued Assistance Act) (new). The first full paragraph of section C.2. of attachment I, UIPL 16-20 change 4 says that: “Anyone that receives a payment of PUA on or after December 27, 2020, (the enactment date of the Continued Assistance Act) will be required to submit documentation substantiating employment or self-employment, or the planned commencement of employment or self-employment.” [emphasis added] Under this guidance, the claimant had to first have been issued a payment after the Continued Assistant Act (CAA) became effective (regardless of the week or weeks the payment(s) were for) before the Department could set the issue to request the documentation. In the exceptions noted by SAO, the first claimant wasn’t paid at all until 2023. Once the payment was issued to the claimant, the PUA Documents Required (PDR) issue was properly set. In the second, the claimant received some payments before 12/27/20 and then had other payment stops on her claim that were not removed until 2023. The removal of those payment stops triggered a payment for the remaining weeks claimed. Because those payments were made after 12/27/20, the PDR issue was set. Under the same section, item c. limits the date the Department can start the denial for failing to comply with the PDR issue: c. Failure to Comply. Individuals who do not provide documentation substantiating employment/self-employment (or planned employment/self-employment) within the required timeframe, as described above, are not eligible for PUA. For DUA, if the individual fails to submit documentation substantiating employment or self-employment, the state must establish an overpayment for the entire DUA claim, per 20 C.F.R. 625.6(e)(2). However, as provided in Section 241(b)(2) of the Continued Assistance Act, for PUA, if the individual fails to submit such documentation, the state may only establish an overpayment for those weeks of unemployment ending on or after December 27, 2020 (the enactment date of the Continued Assistance Act). For example, an individual has a PUA claim effective on November 1, 2020, and files and is paid for weeks of unemployment ending November 7, 2020, through weeks ending January 9, 2021. Because the individual received a payment for PUA after December 27, 2020, the state must notify the individual on January 4, 2021, about the requirement to provide documentation substantiating employment/self-employment (or planned employment/self-employment) within 90 days (by April 4, 2021). If, in that timeframe, the individual fails to provide documentation or fails to show good cause to have the deadline extended, an overpayment must be established for all the weeks paid beginning with the week ending January 2, 2021. This is because the individual cannot be deemed ineligible for a week of unemployment ending before the date of enactment solely for failure to submit documentation (emphasis added). In the cases reviewed, the claimants did not respond to the issue or provide their documentation. Because the denial is limited to only claimed weeks following the enactment of the CAA (weeks ending 1/2/21 and later), any weeks from 2020 that were paid in 2023 had no potential for denial and therefore should not be considered to be incorrectly paid, similar to the example given above from the UIPL. If addition, if claimants never claimed a week ending after the CAA was effective, the PDR issue will set but never be adjudicated because they had never claimed a week that was potentially deniable. In discussions with SAO, the Office cited paragraph b(ii) of the UIPL, to indicate that any claims paid by the State on or after 12/27/2020 require the claimant to provide documentation substantiating employment or self-employment within 90 days of payment, or when directed to submit the documentation by the state workforce agency, whichever is later. This section of the UIPL solely lays out the requirements for establishing the respond-by dates for providing documentation for review. The deadline for responses is different depending on whether the PUA claim was filed before 1/26/21 or on/after that date. This paragraph does not establish the requirements for payment or non-payment of PUA weeks. Additionally, the Department received further guidance in a webinar with USDOL on Monday, January 11, 2021, which reinforced the methodology used by the Department in these cases. Auditor’s Remarks For the claimants in question, we did not receive any documentation from the Department demonstrating that a request was sent to the claimant to provide supporting documentation substantiating employment, nor was there evidence provided that the claims in-question were suspended due to missing documentation from the claimants. Federal guidance contained in Attachment I to UIPL 16-20, Change 4 – Pandemic Unemployment Assistance (PUA) Implementation and Operating Instructions stipulates the following: “Anyone that receives a payment of PUA on or after December 27, 2020, (the enactment date of the Continued Assistance Act) will be required to submit documentation substantiating employment or self-employment, or the planned commencement of employment or self-employment. This includes any individual who receives any payment of PUA on or after December 27, even if the payment is for a week of unemployment that occurred before December 27, 2020. The deadline for providing such documentation depends on when the individual filed the initial PUA claim. • Filing New Applications for PUA on or after January 31, 2021. Individuals filing a new PUA application on or after January 31, 2021 (regardless of whether the claim is backdated), are required to provide documentation within 21 days of application or the date the individual is directed to submit the documentation by the State Agency, whichever is later. The deadline may be extended if the individual has shown good cause under state UC law within 21 days. • Filing Continued Claims for PUA. Individuals who have an existing PUA claim as of December 27, 2020, (the enactment date of the Continued Assistance Act) or who file a new initial PUA claim before January 31, 2021, and who receive PUA on or after December 27, 2020, must provide documentation within 90 days of the application date or the date the individual is instructed to provide such documentation by the state agency (whichever date is later).” We questioned these payments due to the Department not receiving any supporting documentation substantiating employment or self-employment from these claimants during the audit period, and failing to establish overpayment notices to the claimants during the audit period. For all three payments in-question, the claimant filed for PUA prior to December 27, 2020, and therefore would have been required to submit supporting documentation substantiating employment to the Department within 90 days, or as directed by the Department. Because the Department did not receive supporting documentation from the claimants for these benefit weeks during the audit period, we could not determine that the payments were allowable and that the claimants met the PUA eligibility requirements for their benefit weeks paid. We reaffirm our finding and will follow-up on the Department’s corrective action during the next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Office of Management and Budget, 2 CFR Part 200, Appendix XI, Compliance Supplement, Unemployment Insurance, states in part: E. Eligibility 1. Eligibility for Individuals a. PUA – PUA provides benefits to covered individuals, who are those individuals not eligible for regular unemployment compensation (UC or extended benefits under state or federal law or PEUC, including those who have exhausted all rights to such benefits). Covered individuals also include self-employed, those seeking part-time employment, individuals lacking sufficient work history, and those who otherwise do not qualify for regular unemployment compensation or extended benefits under state or federal law or PEUC. PUA is payable to individuals who are ineligible for regular UC, EB, or PEUC and are unemployed, partially unemployed, or unable or unavailable to work due to one of the COVID-19 related reasons identified in Attachment I to UIPL No. 16-20, Change 6. Section 2102(a)(3)(A)(ii)(I) of the CARES Act included 10 specific COVID-19 related reasons. The Department, under the authority provided by Section 2102(a)(3)(A)(ii)(I)(kk) of the CARES Act, added additional COVID-19 related reasons three new COVID-19 related reasons with the publication of UIPL No. 16-20, Change 5 on February 25, 2021. All COVID-19 related reasons apply retroactively to the beginning of the PUA program. Additionally, individuals who are paid on or after December 27, 2020, must submit proof of documentation substantiating employment, self-employment, or the planned commencement of employment or self-employment (see Attachment I, Section C.2. of UIPL No. 16-20, Change 4). This includes individuals requesting retroactive payments that are not received until after December 27, 2020.
