INVESTIGATION: RI State Agency Mismanaged $41M in Federal Grants
Thursday, May 15, 2014
The issues identified in the audit, completed at the end of 2013, have already resulted in the return of $3.01 million in federal funds, according to the Governor’s office.
“There was a silo mentality resulting in a lack of communication and sharing of information between the three groups,” the report states. “The lack of authority, procedures, and controls allowed funds to be transferred between grants without proper documentation or approval. This finding is consistent throughout the audit and is reflected throughout this report.”
The report is already generating a reaction from several candidates for Governor. Clay Pell called the findings “disappointing.” Ken Block said the report illustrates why state agencies need to be “professionalized.” The campaigns of Providence Mayor Angel Taveras and Cranston Mayor Allan Fung likewise took news of the audit as occasion to reaffirm their candidates’ commitment to bringing fiscal discipline to state government. (See below for full responses.)
State officials said they had responded swiftly to the audit.
“This audit gave us an opportunity to identify and correct any potential deficiencies and to ensure stability of our response and recovery efforts throughout the state. Once identified, we addressed them as rapidly as possible so that we remain focused on our very important mission to protect the life and property of our citizens,” said Jamia McDonald, the executive director of RIEMA.
In a separate statement, a spokesman said Major General Kevin McBride, the Adjutant General for the state and the commander of the Rhode Island National Guard, has confidence that now “both agencies are in compliance with state and federal regulations.” (See below for full statement.)
Audit: funds misused for payroll, lobbyist
The state agency also spent funds after grants were set to expire, did not properly track state matching funds, and did not keep a thorough inventory of equipment it had purchased with federal funds.
It didn’t follow state rules either.
The agency spent a total of $39,938 on meals, hotel room, training room, and equipment rentals without going out to bid for the work. And, the report added, the requisitions for the purchases orders for those events were submitted two weeks after the expenses had been incurred. The expenses were for training sessions and conferences, according to the Governor’s office, which said the issue involved “method and process” and “not the validity or appropriateness of the grant expense.”
RIEMA also did not keep tabs on federal funds that it passed on to cities and towns.
Under federal guidelines, the state agency must ensure that any city or town that receives more than $500,000 in emergency management grants submit to an audit and correct any findings. At the time of the RIEMA audit, the staff was apparently unaware that an audit had found issues in Johnston’s management of a public assistance grant for those affected by natural disasters. Audits for four communities were missing. For those communities that had submitted them, RIEMA’s copies were missing several pages.
One recipient, Providence, also inappropriately spent federal grant funds on lobbying expenses, the report claims. The city used nearly $5,000 from a federal grant to hire Capital Strategy Group, LLC to consult on “medical response systems” grant and lobby federal lawmakers, between 2011 and 2012. The money was also used to cover travel expenses, according to the Governor’s office.
When the state issued a “compliance deficiency letter” to Providence officials last September, the city responded with a legal opinion justifying the expenses, the Governor’s office said.
“During the past year, in cooperation with RIEMA and the federal auditors, PEMA provided documentation that demonstrated this practice was legal and allowed under the grant guidance; we satisfied the auditor inquiry. The audit is completed and formally closed,” Gaynor said in a statement provided by city spokesman David Ortiz.
Audit called for 21 reforms at state agency
State authorities at the Bureau of Audits conducted the audit last year at the request of both the Governor’s office and McBride “to ensure that all federal funds were appropriately managed,” according to Chafee spokeswoman Faye Zuckerman.
The audit came on the heels of staffing changes at RIEMA. McDonald, the former deputy chief of staff for Chafee, became acting executive director in April 2013. In the following months, she “conduct[ed] a thorough evaluation of the agency’s operations,” according to a news release from the Governor’s office, announcing her appointment as permanent executive director last July.
The audit was four months later, on November 4. Zuckerman said RIEMA had responded with a “corrective action plan” by the end of the month. At a follow-up meeting this week, state auditors concluded that the agency had implemented 20 out of the 21 recommendations they made, according to Zuckerman.
The outstanding item involves the proper allocation of “indirect costs.” Zuckerman said RIEMA has been working with the state Office of Accounts and Control to resolve the issue. “We anticipate the process improvement to require more time. We do not have a completion date at this time,” Zuckerman said.
In a separate statement, a spokesman for the Rhode Island National Guard noted that the audit followed “a period of significant natural disasters” in the state.
“The Adjutant General is extremely pleased with the direction the new Executive Director has taken with respect to the findings and recommendations. To date, most have been addressed,” said the spokesman, Lt. Col. Peter Parente.
