FINDING REFERENCE NUMBER 2024-004 FEDERAL PROGRAMS (ALN – 84.027) SPECIAL EDUCATION – GRANTS TO STATES (IDEA, PART B) (ALN – 84.196A) EDUCATION FOR HOMELESS CHILDREN AND YOUTH (ALN – 84.425D) COVID-19 EDUCATION STABILIZATION FUND: ELEMENTARY AND SECONDARY SCHOOL EMERGENCY RELIEF FUND (ALN – 84.425R) COVID-19 EDUCATION STABILIZATION FUND: CORONAVIRUS RESPONSE AND RELIEF SUPPLEMENTAL APPROPRIATIONS ACT, 2021 – EMERGENCY ASSISTANCE TO NON-PUBLIC SCHOOLS (CRRSA EANS) (ALN – 84.425U) COVID-19 EDUCATION STABILIZATION FUND: AMERICAN RESCUE PLAN – ELEMENTARY AND SECONDARY SCHOOL EMERGENCY RELIEF (ARP ESSER) (ALN – 84.425V) COVID-19 EDUCATION STABILIZATION FUND: AMERICAN RESCUE PLAN – EMERGENCY ASSISTANCE FOR NON-PUBLIC SCHOOLS (ARP EANS) (ALN – 84.425W) COVID-19 EDUCATION STABILIZATION FUND: AMERICAN RESCUE PLAN – ELEMENTARY AND SECONDARY SCHOOL EMERGENCY RELIEF – HOMELESS CHILDREN AND YOUTH (ARP HCY) (ALN – 84.938A) HURRICANE EDUCATION RECOVERY – INMMEDIATE AID TO RESTART SCHOOL OPERATIONS (RESTART) U.S. DEPARTMENT OF EDUCATION AWARD NUMBERS H027A220003 (0701/2022 – 09/30/2023); S196A220040 (0701/2022 – 09/30/2023); S196A230040 (0701/2023 – 09/30/2024); S425D210029 (01/05/2021 – 03/31/2025); S425R210053 (06/28/2021 – 03/31/2025); S425U210029 (03/24/2021 – 03/28/2026); S425V210053 (09/24/2021 – 03/28/2026); S425W210040 (04/23/2021 – 03/28/2026); S938A180002 (04/26/2018 – 09/30/2025); S938A180009 (09/29/2022 – 04/30/2026); CONSOLIDATED FUNDS COMPLIANCE REQUIREMENT ALLOWABLE COSTS/COSTS PRINCIPLES TYPE OF FINDING MATERIAL NONCOMPLIANCE AND MATERIAL WEAKNESS CRITERIA Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards Subpart E establish the requirements for Cost Principles – Allowable Costs under Federal awards. This Section at § 200.403 discloses factors affecting allowability of costs – states that costs must meet the following general criteria in order to be allowable under Federal awards: (a) Be necessary and reasonable for the performance of the Federal award and be allocable thereto under these principles; and (g) Be adequately documented. Section § 200.404 Reasonable costs add: A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost including (c) Market prices for comparable goods or services for the geographic area. Also, § 200.405 Allocable Costs include that: A cost is allocable to a particular Federal award or other cost objective if the goods or services involved are chargeable or assignable to that Federal award or cost objective in accordance with relative benefits received; including (2) Benefits both the Federal award and other work of the non-Federal entity and can be distributed in proportions that may be approximated using reasonable methods. STATEMENT OF CONDITION During our internal control and compliance tests of disbursements for Federal programs, we selected four (4) payments of professional services of Third-Party Fiduciary Agent Services ("TPFA") as part of our samples of the different Federal major programs. During our tests, we noted the following conditions: 1. Reasonableness of costs: The payment made to the vendor is a "flat fee" monthly payment agreed to in the professional service contract. Although the vendor invoice includes a detail of hours of service and expense summary, this information is solely for "information purposes" and not to be taken into account for the actual invoice payment process. The monthly payment amount only consideration is the agreed upon "flat fee". In the invoices evaluated (see detail below), the vendor includes a total hours incurred for each invoice with a price per hour range from $195 to $695. Also, the invoices include an expense summary for the period. When we compared the actual payment to the hours incurred and related expenditures, we noted