2023-001 The City did not have adequate internal controls for ensuring compliance with federal requirements for procurement and subrecipient monitoring and it did not comply with federal procurement requirements. 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: N/A Pass-through Entity Name: Washington Department of Commerce Pass-through Award/Contract Number: 22-96720-210 Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background The purpose of the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program is to respond to the COVID-19 pandemic’s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer or broadband infrastructure. During 2023, the City spent $3,622,519 in program funds to cover additional costs it had incurred during the pandemic, including expenditures supporting public health, household utility relief, and direct assistance payments to local businesses and nonprofit organizations financially affected by COVID-19. The program funds also included $886,240 passed through to two subrecipients to fulfill components of the program’s objectives. The portion of program funds the City passed through to the subrecipients provided emergency assistance to households and college students financially affected by COVID-19. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Procurement Federal regulations require recipients to follow their own documented procurement procedures, which must conform to the Uniform Guidance procurement standards found in 2 CFR § 200.318-327. These procedures must reflect the most restrictive of applicable federal, state or local laws. When using federal funds to procure goods and services, governments must apply the more restrictive requirements of federal, state or local laws by either obtaining quotes or following a competitive procurement process, depending on the estimated cost of the procurement activity. Competitive bidding may be waived in certain circumstances, including via a sole source exemption when the purchase is only available from a single vendor. Governments must document the process and ensure they comply with applicable laws for waiving competitive bidding. Additionally, state and federal requirements allow it to bypass normal procurement laws through a process commonly referred to as “piggybacking.” This process allows entities to purchase goods and services using contracts awarded by another government or group of governments via an interlocal agreement or cooperative. When piggybacking, the entity must enter into an agreement before it purchases services or goods from another entity’s contract. If the City uses such an agreement, federal regulations require it to confirm the awarding entity followed all procurement laws and regulations applicable to the entity when selecting the contractor. Subrecipient Monitoring Whenever the City passes on federal funding to subrecipients, federal regulations require it to monitor subrecipients to ensure they comply with the terms and conditions of the federal award. For these subawards, monitoring would include verifying the subrecipients only provided assistance to participants who met the program eligibility requirements. Subrecipient requirements also require the City to verify whether prior year awardees received an audit if they expended more than $750,000 in federal awards, and to follow up on any findings issued. Description of Condition Procurement The City’s internal controls were ineffective for ensuring it complied with federal procurement requirements. Although the City has written procurement policies, they do not address requirements for piggybacking and purchasing through a cooperative. Additionally, City’s policy establishes the micro purchase threshold as $20,000, which is less restrictive than the federal threshold of $10,000. Further, the City piggybacked onto another agency’s contract to purchase vehicles and did not retain supporting documentation showing it verified the awarding agency followed applicable procurement requirements before purchasing. It also determined the purchase of a software system to be sole source but did not have documentation showing its rationale and justification for this non-competitive procurement. We consider this internal control deficiency to be a material weakness that led to material noncompliance. Subrecipient Monitoring Our audit found the City did not have internal controls in place to adequately monitor its subrecipients, as federal regulations require. The City awarded program funds to two subrecipients during the audit period and was required to monitor four subrecipients with awards from previous fiscal years in the current audit period. The City did not obtain any documentation from one subrecipient and did not obtain documentation for the final quarter of its agreement with another subrecipient to ensure program participants were eligible for assistance. Further, the City did not determine whether four subrecipients expended more than $750,000 in federal awards and received an audit when required. We consider this deficiency in internal controls to be a significant deficiency. Cause of Condition Procurement Procurement activity is decentralized and performed at the department level. The City experienced turnover in positions responsible for updating procurement policies and procuring transactions. City employees involved in these purchases were not provided adequate training to update policies and ensure they understood procurement requirements. As such, City employees were not aware of all federal requirements involved when piggybacking onto another agency’s contract or using exemptions to competitive procurement for sole source purchases. Subrecipient Monitoring The City received a recommendation in the prior audit related to this issue and began changing its procedures. However, due to timing and staff turnover, it was unable to perform and document all portions of subrecipient monitoring requirements for the period under audit. Effect of Condition Procurement Without updated written policies and procedures, the City is at an increased risk of not complying with the most restrictive of federal, state or local procurement methods when using federal funds to procure goods and services. The City did not provide supporting documentation showing the procurement methods used followed all applicable requirements for the purchase of vehicles and a software system totaling $719,217. Without effective internal controls, the City cannot demonstrate it complied with federal procurement requirements, allowed for full and open competition and received the best price. Subrecipient Monitoring The City did not monitor $290,647 expenditures for two subrecipients to ensure they complied with the terms and conditions of the subaward and appropriately used federal program funds. Therefore, the City was unable to confirm only eligible participants received assistance. Further, the City did not adequately monitor four of its subrecipients to verify they received single audits when required. Although the City sent letters to three of these subrecipients to inquire about single audits, it did not follow up with them and it also did not have evidence that it monitored for audits for the other subrecipient. Without verifying the subrecipients received single audits when required, the City would be unaware if any findings were issued relating to program requirements that would require follow-up action. Recommendation We recommend the City strengthen its internal controls to ensure compliance with federal requirements. Specifically, we recommend the City: • Provide training to employees responsible for updating policies and procurement transactions paid all or in part with federal funds • Update its written procurement policy to conform to Uniform Guidance requirements (2 CFR § 200.318-327) for all procurement activities • Ensure all goods and services charged to federal programs are procured in accordance with federal regulations and its own policy • Verify all subrecipients receive single audits when required and retain sufficient documentation of this verification • Perform and document sufficient monitoring procedures in accordance with subrecipients’ risk to verify they are complying with the terms of the award including providing funding to eligible participants, when applicable City’s Response The City acknowledges the audit findings and recognizes the importance of strengthening internal monitoring practices to ensure full alignment with federal requirements. While there may be additional context to consider regarding the specific circumstances, we appreciate the opportunity to clarify those details and outline the corrective actions that have been taken and are planned. Subrecipient No.1 – Edmonds College One of the subrecipients noted in the finding is a public higher education institution operating under the State Board for Community and Technical Colleges (SBCTC). The subrecipient administered the Student Emergency Assistance Grant (SEAG) in accordance with state guidelines that emphasize low-barrier, equity-focused access to emergency aid. These guidelines intentionally discourage requiring extensive documentation from students and instead rely on: • Written applications and student interviews • Internal verification using the college's ctclink student system • Program-level data tracking through financial aid systems • Quarterly reporting to the City, which was submitted Due to FERPA protections, the college was limited in the level of personal data it could share externally without student consent. While this model limited the City's ability to independently audit eligibility at the individual level, it is consistent with the state's recognized approach to supporting systemically disadvantaged students and aligns with SEAG Program principles. The City accepted this structure as appropriate during the agreement period. Subrecipient No.2 – Washington Kids in Transition For the second subrecipient, the City followed its standard internal audit process, which includes a quarterly review of 10% of submitted invoices to validate eligibility and ensure federal program compliance. After completing the firstquarter audit, the City identified concerns related to the supporting documentation for certain grant disbursements. In response: • The City escalated oversight and required the subrecipient to submit documentation for 100% of invoices from May through July, encompassing both Q2 and Q3. • Concurrently, the City became aware that the subrecipient had not initiated or completed a Single Audit for FY2023. Upon learning that the audit would not be submitted by the federal deadline (September 30), the City immediately ceased all grant funding and closed the program. • Though additional invoices were received in August and September, the City determined that the heightened audit activity from May through July had addressed the prior concerns. Q3 was considered to have been appropriately audited, and no further audit was conducted for the final period. The City has not resumed any partnership with this entity since September 2024. • The subrecipient ultimately declined to obtain the required Single Audit for FY2023 and FY2024. Review of Prior Year Subrecipient Audit Requirements As part of the City's monitoring efforts for subrecipients from previous fiscal years, the Deputy Director of Finance at the time requested Single Audit reports directly from the two college subrecipients and was ultimately able to obtain the reports through the Federal Audit Clearinghouse (FAC). While the City does not have documentation to confirm this process, it was discussed during internal meetings that the reports had been reviewed, and this task was considered complete at the time. Of the four subrecipients referenced in the audit, the third was a nonprofit organization for which the Deputy Director reviewed publicly available financial records. Based on that review, it was determined the organization did not meet the $750,000 federal expenditure threshold and was therefore not subject to a Single Audit. The fourth subrecipient, the entity that did not complete the required audit, was addressed in the corrective actions outlined above. Planned and Ongoing Corrective Actions To strengthen subrecipient oversight moving forward, the City is implementing the following corrective actions: • Updated Subrecipient Agreements: All future contracts will include specific and detailed language regarding audit thresholds, access to documentation, and monitoring expectations, including reference to Uniform Guidance requirements. • Audit Verification Procedures: The City will implement a documented protocol for tracking and verifying Single Audits for any subrecipient receiving $750,000 or more in federal funds. • Monitoring Documentation: The City will maintain written records of all monitoring activities, including eligibility reviews, audit follow-up, and subrecipient communication. • Staff Training and Process Improvements: Staff responsible for subrecipient oversight will receive updated training on monitoring standards, documentation expectations, and federal compliance protocols. These actions will be implemented prior to any future program launches involving subawards of federal funds and will also apply to the monitoring of any current active grants. Although no additional funding of this type was issued in 2024, the City will be subject to audit for this period and will ensure compliance with all applicable requirements, including collecting the FY2024 Single Audit reports as required. Corrective Action Plan – Procurement The City's Purchasing Policy addresses requirements for "piggybacking" and purchasing through a Cooperative in section 13.0 lnterlocal Agreements. However, the City should update the Purchasing Policy section 11.0 Procurement Using Federal Funds to include the same language that specifies the process of Interlocal and Cooperative agreements, or “piggybacking”. • As stated in the auditor's draft notification, state and federal requirements allow it to bypass normal procurement laws through a process commonly referred to as "piggybacking". This process allows entities to purchase goods and services using contracts awarded by another government or group of governments via an interlocal agreement or cooperative. When piggybacking, the entity must enter into an agreement before it purchases services or goods from another entity's contract. If the City uses such an agreement, federal regulations require it to confirm the awarding entity followed all procurement laws and regulations applicable to the entity when selecting the contractor. To ensure compliance, although the City did confirm that the vendor followed their own bid law requirements, the City will do a better job documenting that verification in any future equipment purchases using federal funding. Auditor’s Remarks We thank the City for its commitment to resolving this issue. We will follow up on the status of this finding 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. 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. Title 2 CFR Part 200, Uniform Guidance, section 318, General procurement standards, establishes requirements for written procedures and requirements for maintaining records sufficient to detail the history of procurement. Title 2 CFR Part 200, Uniform Guidance, section 320, Methods of procurement to be followed, establishes requirements for procuring with Federal funds by nonfederal entities. Title 2 CFR Part 200, Uniform Guidance, section 332, Requirements for passthrough entities, establishes the requirements for subrecipient monitoring and management requirements for pass through entities.