Finding 1224888 (2025-004)

2025-004: Material Weakness and Noncompliance: Special Tests and Provisions (Revenue Diversion) U.S. Department of Transportation Airport Improvement Program, Infrastructure Investment and Jobs Act Programs, and COVID-19 Airports Programs Federal Assistance Listing Number (ALN): 20.106 Federal Award Year: 2025 Criteria: The City’s Airport Improvement Program has special tests and provisions requirements applicable to revenue diversion requirements of the grant. The basic requirement for use of airport revenues is that all revenues generated by a public airport must be expended for the capital or operating costs of the airport, the local airport system, or other local facilities that are owned or operated by the owner or operator of the airport and are directly and substantially related to the actual air transportation of passengers or property. This criteria is defined in the OMB Compliance Supplement, as well as the FAA’s policy from the FAA’s Airports Federal Register Notices page. Condition: The FAA has performed an investigation in response to complaints of potential revenue diversion at the Lawrence Regional Airport. Other matters requiring corrective action were also identified in the investigation. The City is in the process of corrective action items for all matters identified in the FAA’s investigative report. The City is also in the process of investigating and determining if an operator at the airport collected revenue that was not remitted to the airport as required per revenue diversion criteria. The City did not sufficiently monitor the entity with which they had a lease and fixed base operator (FBO) agreement, resulting in potential noncompliance with terms and conditions by the lessee/FBO. Cause: The City did not have processes and controls in place to ensure revenue diversion requirements are met, in addition to other regulatory matters identified by the FAA. The City also did not have sufficient processes and controls in place for monitoring the execution and performance of agreements with lessees and FBO. Effect or potential effect: The FAA has alleged the City is not in compliance with certain FAA Grant Assurance topics. Noncompliance can potentially result in funding being withheld or future grants not being awarded to the City. Questioned costs: None. The City has not completed its internal review to determine potential dollar amount of revenue diversion. Context: Testing was performed over revenue diversion based on operating revenues collected and expended in the financial statements with no errors identified. However, the alleged noncompliance relates to amounts not reflected in the airport financial statements, therefore these revenue amounts (pending the City’s internal review) would not have been subject to testing. The potential error amount is unknown. Identification as a repeat finding, if applicable: Not a repeat finding. Recommendation: We recommend the City implement procedures to ensure there are processes and controls in place to maintain compliance with revenue diversion requirements, as well as all FAA regulations and grant assurances. We also recommend the City implement procedures to ensure agreements with lessees and FBO are effectively monitored for compliance. Views of responsible officials: Management agrees with the finding.