Finding No. 2023-002 -Allowable Activities-Loans repayments
Federal Program
CFDA 66.458 - Capitalization Grants for Clean Water State Revolving Funds
Name of Federal Agency
U.S Environmental Protection Agency
Pass-through Entity
Puerto Rico Department of Natural and Environmental Resources (DNER)
Category
Compliance/Internal ControlCriteria
Under the Clean Water Act, the Clean Water State Revolving Fund is a federal program that provides low-interest loans to eligible entities, such as states, tribes, and municipalities, for the construction of water quality infrastructure projects. The regulations governing the Clean Water State Revolving Fund are outlined in Title 40 of the Code of Federal Regulations (40 CFR), specifically in Part 35. Under § 35.3120 Authorized types of assistance are the following: a) loans, b) refinancing existing debt obligations, c) guarantee or purchase insurance for local debt obligations, d) Guarantee SRF debt obligations, e) Loan guarantees for “sub-State revolving funds, f) Earn interest on fund accounts and g) SRF administrative expenses. Loans may be awarded only if: (i)All principal and interest payments on loans are credited directly to the SRF;(ii) The annual repayment of principal and payment of interest begins not later than one year after project completion;(iii) The loan is fully amortized not later than twenty years after project completion; and (iv) Each loan recipient establishes one or more dedicated sources of revenue for repayment of the loan. In addition, in August 18, 2020, the Puerto Rico Infrastructure Authority (PRIFA) (in its capacity as operating agent for the Revolving Fund), the Puerto Rico Department of Natural and Environmental Resources (DNER) (as administrator of the Revolving Fund) and the Puerto Rico Aqueduct and Sewer Authority (PRASA) entered into a loan agreement (the loan agreement) that authorized PRASA for the application of new loans, as set forth on the loan schedules attached to the loan agreement. As established in the Section 3.3 of the loan agreement, “PRASA shall repay each loan in principal instalments payable to PRIFA for credit to the Fund semi-annually on the dates set forth in the applicable Note; provided, however, that in all events in accordance with the Program requirements, (i) the first (1st) principal instalment with respect to each loan commences not later than the earlier of (A) one (1) year from the construction completion date of the applicable Projects and (B) ten (10) years following the issue date of the applicable Note, and (ii) each loan is required to be paid in full within the earlier of (A) thirty (30) years of the construction completion date of the applicable Projects and (B) forty (40) years of the issue date of the applicable Note”. Also, on August 18, 2020 and as part of the loan agreement, PRASA signed the notes payable related to the loan agreement, which stated the following: “Principal of this Note shall be paid in sixty (60) equal semi-annual installments on January 1 and July 1 of each year, beginning on the earlier of (x) the first July 1 following the date on which the Projects identified on the Loan Schedule for the loan are completed and (y) July 1, 2030”. Furthermore, the notes payable executed with the loan agreement state the following: “Interest on the outstanding principal amount of the loan shall accrue from the date of each disbursement at one percent (1%) per annum and shall be payable on January 1 and July 1 of each year (or if such day is not a business day (as such term is defined in the Trust Agreement), the next preceding business day), commencing on the first January 1 or July 1 after PRASA makes a draw on the loan in accordance with Section 3.2 of the Loan Agreement”. Moreover, 40 CFR 35.3135 (h) State accounting and procedures, establishes the following requirement: “(1) The State must agree to establish fiscal controls and accounting procedures that are sufficient to assure proper accounting for payments received by the SRF, disbursements made by the SRF, and SRF balances at the beginning and end of the accounting period”.
Condition found
Principal and interest has not been collected from the revolving fund on projects that were completed since before the execution of the loan agreement, which are included as part of the financial agreement dated August 18, 2020. Therefore, repayment of principal and payment of interest should have begun on their respective dates, as set forth in the loan agreement and notes payable executed thereto.
In addition, interest’s billings for other projects under agreement have not been submitted and collected on a timely basis. Per the loan agreement, “Interest on the outstanding Principal Amount of the loan shall accrue from the date of each disbursement at one percent (1%) per annum and shall be payable on January 1 and July 1 of each year”. However, the invoices corresponding to the periods of December 31, 2022 and June 30, 2023 were issued and billed on February 2, 2023 and August 7, 2023, respectively.