an unreasonable charge to the PRDE and its Federal funds based upon the payment being made versus the actual service hours/expenses included on the invoice; when it is compared to price estimates made during the RFP process when the per hour price ranges were from $65 to $352. VOUCHER NUMBER VOUCHER DATE VOUCHER AMOUNT INVOICE NUMBER INVOICE DATE SERVICE PERIOD TOTAL HOURS INVOICED INVOICE AMOUNT TOTAL RELATED EXPENSES AVERAGE HOURLY RATE CALCULATED 24AP7166 8/14/2023 $ 2,333,333.33 830311-2023-27 7/5/2023 June 2023 7,335.00 $ 2,333,333.33 $ 699,296.00 $ 222.77 01180123 9/6/2023 2,333,333.33 830311-2023-28 8/1/2023 July 2023 6,756.00 2,333,333.33 127,620.42 326.48 01184263 9/19/2023 2,333,333.33 830311-2023-29 9/1/2023 August 2023 7,633.30 2,333,333.33 104,084.01 292.04 01188131 10/19/2023 2,333,333.33 830311-2023-30 10/1/2023 September 2023 6,884.00 2,333,333.33 103,238.55 323.95 01195137 11/28/2023 2,333,333.33 830311-2023-31 11/1/2023 October 2023 6,929.00 2,333,333.33 137,665.35 316.88 01201906 1/10/2024 2,333,333.33 830311-2023-32 12/1/2023 November 2023 5,913.00 2,333,333.33 91,491.21 379.14 01210539 1/30/2024 476,208.71 830311-2023-33A 1/1/2024 December 2023 1,130.00 476,208.71 - 421.42 01210542 2/6/2024 1,857,124.62 830311-2023-33B 1/1/2024 December 2023 4,408.00 1,857,124.62 73,628.57 404.60 01221775 3/12/2024 2,333,333.33 830311-2024-34 2/1/2024 January 2024 6,018.00 2,333,333.33 86,982.26 373.27 01226705 4/9/2024 2,333,333.33 830311-2024-35 3/1/2024 February 2024 5,725.00 2,333,333.33 75,861.61 394.32 01235153 4/16/2024 2,333,333.33 830311-2024-36 4/1/2024 March 2024 6,200.00 2,333,333.33 109,583.33 358.67 01251041 5/23/2024 2,500,000.00 830311-2024-37 5/8/2024 April 2024 6,420.00 2,500,000.00 302,908.85 - 01261194 6/24/2024 53,700.00 830311-2024-38A 6/1/2024 May 2024 126.74 53,700.00 - 423.70 01261196 6/24/2024 1,678,208.00 830311-2024-38B 6/1/2024 May 2024 4,245.79 1,678,208.00 180,197.40 352.82 01261198 6/24/2024 768,092.00 830311-2024-38C 6/1/2024 May 2024 1,964.47 768,092.00 - 390.99 $ 28,333,333.30 $ 28,333,333.30 $ 2,092,557.56 2. Allocability – the payment made was distributed among several Federal programs and state funds as follows: CONSOLIDATED FUNDS (SEA/LEA) ALN 84.027 NON-MAJOR ALN 84.196A ALN 84.425D ALN 84.425R ALN 84.425U ALN 84.425V ALN 84.425W ALN 84.938A TOTAL ALLOCATED AMOUNT $ - $ 2,333,333.33 $ - $ - $ - $ - $ - $ - $ - $ - $ 2,333,333.33 - 2,333,333.33 - - - - - - - - 2,333,333.33 - 2,233,379.03 - 24,483.39 - - - - 75,470.91 - 2,333,333.33 2,333,333.33 - - - - - - - - - 2,333,333.33 2,333,333.33 - - - - - - - - - 2,333,333.33 - - 35,000.00 19,542.04 300,000.00 100,000.00 1,523,791.29 55,000.00 - 300,000.00 2,333,333.33 - - - - - - 476,208.71 - - - 476,208.71 1,857,124.62 - - - - - - - - - 1,857,124.62 2,333,333.33 - - - - - - - - - 2,333,333.33 2,333,333.33 - - - - - - - - - 2,333,333.33 2,333,333.33 - - - - - - - - - 2,333,333.33 2,500,000.00 - - - - - - - - - 2,500,000.00 53,700.00 - - - - - - - - - 53,700.00 1,678,208.00 - - - - - - - - - 1,678,208.00 - 65,031.74 - 63,309.25 - - 500,000.00 - 139,751.01 - 768,092.00 $ 17,755,699.27 $ 6,965,077.43 $ 35,000.00 $ 107,334.68 $ 300,000.00 $ 100,000.00 $ 2,500,000.00 $ 55,000.00 $ 215,221.92 $ 300,000.00 $ 28,333,333.30 62.67% 24.58% 0.12% 0.38% 1.06% 0.35% 8.82% 0.19% 0.76% 1.06% Based on the payment documentation of the evaluated invoices, the allocations were made based on available budget of administrative allocation of Federal awards, the invoices didn't include any basis for the allocation of costs between Federal and non-Federal funds. For example, on invoice number 830311-2023-32 the amount of $1,978,791 (85% of total invoice amount) was charged to several programs of ALN 84.425, although the services described in the