FINDING 2025-004 Subject: COVID-19 - Coronavirus State and Local Fiscal Recovery Funds - Allowable Costs/Cost Principles, Period of Performance 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): 2025 Compliance Requirements: Allowable Costs/Cost Principles, Period of Performance Audit Findings: Material Weakness, Modified Opinion Repeat Finding This is a repeat finding from the immediately prior audit report. The prior audit finding number was 2024-003. Condition and Context As part of sound management of the federal award, the City was responsible for implementing a system of internal controls that would ensure compliance with applicable requirements. The City had not properly designed or implemented such a system, which would include appropriate segregation of duties, that would likely be effective in preventing, or detecting and correcting, noncompliance. INDIANA STATE BOARD OF ACCOUNTS 21 CITY OF VINCENNES SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Prior to the receipt of direct 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 with in carrying out the objectives of their award. Per the Agreement, the City was responsible for the effective administration of the federal award, as well as the application of the sound management practices and administration of federal funds in a manner consistent with program objectives and terms and conditions of the award. Recipients may use the 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 the local needs within four separate eligible use categories. Recipients may use the 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. Make necessary investments in water, sewer, or broadband infrastructure. The City elected to receive the standard revenue loss allowance, allowing it to claim its total SLFRF funds allocation of $3,821,386 as revenue loss to use for government services. The allocated funds may only be used to cover costs incurred from the period beginning on March 3, 2021, and ending on December 31, 2024. Obligations for costs incurred are required to be liquidated no later than December 31, 2026. During the audit period, the City identified that it had not properly obligated its remaining unspent SLFRF funds by the required deadline. Based on guidance from its financial consultant, the City reevaluated activity recorded in its Coronavirus State and Local Fi fund and adjusted the fund to include health insurance payments that had previously been made from another City fund. These payments related to a contractual agreement executed in July 2024 for coverage from August 2024 through July 2025. Health insurance costs incurred and paid between January and July 2025 totaled $591,563. Of the total SLFRF funds balance, the City had $77,706 in funds that were properly obligated by December 31, 2024, but remained unspent. These obligated funds were reclassified to cover $77,706 of the $591,563 in health insurance costs incurred between January and July 2025, leaving $513,857 of those costs without a corresponding obligation as of the December 31, 2024 deadline. In addition, the City incurred and paid health insurance costs totaling $619,875 for the period August through December 2025, which occurred after the contractual coverage period ended. These costs also were not obligated by December 31, 2024. As a result, a total of $1,133,732 in SLFRF funds expenditures were not obligated within the required timeframe and were not paid within the period of performance. Accordingly, these costs do not meet program requirements and are considered unallowable. The City also did not have written procedures for determining the allowability of costs in accordance with subpart E of C CFR 200. The lack of internal controls and noncompliance were systemic issues throughout the audit period. INDIANA STATE BOARD OF ACCOUNTS 22 CITY OF VINCENNES 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). . . ." 2 CFR 200.300(b) states in part: "The non-Federal entity is responsible for complying with all requirements of the Federal award. . . ." 2 CFR 200.302 states: "(a) Each state must expend and account for the Federal award in accordance with state laws and procedures for expending and accounting for the state's own funds. In addition, the state's and the other non-Federal entity's financial management systems, including records documenting compliance with Federal statutes, regulations, and the terms and conditions of the Federal award, must be sufficient to permit the preparation of reports required by general and program-specific terms and conditions; and the tracing of funds to a level of expenditures adequate to establish that such funds have been used according to the Federal statutes, regulations, and the terms and conditions of the Federal award. . . . (b) The financial management system of each non-Federal entity must provide for the following . . . (1) Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received. Federal program and Federal award identification must include, as applicable, the Assistance Listings title and number, Federal award identification number and year, name of the Federal agency, and name of the pass-through entity, if any. (2) Accurate, current, and complete disclosure of the financial results of each Federal award or program in accordance with the reporting requirements set forth in §§ 200.328 and 200.329. . . . (3) Records that identify adequately the source and application of funds for federallyfunded activities. These records must contain information pertaining to Federal awards, authorizations, financial obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation. (4) Effective control over, and accountability for, all funds, property, and other assets. . . . (7) Written procedures for determining the allowability of costs in accordance with subpart E of this part and the terms and conditions of the Federal award." INDIANA STATE BOARD OF ACCOUNTS 23 CITY OF VINCENNES SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) 2 CFR 200.403 states in part: "Except where otherwise authorized by statute, 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. (g) Be adequately documented. . . ." 31 CFR 35.5 states in part: "(a) . . . A recipient may only use funds for the purposes enumerated in § 35.6 (b) through (f) to cover costs incurred during the period beginning March 3, 2021, and ending December 31, 2024 . . . (c) . . . A recipient must return any funds that have not been obligated by December 31, 2024, pursuant to orders placed for property and services or entry into contracts, subawards, and similar transactions that require payment other than funds in the amount reported to Treasury by April 30, 2024, as the estimate of funds that the recipient will expend to comply with a requirement under federal law or regulation or provision of the award terms and conditions to which a recipient becomes subject as a result of receiving or expending funds. A recipient must return funds obligated for a use . . . by December 31, 2024, but not expended by December 31, 2026. . . ." Cause A proper system of internal controls over the SLFRF funds expenditures was not designed by management of the City to ensure the SLFRF funds were being used appropriately. The City did not have policies and procedures in place to ensure that its SLFRF funds were properly obligated by the December 31, 2024 deadline. Effect The lack of an effective internal control system enabled material noncompliance with the Allowable Costs/Cost Principles and Period of Performance compliance requirements to occur and remain undetected. Payments made from the SLFRF funds which were not obligated as of December 31, 2024, as required by the federal grant funding resulted in payments not made in compliance with the period of performance, and, therefore, were not allowable costs. Questioned Costs We identified $1,133,732 in known questioned costs as noted above in the Condition and Context. Recommendation We recommended that management of the City establish a proper system of internal controls and develop policies and procedures to ensure that expenditures of federal awards are allowable costs and occur within the period of performance. Views of Responsible Officials For the views of responsible officials, refer to the Corrective Action Plan that is part of this report.