2022-001 The District overcharged costs to the Education Stabilization Fund program, and it did not have adequate 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: 84.425U-712072,
84.425D-120332,
84.425U-138095,
84.425U-311282
Known Questioned Cost Amount: $61,010
Prior Year Audit Finding: N/A
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 reported it spent $1,656,274 of its ESF awards. This included $684,871 in the Elementary and Secondary School Emergency Relief Fund (ESSER II) subprogram (84.425D), and $971,403 in the American Rescue Plan Elementary and Secondary School Emergency Relief (ARP ESSER III) subprogram (84.425U).
Federal regulations require award recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls.
Allowable Activities/Costs
Federal regulations establish principles and standards for determining allowable direct and indirect costs for federal awards. The Office of Superintendent of Public Instruction (OSPI) establishes the indirect cost rate for each award, and districts cannot exceed this approved rate when claiming reimbursement. If there are changes to the rate during a multi-year award, districts must adjust the amount claimed, if needed, to ensure they do not exceed the approved rate. Districts are also required to ensure only allowable costs are charged to federal programs.
Wage Rate Requirements
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 funds must pay laborers and mechanics wage rates the 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
Allowable Activities/Costs
Although the District’s internal controls were adequate for ensuring it materially complied with the program’s allowable activities and allowable cost requirements, it charged the incorrect indirect cost rate for its ESSER II award (84.425D). Additionally, the District overcharged the program by removing expenditures from the program that had already been reimbursed.
Wage Rate Requirements
During the 2021–22 school year, the District paid $32,964 from its ESSER III award to one contractor to update the heating, ventilation and air conditioning controls in one schools to improve air quality and circulation to prevent the spread of COVID-19. The District also paid $248,286 from its ESSER II award to one contractor for a modular building, as well as $45,507 from its ESSER II award to four additional contractors for electrical, fire, fencing and site work for a modular building.
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 prevailing wage provision in four out of six contracts
• Collect weekly certified payroll reports from contractors or subcontractors to confirm they paid laborers proper prevailing wages
We consider this deficiency in internal controls to be a material weakness, which led to material noncompliance.
Cause of Condition
Allowable Activities/Costs
Management and staff relied on the rate posted in the OSPI iGrants system, and did not know the District needed to manually adjust the indirect cost rate for ESSER awards that covered two fiscal years.
In addition, after requesting reimbursement, the District identified costs it no longer wanted to be paid from program funds. Staff made an accounting adjustment to remove these transactions from the program expenditures within the accounting system, but did not alert the grantor of this change or replace the costs with other eligible expenditures.
Wage Rate Requirements
The District does not normally use federal funds on public works projects. While District officials were aware of state prevailing wage requirements, they were not aware of the federal guidelines to review these prior to payment. Therefore, the District focused on the state requirements.
Effect of Condition and Questioned Costs
Allowable Activities/Costs
We reviewed all indirect costs charged to the program. We found the District charged $41,900 more in indirect costs than allowable because it did not use the correct rate for its ESSER II program. In addition, we identified the District received reimbursement for $19,110 more than its identified expenditures. We are questioning these costs.
Federal regulations require the State Auditor’s Office to report known questioned costs that are greater than $25,000 for each type of compliance requirement. We question costs when we find the District has not complied with grant regulations and/or when it does not have adequate documentation to support expenditures.
Wage Rate Requirements
Without adequate internal controls to 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 did not pay prevailing wage rates to laborers working on the contract.
During the audit period, the District was required to collect certified payroll reports from five contractors and multiple subcontractors. We found the District did not obtain any weekly certified payroll reports from the contractors or subcontractors.
Recommendation
Allowable Activities/Costs
We recommend the District ensure it uses the correct OSPI-issued unrestricted indirect cost rate for the fiscal period when charging costs to federal awards. We further recommend the District ensure only allowable costs are charged to federal awards.
Wage Rate Requirements
We recommend the District develop internal controls to ensure compliance with federal prevailing 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
It is very unusual for the district to ever complete projects with unrestricted Federal funds and in this case it was in the midst of a national crisis. Initially some expenditures were charged to the ESF program but late in the fiscal year a different grant materialized so the expenditures were moved, via journal entries, to the new grant. The district incurred other qualifying expenditures that could have been charged, recorded via additional journal entries, to the Education Stabilization Fund (ESF) program. In the event that there are future projects that are Federally funded in excess of $2,000, Coupeville School District (CSD) will have adequate controls for ensuring compliance with Davis-Bacon Act (Federal prevailing wage rate) requirements. Additionally, when Federal unrestricted ESF funds are received, CSD will be sure to better substantiate expenditures with journal entries so that the program does not appear to be overcharged on the financials.
Auditor’s Remarks
We appreciate the District’s commitment to resolve this finding and thank the District for its cooperation and assistance during the audit. We will review the corrective action taken during our next regular 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 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the cost principles for how direct and indirect costs should be charged to federal programs.
Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements.
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, establishes 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).