invoice were not related only to these programs; therefore, the cost objective is not chargeable in accordance with the relative benefit received. In addition, several invoices for a total amount for the year of $6,965,077 or 24.58% of total payments were charged to Consolidated Funds which includes several Federal programs that could be incurred in unallowed costs. QUESTIONED COSTS Based on the Criterias established on Part II, § 200.403 and § 200.404 for Cost Principles – Allowable Costs under Federal awards, the based used for the costs distribution without specific services rendered to Federal Programs, as described in the Statement of Condition, we estimate as minimum the amount of $3,612,556.60 (including $107,334.68 on a Non-Major Program ALN 84.196A) as questioned costs for not supported documentation. This amount should increase if an evaluation of costs charged to Federal Programs included in Consolidated Funds. See also Perspective Information for more support. PERSPECTIVE INFORMATION The total contract amount awarded for the services over the two-year period is $79,675,000, with a flat fee of $3,143,750 for the first twelve months, and $3,495,833 for the next twelve months. In the fiscal year 2023 there were 3 amendments to the original contract where it was agreed to pay a total fee of $2,995,833 for the months of April and May 2023 and the total amount of $23,333,333 for 10 additional months or $2,333,333 monthly from June 2023 to March 2024. During fiscal year 2024 there were two (2) amendments to the original contract where it was agreed to pay a total monthly fee of $2,500,000 for the months of April 2024 to March 2025, and a total monthly fee of $2,375,000 for the months of April 2025 to October 2025. From the first year of the contract up to the last amendment the total contract amount is approximately $155,625,000. Based on the inconsistent cost allocation method and the lack of a requirement for the payments being made for actual works performed, we considered this a systematic problem in the contract management and payment. Based on the information provided and evaluated the allocation between Federal and non-Federal funds is not applied consistently, other eleven (11) invoices for a total amount of $17,755,699 were paid from non-Federal funds, during the fiscal year. In accordance with the documentation provided the allocation used is based on the budget amounts available from state and Federal funds; during this fiscal year the total amount paid to the supplier was $28,333,333. Of this amount 62.67% were covered with state funds, 24.58% with consolidated activities funds, and 12.75% with Federal programs funds. STATEMENT OF CAUSE The PRDE did not include on the RFP process and the contract negotiation a clause that requires that the payment of services will be made upon actual hours incurred or that a final reconciliation process will be made during the contract period of performance based on actual service hours and expense incurred. The PRDE agreed upon a "flat fee" contract based on an estimate / budget of hours presented by the vendor on its proposal without considering the requirement of adjusting the payment for actual workhours incurred as part of its contract negotiation. The PRDE staff could not provide the basis used to distribute the cost between the different programs and state funds in accordance with the benefit obtained from the costs incurred. There is no consistent treatment or basis for the allocation of the payment costs between Federal programs and state funds. The contract includes the accounting codes that can be charged for the contract costs; however, no amounts, limitations, or basis for the cost’s distributions were included on the contract or in the payment