2025 001 Activities Allowed or Unallowed and Allowable Costs/Cost Principles U.S. Department of Homeland Security, Federal Emergency Management Agency: Passed through New Jersey Department of Law and Public Safety, Office of Emergency Management: COVID 19 Disaster Grants – Public Assistance (Presidentially Declared Disasters) (ALN 97.036) Contract Number and Years: 4488DR NJ 734668; 4488DR NJ 734675; 4488DR NJ 736923 (01/20/2020 – 05/11/2023) Statistically Valid Sample: The sample was not intended to be, and was not, a statistically valid sample Repeat Finding: No Finding Type: Material Weakness, Material Noncompliance Criteria The terms and conditions for recipients of Disaster Grants Public Assistance (Presidentially Declared Disasters) include the following: • The funds are utilized to perform emergency work, which is defined as “Work that must be done immediately to save lives, protect improved property, protect public health and safety, or avert or lessen the threat of a major disaster.” • Federal Emergency Management Agency (FEMA) defines the eligibility of costs based on the following factors: • Directly tied to the performance of eligible work; • Adequately documented (2 CFR section 200.403 (g)); • Reduced by all applicable credits, such as insurance proceeds and salvage values (Stafford Act section 312, 42 USC section 5155, and 2 CFR section 200.406); • Authorized and not prohibited under federal, state, territorial, tribal, or local government laws or regulations; • Consistent with applicant’s internal policies, regulations, and procedures that apply uniformly to both federal awards and other activities of the applicant; and • Necessary and reasonable to accomplish the work properly and efficiently (2 CFR section 200.403) • For large projects, the subrecipient must make an accounting to the state. In submitting the accounting, the entity is required to certify that reported costs were incurred in performance of eligible work, that the approved work was completed, that the project is in compliance with the provisions of the FEMA State Agreement, all grant conditions were met, and that payments for that project were made in accordance with the applicable payment provisions. 2 CFR Section 200.406 states: Applicable credits refer to those receipts or reduction of expenditure type transactions that offset or reduce expense items allocable to the Federal award as direct or indirect (F&A) costs. Examples of such transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments of overpayments or erroneous charges. To the extent that such credits accruing to or received by the non Federal entity relate to allowable costs, they must be credited to the Federal award either as a cost reduction or cash refund, as appropriate. 2 CFR 200.303 requires non Federal entities receiving Federal awards to establish and maintain internal controls designed to reasonably ensure compliance with Federal laws, regulations, and program compliance requirements. Condition and Context On April 28, 2025, FEMA approved and obligated the System’s three applications (734675, 734668, and 736923) totaling $986,596 in total Federal assistance under the COVID 19 Disaster Grants – Public Assistance (Presidentially Declared Disasters) (Disaster Grants). The System reported $986,596 on the schedule of expenditures of Federal awards (SEFA), as these funds were obligated by FEMA in the System’s fiscal year 2025. Subsequently, after the approval of the obligations, FEMA completed the final financial reconciliation, and in March 2026 issued a letter to the System concluding that a portion of the costs previously funded under the program had also been funded through another source, resulting in unallowable costs under Federal requirements. FEMA concluded that $480,020 of the $562,314 obligated under Obligation 734675 and $192,444 of the $384,755 obligated under Obligation 736923 were unallowable due to duplicate funding. In August 2026, the System decided to not appeal FEMA’s finding of duplication of benefits and accepted the finding. The System is responsible for establishing internal controls to ensure the accuracy of eligible expenses reported to the New Jersey Office of Emergency Management. By deciding not to appeal the finding of duplication of benefits, the System’s originally reported amount of $986,596 was reduced to $314,132 creating $672,464 of questioned costs. Cause The System’s did not establish adequate policies and procedures to identify, track, and reconcile Disaster Grants funded expenditures against insurance recoveries and other sources of disaster related funding to ensure that applicable credits were identified and offset against FEMA claims, to detect potential duplicate funding. Effect The System claimed and received reimbursement for amounts under Federal requirements because the costs had been funded from another source. This resulted in questioned costs of $672,464 and the de obligation of previously awarded Federal assistance. The noncompliance affected multiple obligations within the Disaster Grants program. Questioned Costs $672,464 Recommendation We recommend that the System strengthen its policies and procedures to ensure only allowable Disaster Grants costs are claimed for reimbursement, and prior to submission for reimbursement, such costs are reviewed to ensure there are no offsetting amounts or any duplication of benefits paid from other sources for the same disaster. View of Responsible Official Management agrees with the auditor’s finding and will strengthen its grant management and monitoring policies and procedures to ensure insurance recoveries, alternative funding sources, and other applicable credits are identified, communicated, and reconciled to Disaster Grant expenditures. Management will also enhance oversight procedures to identify and prevent potential duplication of benefits and ensure compliance with applicable Federal requirements.