Cause
Due to administrative errors and delays, the DNER, as administrator of the Revolving Fund, did not monitor or enforce financial covenants established in loan agreements. Also, accounting records keeping is in excel causing delays on billings. In addition, PRASA failed to communicate with the DNER regarding the completion of the projects, causing the non-compliance with the federal regulations and also the violation of the terms of the loan agreement.
Effect
Possible consequences for the non-compliance event may include fines or monetary penalties, legal actions, loss of funding, among others. Also, the non-compliance event can negatively impact the reputation of the recipient, leading to a loss of trust and credibility. As stated in 40 CFR 35.3170(a), “failure to satisfy the terms of the capitalization grant agreement, including
unmet conditions or assurances or invalid certifications, is grounds for a finding of noncompliance. In addition,
if the State does not manage the SRF in a financially sound manner (e.g. allows consistent and substantial
failures of loan repayments), the RA may take corrective action as provided under this section”. Also, the 40
CFR 35.3170(c) establishes the following: “If within 60 days of receipt of the noncompliance notice, a State fails
to take the necessary actions to obtain the results required by the RA, or to provide an acceptable plan to achieve
the results required, the RA shall withhold payments to the SRF until the State has taken acceptable actions. If
the State fails to take the necessary corrective action deemed adequate by the RA within twelve months of
receipt of the original notice, any withheld payments shall be deobligated and reallotted to other States”.
Questioned Cost
None. The beginning balance of interest receivable and net position were restated in the accompanying financial
statements to correct the error for the understatement of interest receivable of loans from projects completed.
Also, no balance or reimbursement is owed to the U.S Environmental Protection Agency or the DNER because
of this finding.
Context
The following table summarizes the loans completed, for which the accumulation of interests and beginning of
period of collection had not been commenced on time. Interest receivable not billed or recorded on books during
the correct accounting year amounted to $232,559 as of July 1, 2022.
ID Proyect Description Loan Amount
Final Acceptance of
Completion
C-72-082-11 Caguas WWTP Degritters- Caguas $ 2,734,303 October 30, 2014
C-72-082-10 Caguas WWTP Generators- Caguas 3,455,410 April 24, 2014
C-72-120-14 Road PR-309 TS Rehabilitation- Hormigueros 3,601,830 February 19, 2016
C-72-104-15 Sewer Sanitary System, Marisol Community- Toa Baja 3,920,610 October 31, 2013
C-72-119-13 Sewer Sanitary System, Las Brumas Community Cayey 269,737 February 28, 2017
$ 13,981,890 Identification of a repeat finding
This is a not repeat finding from the immediate previous audit.
Views of responsible officials and planned corrective actions
The management of the Revolving Fund agrees with this finding. Please refer to the corrective action plan section on pages 49-50.
Recommendation
We recommend that the DNER and PRIFA institute policies and procedures that stipulate the administrative process and responsible officials regarding the determination of the completion of projects under the loan agreements and the beginning for the periods of repayment of principal and interests to the Revolving Fund. It is critically important that timely and accurate collections be produced to ensure that the goals and purposes of the fund have been achieved and accounted for properly. Also, the administrator of the program should establish stronger internal controls for the monitoring, supervision and enforcement of the compliance requirements on the federal regulations and on the loan agreements. It is critically important that PRASA assumes its responsibility for compliance with the federal regulations and the loan agreement and notes executed thereto, ensuring they have met all the necessary requirements and guidelines; this includes, and its not limited to, following regulations related to financial management, reporting and program implementation. PRASA and the administrator of the Revolving Fund should be proactive in understanding and fulfilling their obligations to maintain compliance. It is essential for PRASA and the administrator of the Revolving Fund to prioritize compliance with federal regulations to avoid consequences and maintain their integrity.
In addition, the Revolving Fund’s current computer accounting system is inadequate for the accounting needs of the Revolving Fund. There are numerous off-the-shelf accounting packages that are far more efficient and easier to use. We strongly suggest the purchase or development of a new accounting system, which would benefit the fund in two specific ways: first, it would increase the accounting department’s ability to record daily transactions efficiently and effectively and, second, it would provide management with complete and accurate financial information on a timely basis. This investment should be very worthwhile and beneficial over the years.