documentation. POSSIBLE ASSERTED EFFECT Unreasonable costs may be charged to the PRDE's Federal programs that may result in questionable or unallowable costs by the Federal grantors. IDENTIFICATION OF REPEAT FINDING This is a repeat finding (Finding Reference Numbers 2021-006; 2022-008; and 2023-004). RECOMMENDATIONS We recommend to the PRDE to establish an adequate and consistent allocation method of each invoice amount that reflects the relative benefits that the Federal program received from the services provided by the supplier during the invoice period, so the Federal program can be charged for the costs of that period. In addition, we recommend that the PRDE revised the contract terms to include a reconciliation of total hours and rates to adjust the payments made to the vendor before the contract expiration. Also, we recommend that the PRDE should request that adequate supporting evidence from the vendors be presented for any expenses to be reimbursed by the PRDE. VIEWS OF RESPONSIBLE OFFICIALS The PRDE does not agree with the Recommendation to establish an allocation method for TPFA invoices because TPFA services are overhead costs paid from administrative funds and are not tied to any specific federal grant. In addition, the PRDE does not agree that contract terms should be revised before the contract expiration to require a reconciliation of total hours and rates because again, payments to the TPFA are overhead costs not directly tied to any specific program. Finally, the PRDE does not agree with the recommendation that the TPFA submit supporting evidence for the reimbursement of expenses because (i) the TPFA contract is a fixed fee that is inclusive of all professional service fees and expenses and (ii) the TPFA provides an explanation of major expenses incurred within each monthly invoice. Auditor Comment on Management Response for Finding No. 2024-004 As stated in CONDITION 2., “…on invoice 830311-2023-32 the amount of $1,978,791 (85% of total invoice amount) was charged to several programs of ALN 84.425, although the services described in the invoice were not related only to these programs; therefore, the cost objective is not chargeable in accordance with the relative benefit received.” Further, the 2 CFR 200.1, establishes that: “Indirect [facilities & administrative (F&A)] costs mean those costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. To facilitate equitable distribution of indirect expenses to the cost objectives served, it may be necessary to establish a number of pools of indirect (F&A) costs. Indirect (F&A) cost pools must be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived.” This information was not provided for our evaluation. Also, we made reference to the Program Determination Email for ALNs. 84.938 and 84.425 dated September 18, 2024 (Audit Control Number 02-21-39634), received from Ms. Catherine Miers of the Office of Elementary and Secondary Education of the US Department of Education (USDE), in which they required that the PRDE provide documentation for the following corrective actions: “revised the contract terms to include a reconciliation of total hours and rates to adjust the payments made to the vendor before the contract expiration; requested that adequate supporting evidence from the vendors be presented for any expenses to be reimbursed by the PRDE; and develop an adequate review of the vendors invoice to properly identify the actual hours of services that benefited the Federal programs so a correct allocation of the costs incurred can be made within Federal programs and state funds”. IMPLEMENTATION DATE None RESPONSIBLE PERSON Jullymar Octtaviani Vega Sub-Secretary of Administration María de los Angeles Lizardi Valdés Office of Federal Affairs Director