FINDING REFERENCE NUMBER 2025-003 FEDERAL PROGRAMS FEDERAL PROGRAMS IN THE CONSOLIDATED FUNDS: (ALN – 84.010A) TITLE I GRANTS TO LOCAL EDUCATIONAL AGENCIES (TITLE I, PART A OF THE ESSEA) (ALN – 84.287) TWENTY-FIRST CENTURY COMMUNITY LEARNING CENTERS (ALN – 84.367A) SUPPORTING EFFECTIVE INSTRUCTION STATE GRANTS (FORMERLY IMPROVING TEACHER QUALITY STATE GRANTS) U.S. DEPARTMENT OF EDUCATION AWARD NUMBERS S010S220052 (Fiscal Year: 07/01/2022 – 09/30/2023); S010S230052 (Fiscal Year: 07/01/2023 – 09/30/2024); S010S240052 (Fiscal Year: 07/01/2024 – 09/30/2025) S287C230039A (Fiscal Year: 0701/2023 – 09/30/2024); S287C230039A (Fiscal Year: 0701/2023 – 09/30/2024) S367A230052 (Fiscal Year: 0701/2023 – 09/30/2024); S367A240052B (Fiscal Year: 0701/2024 – 09/30/2025) COMPLIANCE REQUIREMENT ALLOWABLE COSTS/COSTS PRINCIPLES TYPE OF FINDING INTERNAL CONTROL AND COMPLIANCE – MATERIAL WEAKNESS AND MATERIAL NONCOMPLIANCE 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 (included in the Consolidated Fund), we selected seven (7) 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 25AP0268 7/29/2024 $ 2,500,000.00 830311-2024-39 7/1/2024 Jun-24 5,421.00 $ 2,500,000.00 $ 672,893.25 $ 337.04 1277646 9/9/2024 2,500,000.00 830311-2024-40 8/1/2024 Jul-24 5,777.00 2,500,000.00 89,160.12 417.32 1281131 9/23/2024 2,500,000.00 830311-2024-41 9/1/2024 Aug-24 6,414.00 2,500,000.00 55,557.56 381.11 1287473 10/11/2024 2,500,000.00 830311-2024-42 10/1/2024 Sep-24 6,082.00 2,500,000.00 142,510.00 387.62 1300722 12/5/2024 2,500,000.00 830311-2024-43 11/1/2024 Oct-24 6,311.00 2,500,000.00 56,081.93 387.25 1301526 1/7/2025 2,500,000.00 830311-2024-44 12/2/2024 Nov-24 5,060.00 2,500,000.00 70,654.00 480.11 1309568 2/14/2025 2,500,000.00 830311-2025-45 1/1/2025 Dec-24 5,302.00 2,500,000.00 60,040.27 460.20 1316767 3/5/2025 2,500,000.00 830311-2025-46 2/1/2025 Jan-25 5,538.00 2,500,000.00 37,906.95 444.58 1324572 3/25/2025 2,500,000.00 830311-2025-47 3/1/2025 Feb-25 4,961.00 2,500,000.00 80,429.52 487.72 1333390 / 1333392 4/25/2025 & 5/6/2025 2,500,000.00 830311-2025-48 4/1/2025 Mar-25 5,260.00 2,500,000.00 58,231.99 464.21 1345009 5/26/2025 2,375,000.00 830311-2025-50 5/1/2024 Apr-25 5,223.00 2,375,000.00 614,961.22 ● 336.98 1356525 6/26/2025 2,375,000.00 830311-2025-51 6/1/2024 May-25 5,187.00 2,375,000.00 229,866.71 413.56 $ 29,750,000.00 $ 29,750,000.00 $ 2,168,293.52 ●This amount include $570,000 of Performance Bond Insurance. 2. Allocability – the payment made was distributed among several Federal programs (Consolidated Funds) and state funds as follows: State Fund CONSOLIDATED FUNDS (SEA/LEA) TOTAL ALLOCATED AMOUNT $ - $ 2,500,000.00 $ 2,500,000.00 - 2,500,000.00 2,500,000.00 - 2,500,000.00 2,500,000.00 - 2,500,000.00 2,500,000.00 2,500,000.00 - 2,500,000.00 2,500,000.00 - 2,500,000.00 2,500,000.00 - 2,500,000.00 2,500,000.00 - 2,500,000.00 2,500,000.00 - 2,500,000.00 195,723.15 2,304,276.85 2,500,000.00 2,375,000.00 - 2,375,000.00 - 2,375,000.00 2,375,000.00 $ 15,070,723.15 $ 14,679,276.85 $ 29,750,000.00 50.66% 49.34% Based on the payment documentation of the evaluated invoices, the allocations were made based on available budget of administrative allocation of Federal awards that “consolidate administration funds of those programs”, the invoices didn't include any basis for the allocation of costs between Federal and non-Federal funds, and no allocation was made to programs that do not consolidated administration funds but benefited from the TPFA process. QUESTIONED COSTS Based on the Criteria 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 $14,679,276.85 as questioned costs for not supported documentation. See also Perspective Information for more support. PERSPECTIVE INFORMATION This is a systemic deficiency. 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. 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 $29,750,000. Of this amount 50.66% were covered with state funds, and 49.34% with consolidated activities administrative funds of Federal Awards of some programs. Some payments were charged completely to state funds or consolidated funds, while others were prorated between the two funding sources without documentation of services provided. 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 in 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 2024-004). RECOMMENDATIONS We recommend 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.