2023-015 The Washington State Department of Transportation did not have adequate internal controls over and did not comply with cash management requirements for the Formula Grants for Rural Areas program. Assistance Listing Number and Title: 20.509 Formula Grants for Rural Areas Federal Grantor Name: U.S. Department of Transportation Federal Award/Contract Number: WA-2019-091-01; WA-2020-038-01; WA-2021-052-01; WA-2021-130-01; WA-2021-133-01; WA-2022-031-01 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Cash Management Known Questioned Cost Amount: $41,555 Prior Year Audit Finding: No Background The Washington State Department of Transportation administers the Section 5311 program— Formula Grants for Rural Areas—to rural transportation areas by providing financial assistance for operating, planning, administrative expenses, and the acquisition, construction, and improvement of facilities and equipment. In addition, Section 5311 specifically provides for the support of rural intercity bus services, as well as funding for training, technical assistance, research, and related services to support the rural transit service. The Department spent about $80.3 million in program funds during fiscal year 2023. Of that amount, it passed through about $35.2 million to subrecipients through subawards. The Formula Grants for Rural Areas program is not subject to the Cash Management Improvement Act, and is not included in the Treasury-State Agreement for Washington. Programs not covered by a Treasury-State Agreement are subject to the provisions of Title 31 of the U.S. Code of Federal Regulations, Part 205, Subpart B, which specifies how funds transfers from the federal government must be processed. The Department requests monthly federal reimbursements for operating expenses and disbursements to subrecipients. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with cash management requirements for the Formula Grants for Rural Areas program. We used a non-statistical sampling method to randomly select and examine 17 draws of program funds out of a total population of 128. We also selected six large draws that were individually significant. During our review, we found that one draw in the amount of $41,555 was made for an incorrect program. Management reviewed, verified, and approved this draw, but the Department did not detect that funds were drawn for the incorrect program during the audit period. We consider these questioned costs. Additionally, we found that two of the six individually significant draws were not made timely. One draw for $6.3 million was made in June 2023 for expenditures the Department incurred and paid in fiscal year 2021. Similarly, another draw for $9 million was made in April 2023 for expenditures the Department incurred and paid for in fiscal year 2022. Based on the length of time it took to perform the associated draws, we determined that the Department did not comply with federal requirements to minimize the time between the drawdown of federal funds and their disbursement for federal program purposes. Therefore, the Department’s controls did not ensure timely draws in compliance with federal regulations. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Management review was insufficient for ensuring that program funds were drawn only for allowable program expenditures. Additionally, management did not ensure that draws were performed timely in accordance with federal regulations and said this was due to difficulties in reconciling expenditure accruals to the payment system. Effect of Condition and Questioned Costs Drawing funds for the incorrect federal program can potentially result in uncollected funds in one program and overdrawing another. Further, delaying federal drawdown requests results in state funds being advanced longer than necessary and lost interest revenue for the state. The table below summarizes the questioned costs our audit identified. Projection to population Likely Questioned Costs (Estimate) Known Questioned Costs $41,555 Federal expenditures $298,218 Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflects this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR §200.516(3). We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Improve its internal controls to ensure reimbursement requests are for the correct federal award • Ensure draws of federal program funds are performed in a timely manner • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Washington State Department of Transportation (WSDOT) appreciates the State Auditor’s Office (SAO) audit of the Formula Grants for Rural Areas Program. The Department is committed to ensuring our programs comply with federal regulations related to Cash Management. WSDOT has implemented additional controls to help ensure the draws of program funds are accurate, drawn on the correct program, and timely. The updated procedures include: Identifying back up staff to ensure coverage during regular staff absences; Change in the timing of draws of program funds; Use of automatic ECHO system confirmations for draws entered; Additional reviews of draw amounts by project, and a Validation process with the WSDOT program staff. In addition, the questioned costs have been refunded to the incorrectly charged federal program. In an effort to ensure increased compliance, these procedures will be reviewed regularly and updated as required. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department's corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 205.33, How are funds transfers processed?, states in part: a. A State must minimize the time between the drawdown of Federal funds from the Federal government and their disbursement for Federal program purposes. A Federal Program Agency must limit a funds transfer to a State to the minimum amounts needed by the State and must time the disbursement to be in accord with the actual, immediate cash requirements of the State in carrying out a Federal assistance program or project. The timing and amount of funds transfers must be as close as is administratively feasible to a State’s actual cash outlay for direct program costs and the proportionate share of any allowable indirect costs. States should exercise sound cash management in funds transfers to subgrantees in accordance with OMB Circular A–102 (For availability, see 5 CFR 1310.3.). The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-017 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to ensure payments to subrecipients of the Emergency Rental Assistance program were allowable and properly supported. Assistance Listing Number and Title: 21.023 COVID-19 Emergency Rental Assistance Program Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: N/A Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs / Cost Principles Period of Performance Known Questioned Cost Amount: $4,123,486 Prior Year Audit Finding: Yes, Finding 2022-016 Background Congress passed two acts authorizing federal funds for the Emergency Rental Assistance (ERA) program to respond to the COVID-19 pandemic. