Finding Text
Assistance Listing Number, Federal Agency, and Program Name 10.766, United States Department of Agriculture, Community Facilities Loans and Grants
Federal Award Identification Number and Year N/A
Pass through Entity N/A
Finding Type Material weakness and material noncompliance with laws and regulations
Repeat Finding No
Criteria: The Loan Agreement between Avita Health System (the "System") and the United States Department of Agriculture ("USDA") requires the System to establish and maintain a separate debt service reserve fund. If the required debt service reserve falls below the minimum required balance, the System is required to make monthly deposits until the minimum required debt service reserve has been accumulated.
Condition: The System failed to make the monthly debt service reserve fund deposits required by the USDA loan agreement.
Questioned Costs: None
Identification of How Questioned Costs Were Computed: N/A
Context: The debt service reserve fund was fully funded upon issuance of the loan. Prior to fiscal year 2022, the System had not made any withdrawals from the debt service reserve fund; therefore, there were no monthly deposit requirements. However, during 2022, approximately $4,200,000 was withdrawn from the debt service reserve fund. In accordance with the loan agreement, when the debt service reserve fund falls below one year of annual debt service on the outstanding USDA loans, the System is required to make monthly deposits until the required debt service reserve balance is met. After the withdrawals were made during 2022, the debt service reserve fund balance was approximately $873,000, whereas the required debt service reserve balance was approximately $1,720,000 as of June 30, 2022. The System made no deposits to replenish the debt service reserve fund during the year ended June 30, 2022.
Cause and Effect: The lack of review of the debt service reserve requirements in the loan agreement resulted in the underfunding of the debt service reserve account during 2022.
Recommendation The System should review the loan agreement and applicable compliance requirements related to their loan program to ensure maintenance of the debt service reserve fund is executed in accordance with the required by the USDA loan agreement and other relevant regulations and requirements.
Views of Responsible Officials and Corrective Action Plan Once it was determined that it was necessary to keep the balance of the fund at an amount equal to one year of debt service prorated by 10 years, we began funding it and met that requirement by the end of fiscal year 2023, and we have maintained the required funding since.