Candidates for Governor react to report
Asked to comment on the audit, several candidates for Governor expressed concern about its findings.
“The apparent lapse in administration and oversight of federal grants by RIEMA is disappointing. I am pleased there is new agency leadership, and hopeful the auditors’ recommendations will be implemented,” said Pell, a Democrat. “Having served as a Coast Guard officer, I have seen how vitally important emergency preparedness and management are to Rhode Island—not only because of the impact of climate change and extreme weather, but for economic development as well.”
On the GOP side, Barrington businessman Ken Block emphasized his professional experience in streamlining government spending. “As Governor, I will professionalize our state government and establish strong management practices in all the agencies that I am responsible for. When government operations are mismanaged, the resulting inefficiency represents an unacceptable cost to taxpayers. My professional career has been spent identifying wasteful spending and making government programs operate more efficiently, and I will bring that experience to the Governor’s office,” Block said.
Bergantino pointed to Taveras’ record as Providence mayor—notably, the closing of a $110 million deficit with cuts in each department, including the mayor’s office—as an example of the “fiscal leadership” he would bring to the state as Governor.
“As Governor, he will bring the same type of fiscal leadership to root out this kind of waste and strengthen our state's economy and has pledged to lead a comprehensive review of our state budget to ensure our financial resources are being used most effectively. He wants to make sure that we can expand on programs that work, eliminate those that don’t, and be responsible with our state budget dollars,” Bergantino said.
The campaign manager for Fung, a Republican candidate, pointed to the RIEMA audit as an example of “systemic problems” in state government. “Bloated government and lack of oversight are systemic problems plaguing Rhode Island. Couple that with high taxes and a poor business climate, it’s no surprise Rhode Islanders are voting with their feet. We can turn this state around, however, starting on day one of a Fung administration,” said Patrick Sweeney.
The campaign for General Treasurer Gina Raimondo, a third Democratic contender for Governor, did not respond to repeated requests for comment.
State officials requested second audit
In the wake of the first audit, state officials requested a second one for the costs of renovating and expanding the Rhode Island National Guard Command Readiness Center in Cranston. That audit, completed in April, overall gave the project a clean bill of financial health.
“A recently conducted audit of the Command Readiness Center construction project by the Bureau of Audits found that the Rhode Island National Guard was in strict compliance with purchasing and contract procedures,” Parente said.
He concluded: “The Adjutant General is confident that both agencies are in compliance with state and federal regulations.”
Correction: A previous version of this report identified Jamia McDonald as Governor Lincoln Chafee's former chief of staff. She was deputy chief of staff.
Related Slideshow: Audit Grant Administration Violations
From payroll expenses to purchasing requirements, a new audit found major violations in how a state agency handled—or mishandled—tens of millions in federal funds. Below is a snapshot of each major violation, based on excerpts from the report of the state Bureau of Audits. The report was completed at the end of last year.
Federal Payroll Rules
RIEMA is not compliant with federal cost principles governing expenditures for employee compensation charged directly to federal grants, specifically, the tracking and recording or employee time and effort charged to a grant. RIEMA does not have an adequate method to document employee assignments and related federal funding, and time sheets lack evidence of supervisory approvals.
Additionally, RIEMA does not apply its federally approved indirect cost rate to employee compensation; employees who work indirectly on programs are charged directly to grants. RIEMA is also unable to substantiate the expenditures for payroll to support its draw down of federal funds. This may result in RIEMA owning money to the federal government. Additionally, charging employees to the wrong grant results in unnecessary use of state general revenue for wages and benefits when the cost could be recovered through federal grants.
Rules on Availability of Funds
RIEMA was not compliant with Federal Emergency Management and Assistance regulations regarding period of availability of funds.
Specifically, RIEMA has charges expenditures to grants, and made journal entries transferring expenditures to other grants, that occurred outside of the perior of performance. The Bureau of Audit's report concluded that:
• Program staff is not involved in the approval process of journal entries transferring expenditures between grants.
• Numerous journal entries to transfer expenditures to other grant programs and years were made without adequate documentation.
• Invoices and documentation were sent to the RIEMA fiscal office months before the grant period of availability ended, but not processed timely, contributing to disbursements outside the period of availability.
To view the "Period of Availability of Funds" regulation, click here.