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, provided $25 billion for ERA. These funds are known as ERA1. The American Rescue Plan Act of 2021, enacted on March 11, 2021, provided $21.55 billion in additional funding for ERA. These funds are known as ERA2. The funds are provided directly to states, U.S. territories, local governments and, in the case of ERA1, Indian tribes, to assist eligible households through existing or newly created rental assistance programs. The Department of Commerce administers the ERA program in Washington. The Department subawarded federal funds to subrecipients to provide financial assistance to households, landlords and utility providers. In fiscal year 2023, the Department spent about $62.5 million in ERA1 and ERA2 funds. During the audit period, the Department allocated program funds to 13 ERA1 subrecipients and 12 ERA2 subrecipients. Grant recipients may use ERA1 and ERA2 funds for administrative expenses, housing stability services, financial assistance, and other affordable rental housing and eviction prevention purposes. Most of the expenditures the Department spent were for financial assistance to eligible households, which included payment of rent, rental arrears, utilities and home energy costs, utilities and home energy costs arrears, housing stability services and other expenses related to housing. Under the ERA1 program, award funds used for “other expenses” must be related to housing and “incurred due, directly or indirectly, to the COVID-19 outbreak.” The amount for prospective rent cannot exceed three months under a single household application. Financial assistance arrears may only cover household expenses accrued on or after March 13, 2020, up to a maximum of 15 months for ERA1 and a maximum of 18 months under ERA1 and ERA2 combined. There is no maximum dollar amount for the cumulative financial assistance that may be provided on behalf of an eligible household beyond the requirement that the amounts paid be based on documentation of household income, leases and equivalent forms. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In prior audits, we reported the Department did not have adequate internal controls over and did not comply with requirements to ensure payments to subrecipients of the ERA program were allowable and properly supported. The prior finding number was 2022-016. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to ensure payments for the ERA program were allowable and properly supported. During the audit period, the Department had procedures in place, which required staff to review supporting documentation when approving payments. We used a statistical sampling method to randomly select and examine 48 out of a total population of 136 subrecipient payments. Additionally, we judgmentally reviewed two significant payments that each exceeded $3 million. In total, we examined more than $39 million in provider payments as part of the audit. Of the 48 randomly selected payments examined, we identified seven (15 percent) that did not have adequate documentation to ensure the payment was for allowable activities, met cost principles, and occurred within the award’s period of performance. We consider this internal control deficiency to be a material weakness, which led to material noncompliance. Cause of Condition In July 2022, the Department implemented procedures requiring staff to review supporting documentation to ensure reimbursement requests were for allowable activities before reimbursing subrecipients. However, Department staff did not follow these procedures and approved reimbursements to subrecipients that did not provide adequate supporting documentation. Management said that this was caused by staff turnover during the audit period. Effect of Condition and Questioned Costs We determined the Department did not receive adequate supporting documentation before reimbursing subrecipients to ensure that expenditures were for allowable activities, met cost principles, and occurred within the award’s period of performance. As a result, we identified $4,123,486 in known federal questioned costs and $11,511,399 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR 200.516(a)(3). Without establishing adequate internal controls, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that program spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Improve internal controls to ensure payments to subrecipients are not approved without a review of adequate supporting documentation • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department acknowledges the payments reported lacked adequate documentation to ensure compliance with federal requirements. In July 2022, the Department began requiring subrecipients to submit supporting backup documentation for all expenditures to the program for review and approval. Due to the temporary nature of the Emergency Rental Assistance (ERA) program, all staff supporting the administration of the program held temporary positions and staff turnover impacted consistency with compliance of federal requirements. As a result, supporting documentation for seven of the randomly selected 48 payments were approved before they were fully reviewed and determined to be properly supported. The Department will obtain the supporting documentation for those transactions to ensure the invoices paid were properly supported and to retail with the corresponding invoices. The Department has used the reported deficiency to improve our internal control processes and has since implemented a new control process requiring staff include a note to the invoicing system recording documentation received supported and reconciled to the submitted invoice before payment is approved. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department's corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance, establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.
2023-029 The Department of Social and Health Services did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: None Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $312,659,850 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides direct payments to states to respond to the COVID-19 pandemic and its negative economic effects. Washington received about $4.4 billion of SLFRF funds from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent more than $1.7 billion in SLFRF funds, $344 million of which was spent by the Department of Social and Health Services. The Department spent more than $332 million to administer financial assistance through the Washington Immigrant Relief Fund to people in Washington who lacked permanent legal status. The purpose of this program was to provide cash grants to residents of Washington who were at least 18 years old and were ineligible to receive federal economic impact payments or unemployment benefits due to their immigration status. The Legislature appropriated $340 million to the Department in SLFRF funding to administer one-time grants to eligible recipients during fiscal year 2023. Under the legislative mandate, the Department could not spend more than 10 percent of the appropriated funds for the administration of the program. In total, the Department paid more than $312 million in cash grants to approved recipients. According to the legislative mandate, people needed to complete an application and meet the following eligibility requirements to receive a grant: • The person must live in Washington state. • The person must be age 18 years, or older. • After January 1, 2021, and before June 30, 2023, the person must have been significantly affected by the COVID-19 pandemic. • The person must not be eligible to receive federal economic impact payments or unemployment insurance benefits due to immigration status. • The person may not receive more than three grants. The Department was required to prioritize granting payments to people who had the greatest need of assistance. The factors used to prioritize need included: • People who had a total household income at or below 250 percent of the federal poverty level • People who were the primary or sole income earner of their household • People who experienced housing instability • People who contracted or were at high risk of contracting COVID-19 During the audit period, the Department contracted with a for-profit subrecipient to implement and manage the program. The funds expended in the audit period were the final round of funding for this program. In prior years, there were two other rounds of funding, each of which provided $1,000 cash grants to approved recipients. For the final round of funding, the Department reimbursed the subrecipient for issuing additional grants of $3,075 to 101,678 approved recipients in the form of either a check or prepaid debit card. Each round of funding was managed by a different subrecipient. To receive a grant, the Department instructed its subrecipients to approve applications for people who met all criteria outlined above, as well as demonstrate the applicants had not yet received the maximum allowable number of three grants. Applicants were allowed to participate in all three rounds of funding, provided they met all eligibility requirements to receive assistance. In total, the same recipient could have received $5,100 in cash grants from the state as part of the Immigrant Relief program. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Some federal awards may be passed through to for-profit entities, who are accountable to the pass-through entity for the use of the federal funds provided. Because for-profit subrecipients are not subject to audit requirements under the Uniform Guidance, Subpart F, the Department is responsible for establishing requirements, as necessary, to ensure the for-profit subrecipient complies with the terms and conditions of its subaward. The agreement with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure for-profit subrecipients’ compliance may include pre-award audits, monitoring the subrecipient during the agreement, and conducting post-award audits. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department awarded funds to its subrecipient to implement and manage the program, including creating an application platform, determining the eligibility of applicants to receive financial assistance, and distributing Department funds to third-party vendors to facilitate payments to recipients. However, the application developed by the subrecipient and approved by the Department did not address each eligibility criterion established by the Legislature. In addition, the application’s questions were written in a way that a person’s responses could be truthful and make them appear to be eligible for assistance but not meet the criteria of the legislative mandate. Specifically, the application: • Asked applicants to answer whether they “received a federal stimulus check” or “received unemployment benefits during the pandemic,” without specifically asking if it was due to their immigration status, which was a core eligibility requirement • Included two scenarios that did not necessarily indicate whether someone had been significantly affected by the COVID-19 pandemic. These scenarios were whether applicants had borrowed money from a friend or relative, and whether they were past due on rent, mortgage payments, utility bills, or had lost their housing. The Department’s award contract to the subrecipient outlined that for the subrecipient to receive funds for the grant award, it would need to submit a list of all approved applicants when requesting payments. However, the subrecipient was required to redact all personally identifiable information before submitting the list of applicants to the Department. The contract also specified the Department would complete a review of applications to ensure the subrecipient was correctly determining eligibility. The subrecipient included the list of approved applicants when it submitted invoices to the Department requesting reimbursement for funds rendered to clients. However, these invoices contained only the application identification numbers for approved applicants and their payment amounts. The invoices did not include any information to identify the applicant or support the subrecipient’s eligibility determination. Department officials said the subrecipient maintained all supporting documentation to demonstrate an applicant was eligible. However, because the Department did not request documentation from the subrecipient to support those grant payments to applicants, the Department could not determine if the applicants were eligible and the payments were actually dispersed to them. Ultimately, due to the lack of supporting documentation, we could not determine whether the Department used program funds for allowable activities, or that recipients who received grants met all requirements established by the Legislature. On four separate occasions, the Department requested the subrecipient to provide 250 beneficiary applications so staff could review them to determine whether the subrecipient correctly determined that applicants were eligible to receive financial assistance. The subrecipient picked the samples each time, and the Department did not receive details about the sampling methodology the subrecipient used to determine the samples. Each batch only included de-identified samples that did not have any personally identifiable information. Therefore, the Department did not have sufficient information to review to ensure all eligibility and prioritization criteria, as outlined in the legislative mandate, were met. In addition, the Department did not retain any of the supporting documentation it did receive from the subrecipient. We determined the Department’s monitoring design for the subrecipient was insufficient to determine whether only eligible applicants received grants, or if all recipients actually existed. Specifically, the Department could not determine whether the recipients: • Had already applied for and were denied eligibility for unemployment insurance benefits by the state, due to their immigration status • Were not eligible to receive federal economic impact payments due to their immigration status • Were residents of Washington state • Did not already receive the maximum allowable number of grants under the program • Met the income requirement to be at or below 250 percent of the federal poverty level Once the application period ended, the subrecipient provided the Department with a list of all approved applicants, which totaled 101,678 people. Although the first two awards given to recipients were $1,000 each, the Department decided it would evenly distribute the remaining funds between everyone who had been approved to receive a grant. Department management said they chose to distribute the remaining funds this way to minimize public concerns about unallocated grants. Based on the total number of applicants and the remaining funds, management in the Department’s Office of Refugee and Immigrant Assistance determined each grant award would be $3,075. While the Department did perform some fiscal monitoring of the subrecipient’s administrative costs, management chose not to complete any fiscal monitoring of the grant award payments. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition The Department approved the eligibility application that the subrecipient created, but the application did not ensure only eligible applicants were approved because it included criteria that was not in the legislative mandate. In addition, management wrote the award contract in a way that restricted the subrecipient from providing any personally identifiable information for applicants. Without this information, the Department could not sufficiently monitor the subrecipient to ensure only eligible applicants were approved and received grant funds. Since the subrecipient was required to retain all supporting documentation, the Department could have performed fiscal monitoring to ensure the grant payments to the subrecipient were distributed only to eligible applicants. However, management said the Department had no plans to do so. Effect of Condition and Questioned Costs We determined the Department did not review adequate supporting documentation before paying the subrecipient for applications processed during the audit period. Since the Department did not perform adequate monitoring to ensure that expenditures were for allowable activities, it does not have assurance that the subrecipient spent program funds in accordance with the legislative mandate. As a result, we identified $312,659,850 in known federal questioned costs. Without establishing adequate internal controls and reviewing detailed supporting documentation from the subrecipient for grant awards, including verifying that only eligible applicants received grant funds, the Department did not reasonably ensure it used federal funds