FINDING 2024-003 Subject: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds - Activities Allowed or Unallowed and Allowable Costs/Cost Principles Federal Agency: Department of the Treasury Federal Program: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds Assistance Listings Number: 21.027 Federal Award Number and Year (or Other Identifying Number): FY2023 Compliance Requirements: Activities Allowed or Unallowed, Allowable Costs/Cost Principles Audit Findings: Material Weakness, Modified Opinion Condition and Context Prior to receipt of the COVID-19 - Coronavirus State and Local Fiscal Recovery Funds (SLFRF), all eligible entities were required to execute a Financial Assistance Agreement (Agreement), which included the Award Terms and Conditions that recipients must comply within carrying out the objectives of their award. Per the Agreement, the County was responsible for the effective administration of the federal award, as well as the application of sound management practices and administration of the federal funds in a manner consistent with the program objectives and the terms and conditions of the award. Recipients may use SLFRF funds for any eligible expenses subject to the restrictions set forth in sections 602 and 603 of the Social Security Act, as added by section 9901 of the American Rescue Plan Act of 2021. The SLFRF program provides substantial flexibility for each recipient to meet local needs within four separate eligible use categories. Recipients may use SLFRF funds to: • Respond to the COVID-19 public health emergency and its negative economic impacts; • Respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers of eligible employers that have eligible workers who are performing essential work; • Provide government services, to the extent COVID-19 caused a reduction in revenues collected in the most recent full fiscal year of the recipient; and • Make necessary investments in water, sewer, or broadband infrastructure. Throughout its fleet procurement program, the City has relied on lease-to-own agreements to acquire police vehicles, structuring payments so that title transfers upon final lease settlement. During the recent audit period, staff applied $72,435 of SLFRF funds toward the early payoff of one such vehicle lease, aiming both to eliminate future interest costs and to ensure full obligation of grant resources by year end. This transaction was undertaken under a misapprehension of the SLFRF eligibility criteria. The SLFRF Final Rule expressly prohibits the use of grant funds for debt service, which the buyout of the police vehicle lease falls squarely within the definition of debt service, and it constitutes an unallowable expenditure under federal requirements. The City had a system of internal controls over the compliance requirement; however, it was not properly implemented to prevent noncompliance. INDIANA STATE BOARD OF ACCOUNTS 18 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Criteria 2 CFR 200.303 states in part: "The non-Federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in 'Standards for Internal Control in the Federal Government' issued by the Comptroller General of the United States or the 'Internal Control Integrated Framework', issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). . . ." 31 CFR 35.9 states in part: "A recipient must comply with all other applicable Federal statutes, regulations, and executive orders, and a recipient shall provide for compliance with the American Rescue Plan Act, . . ." Federal Register, Vol. 87, No.18, page 4340, January 27, 2022, states in part: ". . . For all recipients, funds may not be used for debt service or replenishing financial reserves. . . ." Federal Register, Vol. 87, No.18, page 4430, January 27, 2022, states in part: ". . . The final rule maintains the restriction on the use of funds for debt service . . . First, debt service and reserve replenishment costs do not constitute the provision of services to constituents. As noted in the interim final rule, financing expenses - such as issuance of debt or payment of debt service - do not provide services or aid to citizens. . . . With SLFRF resources available, recipients have less need to incur debt for otherwise-eligible SLFRF uses. . . ." Cause The City applied its SLFRF award toward the payoff of an existing lease to ensure that all grant funds would be legally obligated or expended by year end and to eliminate any future interest charges. At the time, staff was not aware that paying off a preexisting lease constitutes debt service, which is expressly unallowable under the SLFRF Final Rule. Effect Due to a misunderstanding of SLFRF requirements, the City inadvertently allocated federal grant funds to an unallowable expenditure. Questioned Costs We identified $72,435 in known questioned costs as noted above in the Condition and Context. Recommendation We recommended that management of the City design and implement a proper system of internal controls, including policies and procedures that would provide segregation of duties, to ensure appropriate reviews, approvals, and oversight are taking place prior to payment of funds from the SLFRF award. We also recommended City officials review and become familiar with the grant requirements. INDIANA STATE BOARD OF ACCOUNTS 19 CITY OF NEW CASTLE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.