Internal Controls in Journal Entries
RIFANS journal approval process procedures require supporting documentation for journal entries to be attached to RIFANS electronically or maintained at the agency, but RIEMA journal entries are being processed and approved with little or no documentation to support the transfer of funds from one grant to another, or from one grant year to another grant year. The processing and approval of journal entries at RIEMA lacks the following internal controls:
• Verifying whether journal entry transfers and allowable under grant guidance
• Validating the activity and journal entry date within the period of performance
• Considering the remaining grant balance
• Notifying the grant and program managers administering the grants of the transfer of expenditures
The lack of controls illustrated has resulted in inaccurate grant balances, over/under spending of grants, and expenditures that do not meet the criteria set forth in the grant guidance kits.
Federal Cost Principles for Inventory Records
RIEMA and its sub-grantees are required to maintain inventory for equipment purchased with federal funds in compliance with federal requirements 44CFR 13.32 and State procedures (FACTS).
The Bureau of Audit’s review of the equipment procedures and transactions showed several areas where procedures and controls could be improved, such as:
• Office of Accounts and Control form SFA-12 is not being submitted for all required equipment purchases; therefor, some equipment is not properly recorded into the state system and does not have the required state property tags.
• Inventory for federal grant purposes is incomplete and does not include the source of federal funds used to acquire the asset.
• Not all sub-grantees are reporting equipment inventory information to RIEMA as required by 44 CFR 13.32.
Inaccurate and incomplete equipment controls reduce the ability to safeguard assets, Lack of compliance with federal requirement noted in the second bullet point could result in disallowed costs. Furthermore, the lack of compliance with state inventory requirements affects the state fixed asset inventory records.
Monitor Sub-Recipients Controls
RIEMA does not have adequate controls in place to ensure that its sub-recipients have taken appropriate corrective action to resolve OMB Circular A-133 audit findings. OMB Circular A-133 requires all auditees expending more than $500,000 in federal grants meet the audit requirements stated here.
The areas of noncompliance include:
• RIEMA did not identify the audit finding in the Town of Johnston audit report related to Cash Management of its Disaster Grant-Public Assistance, CFDA #97.036 (2012-5). Consequently, RIEMA has not issued a management decision on this finding nor ensured it was resolved as is required by OMB Circular A-133.
• RIEMA does not have procedures in place to follow up on sub-recipient audit findings and corrective action plans, or for issuing management decisions.
• RIEMA did not ensure that sub-recipients had submitted all information related to an A-133 required audit as several pages relating to audit findings were missing from audit reports. Further, RIEMA did not obtain the missing information from either the entity website or federal single-audit clearinghouse and include it in the audit folder.
RI Purchasing Requirements
The Bureau noted three instances of noncompliance with state purchasing requirements. Three purchase orders, totaling $39,938.27, for hotel room rentals, training room rentals, equipment rental and meals at Rhode Island area hotels were processed as “single source,” rather than put out to bid.
Additionally, the requisitions for the purchase orders were created at least two weeks after the events were held. The purchases were paid for with EMPG 2011 funds.
State of RI Purchasing Regulations Section 9, Exceptions to Competitive Bidding Requirements, details allowed exceptions to competitive budding; hotel room rentals, training room rentals, equipment room rental, and meals are not allowable exceptions under the regulations.
Matching Funds Contribution Requirements
Two of the 19 grant programs the Bureau reviewed required a 50% State fund match: EMPG 2010 and EMPG 2011. As of the date of the Bureau’s audit, RIEMA does not centrally track the hard/soft/in-kind state match to federal grants. RIEMA reports the State funded match amounts in the quarterly Federal Financial Report (FFR/SF-425) as “Recipient share of expenditures.” The Bureau was unable to validate or review supporting documentation of the State funding match provided for EMPG 2010 and EMPG 2011 as it could not be provided by RIEMA.
Three Purchase Orders for training instructors totaling $9,625, funded by federal grant EMPG 2011 did not have an appropriate match of state funds. In accordance with the EMPG grant requirements, RIEMA must provide a match for EMPG expenditures. If it is not provided, the expenditures may be disallowed.
Advancements of Federal Funds
The Bureau noted three instances where RIEMA requested and received an advancement of federal funds (totaling $104,991,34) approximately one month prior to payment. The State Controller annually communicates the federal draw-down policy known as the Cash Management and Improvement Act (CMIA) which states that the draw down of funds should be based upon a reimbursement method, and that the request for federal grant reimbursement should be on a bi-weekly basis. Also, the CMIA policy further states, in the event that estimates or advancements of federal funds has been received by the agency, there should be a reconciliation of federal funds advanced to actual grant expenditures.
The Bureau found no reconciliations of advancements of federal funds to actual expenditures for the 19 grants reviewed.
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