for allowable purposes and that spending occurred within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Perform a sufficient level of subrecipient monitoring that meets federal requirements so the Department can reasonably determine whether its subrecipient only disbursed grant funds to eligible applicants • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The Department partially concurs with the Auditor’s findings. The Department’s Office of Refugee and Immigrant Assistance (ORIA) administered the fund and contracted with a subrecipient organization to conduct eligibility determinations and to approve and disburse funds to undocumented immigrants. The final payments went out in early 2023 and the Washington COVID-19 Immigrant Relief Fund is now closed and all subrecipient contracts have ended. We concur that we should have strengthened our internal controls to have reasonably determined the subrecipient only disbursed grant funds to eligible applicants. ORIA will work with contracts and accounting staff to develop effective internal controls and clear written procedures covering subrecipient monitoring requirements. ORIA will train all staff responsible for subrecipient monitoring on the newly established internal controls and written procedures. In addition, the Office of the Secretary will request the Department’s Internal Audit and Consultation office conduct an internal audit of ORIA to ensure the program implements strong internal controls, properly accounts for federal funds, and materially complies with federal requirements. The Department does not concur with the questioned costs. The Department used the funds to assist Washington workers/families who were affected by the COVID-19 pandemic but were unable to access federal stimulus programs and other social supports due to their immigration status. Repayment of these funds would only hinder the state’s ability to provide critical services to our clients. If the grantor contacts the Department regarding the questioned costs, the Department will discuss the manner in which we used the funds with the Department of Health & Human Services and will take additional action if appropriate. Auditor’s Remarks We appreciate the Department acknowledging that internal controls need to be strengthened. Regarding the Department not concurring with questioned cost, we determined the Department did not review supporting documentation from the subrecipient to demonstrate that assistance only went to eligible beneficiaries and therefore does not have assurance that federal funds were properly spent. We reaffirm our finding and will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200.1, Uniform Guidance establishes definitions for questioned costs. Part 200.410 establishes requirements for the collection of unallowable costs. Title 2 CFR Part 200.403, Uniform Guidance establishes the factors affecting the allowability of costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: NEW SECTION. Section 205. FOR THE DEPARTMENT OF SOCIAL AND HEALTH SERVICES – ECONOMIC SERVICES PROGRAM Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations: 15. $340,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for the Washington immigrant relief fund, a disaster assistance program to provide grants to eligible persons. Administrative costs may not exceed 10 percent of the funding in this subsection. a. A person is eligible for a grant who: I. Lives in Washington state; II. Is at least 18 years of age; III. After January 1, 2021, and before June 30, 2023, has been significantly affected by the coronavirus pandemic, such as loss of employment or significant reduction in work hours, contracting the coronavirus, having to self-quarantine as a result of exposure to the coronavirus, caring for a family member who contracted the coronavirus, or being unable to access childcare for children impacted by school or childcare closures; and IV. Is not eligible to receive federal economic impact (stimulus) payments or unemployment insurance benefits due to the person’s immigration status. b. The department may not deny a grant to a person on the basis that another adult in the household is eligible for federal economic impact (stimulus) payments or unemployment benefits or that the person previously received a grant under the program. However, a person may not receive more than three grants. c. The department’s duty to provide grants is subject to the availability of the amounts specified in this subsection, and the department must prioritize grants to persons who are most in need of financial assistance using factors that include, but are not limited to: (i) Having an income at or below 250 percent of the federal poverty level; (ii) being the primary or sole income earner of household; (iii) experiencing housing instability; and (iv) having contracted or being at high risk of contracting the coronavirus. The department may contract with one or more entities to administer the program. If the department engages in a competitive contracting process for administration of the program, experience in administering similar programs must be given weight in the selection process to expedite the delivery of benefits to eligible applicants.
2023-027 The Department of Commerce did not have adequate internal controls over and did not comply with requirements for monitoring subrecipients to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $95,560 Prior Year Audit Finding: Yes, Finding 2022-019 Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Department used SLFRF funds to administer and provide economic assistance to households at risk of eviction and homelessness primarily through the Eviction Rental Assistance Program (ERAP 2.0) and Treasury Rent Assistance Program (TRAP 2.0), in addition to transportation, tourism and other pandemic-recovery projects. During fiscal year 2023, the Department expended about $253.5 million on reimbursements and advance payments to local governments and nonprofit organizations as subrecipients. These subrecipients were responsible for making direct payments of rent and utilities for eligible low-income households with overdue rent payments dating as far back as March 2020. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. In the prior audit, we reported the Department did not have adequate internal controls over and did not comply with federal requirements for monitoring subrecipients to ensure payments were allowable, properly supported and within the period of performance. The prior finding number was 2022-019. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients to ensure payments were allowable, properly supported and met period of performance requirements for the SLFRF program. During the audit period, the Department only required summary level supporting documentation when approving subrecipient payments. Since detailed source documentation was not required at the time of reimbursement, the Department implemented a fiscal review process for ERAP and TRAP 2.0 subrecipients. We used a statistical sampling method to randomly select and review 56 out of 554 payments. Of the payments examined, we identified nine (16 percent) payments that were not allowable under terms and conditions of the subaward. Specifically: 1. Seven payments (13 percent) were for advances to the subrecipient, which are specifically prohibited under the terms and conditions of the Department’s subaward 2. Four payments (7 percent), including one of the payments mentioned above, did not have adequate documentation to ensure the payment was for an allowable activity under the subaward, met cost principles and occurred within the award’s period of performance. The Department’s invoice review procedure required the Department to verify that each subrecipient submitted, along with its invoice, a voucher detail worksheet that outlines expenses by budget category, and a general ledger report detailing the expenses incurred by the subrecipient during the invoice period. For four of the nine payments referenced above, we found the Department approved them for payment without receiving a general ledger report from the subrecipient detailing all incurred expenses. In one of these instances, we also found the Department advanced