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:
COVID-19, 84.425W-0459544
COVID-19, 84.425W-0459014
COVID-19, 84.425U-0140613
COVID-19, 84.425U-0140072
COVID-19, 84.425U-0140021
COVID-19, 84.425D-0120523
COVID-19, 84.425D-0138183
COVID-19, 84.425D-0137204
COVID-19, 84.425D-0120128
COVID-19, 84.425U-0712015
Known Questioned Cost Amount: $0
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 spent $20,271,990 in federal funding under its ESF awards. This included $20,191,081 in the Elementary and Secondary School Emergency Relief (ESSER II) Fund subprogram (84.425D), $49,173 in the American Rescue Plan Elementary and School Emergency Relief (ARP ESSER/ESSER III) subprogram (84.425U), and $31,736 in the American Rescue Plan Elementary and Secondary School Emergency Relief – Homeless Children and Youth (ARP-HCY)
subprogram (84.425W). Federal regulations require award recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding program 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 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 contractors and subcontractors 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 $3,073,462 from its ESSER II and ESSER III awards to one contractor. This contractor upgraded some of the District’s antiquated heating, ventilation and air conditioning systems to improve air quality and circulation to prevent the spread of COVID-19. Our audit found that the District did not have adequate internal controls for ensuring compliance with federal prevailing wage rate requirements. Specifically, the District did not collect and review weekly certified payroll reports from the contractor to confirm it paid laborers proper prevailing wages. We consider this internal control deficiency to be a material weakness that led to material noncompliance.
Cause of Condition
District staff were aware of state prevailing wage requirements. However, since this was the first construction project the District paid for with federal funds, staff were unaware of the federal requirement to obtain weekly certified payroll reports.
Effect of Condition
Without adequate internal controls that ensure it collects all weekly certified payroll reports, the District cannot demonstrate it complied with federal wage rate requirements. The District could be liable for paying any additional wages if the contractor and its subcontractors 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 one contractor. We found that the District did not obtain any of the weekly certified payroll reports.
Recommendation
We recommend the District develop internal controls that ensure compliance with federal prevailing wage rate requirements. This should include implementing an effective monitoring process to collect and review all weekly certified payroll reports in a timely manner from contractors and subcontractors.
District’s Response
The District stewards public resources carefully and takes pride in developing and maintaining strong internal controls. The District has already made adjustments in response to this finding to ensure compliance for Federally funded construction projects. Going forward, the District will also ensure staff are appropriately trained on these requirements. The context of this finding is that the District had established internal controls to check for compliance with state prevailing wage requirements. Until 2021-22, the District very rarely utilized Federal funds for public works contracts, and thus the unique and complex nature of these Federal resources and the requirements around their use were unanticipated. When made aware of this oversight during the audit, the District took steps to review certified payroll documents from the beginning of the project to the current period, and to verify that contractors were in compliance with Federal prevailing wage rules. The District respects and values the work of the State Auditor’s Office in conducting their annual audit. However, given that numerous districts across the state were provided with one-time federal ESSER dollars to mitigate the impacts of a global pandemic, and that Federal funds are rarely used by districts to support public works projects, all districts would have benefited from clearer guidance and caution by supporting state agencies around these additional federal reporting requirements.
Auditor’s Remarks
We appreciate the District’s commitment to resolving the issue. We will review the condition during our 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 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).