Steilacoom Historical School District No. 1 September 1, 2021 through August 31, 2022 2022-001 The District did not have adequate internal controls for ensuring compliance with federal wage rate requirements. Assistance Listing Number and Title: 84.425, COVID-19 Education Stabilization Fund Federal Grantor Name: U.S Department of Education Federal Award/Contract Number: N/A Pass-through Entity Name: Office of Superintendent of Public Instruction Pass-through Award/Contract Number: 84.425D-120511, 84.425D-141610, 84.425U-138030, 84.425U-137042, 84.425U-712245 Known Questioned Cost Amount: $0 Background The objectives of the Education Stabilization Fund (ESF) program are to prevent, prepare for and respond to the COVID-19 pandemic. In fiscal year 2022, the District spent a total of $2,813,829 of its ESF awards. This included $815,216 in the Elementary and Secondary School Emergency Relief (ESSER II) Fund subprogram (84.425D) and $1,998,613 in the American Rescue Plan Elementary and Secondary School Emergency Relief (ARP ESSER/ESSER III) subprogram (84.425U). Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Under federal wage rate requirements, also known as the Davis-Bacon Act, contractors and subcontractors that work on projects financed with more than $2,000 of federal money must pay laborers and mechanics wage rates that the Page 6 Office of the Washington State Auditor sao.wa.gov U.S. Department of Labor considers being similar to what local workers have been paid for similar projects. For construction contracts subject to these wage rate requirements, the District must include a provision that the contractor and subcontractor comply with those requirements and the Department of Labor?s regulations. This includes a requirement for the contractor and its subcontractor to submit to the District weekly, for each week in which any contract work is performed, certified payroll reports. These reports must include a copy of the payroll and a signed statement of compliance. Description of Condition During the 2021?22 school year, the District paid $413,521 from its ESSER III award for to pay a contractor and its subcontractors to update the heating, ventilation and air conditioning controls in one school. This project was part of the District?s school facility capital improvement efforts to prevent the spread of COVID-19 and enable school operations by facilitating greater air flow and filtration. Our audit found the District did not have adequate internal controls for ensuring compliance with federal prevailing wage rate requirements. Specifically, the District did not include the required federal wage rate clauses in the contract, and it did not collect weekly certified payroll reports from the contractor and its subcontractors to confirm they paid laborers the proper prevailing wages. We consider these deficiencies in internal controls to be a material weakness, which led to material noncompliance. The issue was not reported as a finding in the prior audit. Cause of Condition District staff did not know about the prevailing wage rate contract clause requirement, and that the District needed to obtain all certified payroll reports each week. Instead, staff relied on the contractor and subcontractors to submit weekly certified payroll to the Washington State Department Labor and Industries (L&I) website. Although staff said they checked that weekly certified payrolls were uploaded to the L&I system before the District paid the contractor, they did not document this process. Page 7 Office of the Washington State Auditor sao.wa.gov Effect of Condition Without adequate internal controls that ensure it includes the prevailing wage rate clauses in its contracts and collects all weekly certified payroll reports, the District cannot demonstrate it complied with federal wage rate requirements. The District could also be liable for paying any additional wages if the contractor and subcontractors did not pay prevailing wage rates to laborers working on the contracts. For this project, the District was required to obtain a total of nine weekly certified payroll reports. Since the contractor and subcontractors submitted the required payroll reports for the project to L&I, the District was subsequently able to collect them during our audit. Recommendation We recommend the District develop internal controls that ensure compliance with federal wage rate requirements. This should include inserting prevailing wage rate clauses into contracts, as well as implementing effective monitoring processes to collect and review all weekly certified payroll reports timely from contractors and subcontractors. District?s Response The district concurs that it lacked appropriate internal controls to ensure compliance with the federal wage rate requirements. It is highly unusual for a school district to receive federal funds for construction activities and the required contract provisions are not included in the district?s standard contracting templates. The State Auditor's Office reported that the former CFO indicated that she and staff were unaware of federal wage rate requirements. The district agrees that the former CFO should have been aware of these requirements and was responsible to ensure compliance with the requirements. The district does not expect to receive any federal funds to support construction activities in the near future and therefore finds it highly unlikely that this condition will be repeated. However, the district will take the following steps as corrective action: 1. Update formal procedures to specifically require staff to consider Davis Bacon and other federal requirements when public works are funded with federal funds. Page 8 Office of the Washington State Auditor sao.wa.gov 2. Ensure current staff responsible for public works project compliance understand the federal requirements when federal funds are used for such projects. The district believes that these corrective action steps in addition to a change in personnel responsible for overall federal compliance will provide reasonable assurance of future compliance. Auditor?s Remarks We appreciate the District?s commitment to improving its processes and resolving this issue. We thank the District for its cooperation and assistance during the audit. We will review the status of the District?s corrective action during the 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 29 U.S Code of Federal Regulations (CFR) Part 5, Labor standards provisions applicable to contracts covering federally financed and assisted construction. Subpart A, Davis-Bacon and related acts provisions and procedures. 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 29 CFR, Section 3.3 ? Weekly statement with respect to payment of wages, and Section 3.4 ? Submission of weekly statements and the preservation and inspection of weekly payroll records, establish requirements for contractor or subcontractor submission of weekly certified payroll reports. Title 29 CFR, Section 5.5 ? Contract provisions and related matters establishes the requirements for the contracting officer to insert in full in any contract in excess of $2,000 which is entered into for the actual construction, alteration and/or repair, including painting and decorating, of a public building or public work, or building or work financed in whole or in part with federal funds the clauses listed, which includes but is not limited to the minimum wages to be paid and payrolls and basic records to be maintained (submission of weekly certified payrolls).