program funds to the subrecipient without reviewing supporting documentation from the subrecipient to demonstrate that all expenditures were incurred to support the amount advanced by the Department. We were not provided with any documentation demonstrating these funds were returned to the Department. We also used a non-statistical sampling method to randomly select and examine nine out of 35 subrecipients for which the Department completed monitoring during the audit period. We determined five of the nine fiscal reviews completed (56 percent) were insufficient to ensure payments to the subrecipients were allowable and adequately supported. We came to this conclusion because the support we were provided lacked enough details to ensure the activities were allowable and within the period of performance. In addition, the Department did not have evidence that it obtained supporting documentation for client files from one of the nine subrecipients we examined. We also examined program monitoring documentation completed for the same nine subrecipients. The Department only selected five households from each subrecipient for eligibility verification. There was a total of 53,699 households served for ERAP 2.0, and an additional 8,373 households served for TRAP 2.0. Therefore, the Department reviewed less than one-half of one percent of client files for each subrecipient. For these nine subrecipients, we verified that staff reviewed the number of client files that management required under the program. However, in our judgment, the total number of client files reviewed for each subrecipient was inadequate to reasonably ensure compliance with program requirements. The following table summarizes the percentage of client files the Department reviewed for each subrecipient during the audit period: We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. Cause of Condition Management did not ensure that proper internal controls were in place to oversee ERAP 2.0 and the use of SLFRF funds. The Department approved payments to subrecipients without reviewing adequate supporting documentation, and management relied on annual program and fiscal monitoring to ensure subrecipients had proper supporting documentation and only served eligible households. In addition, it issued advance payments to subrecipients despite the subawards explicitly stating this was not allowable. Management did not ensure program and fiscal monitoring conducted included a sufficient sample of subrecipient records, and required detailed source documentation, to provide reasonable assurance of material compliance with federal SLFRF requirements and the terms and conditions of the subawards. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds advanced to subrecipients were disbursed to eligible households and for allowable activities. As a result, we identified $95,560 in known federal questioned costs and $1,482,489 in likely federal questioned costs. Our sampling methodology meets statistical sampling criteria under generally accepted auditing standards in AU-C 530.05. It is important to note that the sampling technique we used is intended to support our audit conclusions by determining if expenditures complied with program requirements in all material respects. Accordingly, we used an acceptance sampling formula designed to provide a high level of assurance, with a 95 percent confidence of whether exceptions exceeded our materiality threshold. Our audit report and finding reflect this conclusion. However, the likely improper payment projections are a point estimate and only represent our “best estimate of total questioned costs,” as required by 2 CFR § 200.516(3). To ensure a representative sample, we stratified the population by dollar amount. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Update its written procedures to require an adequate number of subrecipient client files to be reviewed during fiscal and program monitoring to provide reasonable assurance that each subrecipient is compliant with program requirements • Improve internal controls to ensure subrecipients provide adequate supporting documentation when requesting reimbursement • Request and review supporting documentation from all participating subrecipients on households served with SLFRF funds to determine if any amounts reimbursed to the subrecipients must be returned to the Department • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The State and Local Fiscal Recovery Funds were provided to the state as an advanced payment by which the Department used them to address the immense rent assistance needs as a result of the COVID-19 pandemic. Commerce funded subrecipients up to 25% of their contract total in an effort to mitigate cash flow issues to allow the swift distribution of funding. The Department utilized this method as obtaining documentation and processing reimbursements on a weekly basis still could not provide sufficient funding for all of the rent assistance needs. The Department now acknowledges the advanced payments were not authorized per federal guidance, however, all housing expenses were verified through thorough review of subrecipient expenditure supporting documentation. The Department completed fiscal and program monitoring of each subrecipient over the contract period, however, neither the Code of Federal Regulations nor the Washington State Auditor’s Office has been able to provide the Department with the number of client files that would need to be reviewed to be considered adequate. The Department created a procedure to review a minimum of five client files per subrecipient and followed this procedure. The Department understands that given the urgent need for assistance and the enormous amount of rent assistance funding distributed, thousands of client files would had to have been reviewed in a short period of time and we could not build and sustain the necessary staff capacity to match the fast-paced program delivery. The Department did increase internal controls related to program monitoring to more accurately comply with federal requirements as a result of the prior audit results. In July 2022, the Department began to review supporting backup documentation for all expenditures. The Department did not yet understand that transaction level detail was required and its review included a higher level of detail. Since the process was newly implemented in fiscal year 2023, it took some time to work out compliance challenges and provide technical assistance to subrecipients in order to comply with the federal requirements. The Department’s expenditure backup documentation review process began including transaction level detail in fiscal year 2023 as a result of the prior audit results. Any repayment of questioned costs will be determined through the standard resolution process with the United States Department of Treasury. Auditor’s Remarks Federal regulations require pass-through entities to monitor the activities of subrecipients as necessary to ensure that subawards are used for authorized purposes and in compliance with federal requirements and the terms and conditions of the subaward. In our judgement, the Department’s design of monitoring subrecipients for fiscal and program compliance did not provide this level of assurance. Specifically, the Department’s decision to review only five client files per subrecipient did not provide reasonable assurance of each subrecipient’s compliance when the average subrecipient served 1,413 clients, as illustrated in the Description of Condition. Based on this evidence, the Department only reviewed a total of 230 client files during the audit period, which makes up less than 0.4 percent of the total number of clients served. In addition, the Department’s decision to not review transaction-level supporting documentation at the time of issuing payment to subrecipients means that the monitoring of subrecipients was also being relied upon to ensure all payments made to subrecipients were only for allowable activities under the subaward. In our judgment, the procedures in place requiring only five client files be reviewed for each subrecipient were not sufficient to provide reasonable assurance of material compliance with the requirements for Activities Allowed or Unallowed and Allowable Costs/Cost Principles. We reaffirm our audit finding and will follow up on the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting the allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11.
2023-028 The Department of Commerce did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the Coronavirus State and Local Fiscal Recovery Funds. Assistance Listing Number and Title: 21.027 COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: SLFRP0002 Pass-through Entity Name: None Pass-through Award/Contract Number: None Applicable Compliance Component: Activities Allowed or Unallowed Allowable Costs/Cost Principles Period of Performance Subrecipient Monitoring Known Questioned Cost Amount: $75,251,225 Prior Year Audit Finding: No Background The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), as part of the America Rescue Plan Act of 2021, delivered $350 billion to state, local, and tribal governments to support the response to and recovery from the COVID-19 public health emergency. Washington received $4.4 billion of SLFRF money from the U.S. Department of the Treasury, which the state’s Office of Financial Management allocated to state agencies for various programs. In fiscal year 2023, state agencies spent about $1.9 billion in SLFRF funds, more than $718 million of which was spent by the Department of Commerce. The Legislature appropriated SLFRF funding to the Department for the purpose of providing assistance to public and private water, sewer, garbage, electric, and natural gas utilities to reduce residential customer account balances that were accrued between March 1, 2020, and December 31, 2021, and were unpaid due to the COVID-19 pandemic and the related economic downturn. The Department’s Energy Division expended more than $101 million in payments to public and private utilities as subrecipients. Each utility that wished to participate in the program was required to submit an application for financial assistance documenting the current arrearage balances for residential customers as of March 31, 2022, as well as any available information on arrearage balances of low-income customers, including those receiving government assistance through the Low-Income Home Energy Assistance Program, Low-Income Water Assistance Program, or other ratepayer-funded Department programs as of March 31, 2022. In the event that the utility did not have access to this customer information, the Department distributed SLFRF funds to the community action program serving the same area as the utility. In determining the amount of funding that each utility could receive, the Department was required by the Legislature to consider: • Each participating utility’s proportion of the aggregate amount of arrearages among all participating utilities; • Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; • American community survey poverty data; and • Whether the utility has leveraged other fund sources to reduce customer arrearages. Pass-through entities are required to monitor the activities of subrecipients to ensure they are properly using federal funds for allowable activities and expenditures. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Description of Condition The Department did not have adequate internal controls over and did not comply with requirements to monitor subrecipients and to ensure payments were allowable, properly supported, and met period of performance requirements for the SLFRF program. During the audit period, the Department reimbursed more than $101 million in SLFRF funds to 62 different utilities and community action program subrecipients. Utilities were instructed to submit a request summarizing the outstanding arrearage balance for existing utility customers as of March 31, 2022. We determined the Department did not adequately monitor any of the 62 utilities and community action program subrecipients to ensure that payments issued by the Department were for allowable activities and only eligible households received assistance. The Department received the arrearage balances and awarded funds to utilities in November 2022. At the time the Department awarded funds, utilities were directed to provide updated balances. Several utilities reported changes to their arrearage balances, and no longer needed awards based on the initial data. These funds were returned to the Department and redistributed to other utilities that had remaining arrearage balances after the initial allotment of funds. We used a non-statistical sampling method to randomly select and examine 15 out of 94 payments to subrecipients, in addition to seven individually significant payments. Of the payments examined, we found none of the 22 payments had adequate documentation to support the payments were for allowable activities under the subaward, met cost principles, and occurred within the award’s period of performance. The Department did not obtain documentation from the utilities demonstrating when each household arrearage balance was accrued. Therefore, we cannot determine whether the amounts reimbursed to subrecipients were adequately supported, and that the underlying costs were incurred during the period of performance of the subaward. The Department also did not ensure subawards issued to subrecipient utilities contained accurate information. We randomly selected and examined 12 out of 62 subawards issued during the audit period, including five individually significant subawards, and found all 17 subawards (100 percent) did not include the correct period of performance of the federal SLFRF award. In each instance, the Department communicated to the subrecipient that the period of performance of the subaward should include low-income customer arrearages that were accrued between March 1, 2020, and December 31, 2021. However, the period of performance for the federal award began on March 3, 2021. In addition, the Legislature required participating utilities to submit reports to the Department by March 1, 2023, documenting how funds were used to support households. We determined the Department did not collect and review these reports from any of its subrecipients, and did not perform any additional fiscal or programmatic monitoring. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was not reported as a finding in the prior audit. Cause of Condition Division management for the Department did not request reports on households served with program funding from its subrecipients, as the Legislature required. Instead, the Department instructed subrecipients to summarize the number of households that qualified for assistance, and the Department did not request supporting documentation to demonstrate that individual households were eligible to receive assistance and the amounts reimbursed to the subrecipient for each household’s utility arrearage were accurate and adequately supported. Additionally, the Legislature authorized the Department to expend these funds for activities that partly occurred outside of the period of performance for the federal award. Effect of Condition and Questioned Costs We determined the Department did not request and review adequate supporting documentation before paying subrecipients, and it did not perform adequate fiscal monitoring to ensure that funds paid to subrecipients were disbursed only for eligible households and for allowable activities. As a result, we identified $75,251,225 in known federal questioned costs and $101,433,722 in likely federal questioned costs. Without establishing adequate internal controls and reviewing required supporting documentation from subrecipients, the Department cannot reasonably ensure it is using federal funds for allowable purposes and that spending occurs within the allowed period of performance. Further, by not properly labeling the subawards, the subrecipients may not be aware that federal regulations pertaining to subrecipients apply to their subawards. We question costs when we find an agency has not complied with grant regulations or when it does not have adequate documentation to support its expenditures. Recommendations We recommend the Department: • Establish internal controls to ensure payments to subrecipients are adequately supported, allowable and only reimburse costs incurred during the period of performance • Ensure each subaward contains all federally required elements, in accordance with Uniform Guidance, including clearly identifying it as a subaward • Ensure it collects the household reports from all subrecipients, as required by the Legislative mandate • Consult with the grantor to discuss whether the questioned costs identified in the audit should be repaid Department’s Response The COVID-19 pandemic caused a global economic slowdown and an economic downturn in Washington State, which resulted in layoffs and reduced work hours for a significant percentage of our workforce and reductions in business activity. The pandemic resulted in significant economic impacts on our economy including the threat of utility services being disconnected and late payment fees imposed. Maintaining utility services during the crises was an essential tool in sustaining and protecting the health and welfare of our businesses and citizens. On February 29, 2020 Proclamation 20-23.2 Ratepayer Assistance and Preservation of Essential Services was signed to protect the availability and affordability of essential utility services for those economically impacted by the COVID-19 pandemic through a variety of measures, including: suspending disconnection of utilities for nonpayment, waiving late fees, working with affected utility customers to establish payment arrangements, and improving access to energy assistance for affected customers. The result of this proclamation compounded customer account balances and generated over $160 million in arrearages for Washington utilities. ENGROSSED SUBSTITUTE SENATE BILL 5693, Section 128 (199), 2022 Supplemental Operating Budget provided the Legislature appropriate $100 million for public and private water, sewer, garbage, electric and natural gas utilities arrearages. The funding was used by utilities to reduce residential customer accrued arrearages. As a result of the bill, the Department received specific information from each utility provider expecting that information was appropriate documentation at that time. The Department acknowledges the information obtained did not include the appropriate supporting documentation as required by the Code of Federal Regulations. The Department funded the arrearages for the period of performance allowed in the Senate Bill from March 1, 2020 through December 31, 2021. The Senate Bill approved and provided the incorrect period of performance which may have resulted in unallowable costs of arrearages paid between March 1, 2020 through March 2, 2021. The Department will work with the legislature and Office of Financial Management (OFM) on next steps. OFM has already been notified of this circumstance. The Department will also work with utility providers to obtain detailed supporting documentation to reconcile all arrearages paid to determine and verify the amounts expended. All variances will be reviewed. The Department will work with OFM to determine next steps for the reporting of any variances or deficiencies identified. All deficiencies reported will be used to strengthen internal controls and compliance for future awards. In 2022, prior to this audit, all Department federal contract templates were updated to identify if the contract recipient type was a contractor or subrecipient. The Department’s use of the term “contractor’ was in reference to the contract, it was not intended to designate the recipient type. The updated templates now remove any confusion of the recipient type. We thank the Washington State Auditor’s Office for the opportunity to provide a response to the audit finding and provide the steps the Department is actively taking to remediate all deficiencies. Auditor’s Remarks We thank the Department for its cooperation and assistance throughout the audit. We will review the status of the Department’s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 CFR Part 200, Uniform Guidance, section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for pass-through entities, establishes the requirements for all pass-through entities. Title 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the general criteria in order for a cost to be allowable under federal awards, including being adequately documented. Title 2 CFR Part 200.1, Uniform Guidance, establishes definitions for improper payments. Part 200.410 establishes requirements for the collection of unallowable costs. Title 31 CFR Part 35, Pandemic Relief Programs, section 5, Use of funds, establishes the period of performance for the Coronavirus State and Local Fiscal Recovery Funds and states, in part: 35.5 Use of funds. (a) In general. A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2) and 603(c)(2) of the Social Security Act, as applicable. A recipient may only use funds for the purposes enumerated in § 35.6 (g) through (h) to cover costs incurred during the period beginning December 29, 2022, and ending December 31, 2024, subject to the restrictions set forth in sections 602(c)(2), 602(c)(5)(C), 603(c)(2), and 603(c)(6)(B) of the Social Security Act, as applicable. (b) Costs incurred. A cost shall be considered to have been incurred for purposes of paragraph (a) of this section if the recipient has incurred an obligation with respect to such cost by December 31, 2024. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. State of Washington Engrossed Substitute Senate Bill 5092, 67th Legislature 2021 Regular Session, Operating Budget, states in part: Section 128. FOR THE DEPARTMENT OF COMMERCE Coronavirus State Fiscal Recovery Fund – Federal The appropriations in this section are subject to the following conditions and limitations; (1) $100,000,000 of the coronavirus state fiscal recovery fund – federal appropriation is provided solely for grants for public and private water, sewer, garbage, electric, and natural gas utilities to address low-income customer arrearages compounded by the COVID-19 pandemic and the related economic downturn that were accrued between March 1, 2020, and December 31, 2021. a. By May 27, 2022, each utility that wishes to participate, must opt-in to the grant program by providing the department the following information: i. Current arrearage balances for residential customers as of March 31, 2022; and ii. Available information on arrearage balances of low-income customers, including customers who received assistance from the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs between April 1, 2020, and March 31, 2022, as of March 31, 2022. If a utility does not have access to information regarding customer participation in these programs, the department must distribute funding to the community action program serving the same service area as the utility instead of the utility. b. In determining the amount of funding each utility may receive, the department must consider: i. Each participating utility’s portion of the aggregate amount of arrearages among all participating utilities; ii. Utility service areas that are situated in locations experiencing disproportionate environmental health disparities; iii. American community survey poverty data; and iv. Whether the utility has leveraged other fund sources to reduce customer arrearages. c. The department may retain up to one percent of the funding provided in this subsection to administer the program. d. Each utility shall disburse funds directly to customer accounts by December 31, 2022. Funding shall only be distributed to customers that have participated in the low-income home energy assistance program, low-income water assistance program, or ratepayer-funded assistance programs. e. Utilities may, but are not required to, work with other utilities or use community action agencies to administer these funds following the eligibility criteria for the low-income home energy assistance program and the low-income household water assistance program. f. By March 1, 2023, each utility who opted into the grant program must report to the department, utilities and transportation commission, and state auditor on how the funds were utilized and how many customers were supported. g. Utilities may account for and recover in rates administrative costs associated with the disbursement of funds provided in this subsection.