Semiannual Report to Congress April 1 - September 30, 1996

As required by sections 5(a)(1) and (2) of the Inspector General Act of 1978, as amended, this section identifies significant problems, abuses, and deficiencies relating to the Agency's programs and operations along with recommendations for the current period. The findings described resulted from audits performed by or for the Office of Audit. Findings are open to further review but are the final position of the Office of Inspector General. This section is divided into five areas: Governmentwide Issues, Program Management, Extramural Resources Management, Financial Management, and Construction Grants.

Governmentwide Issues

In September 1986, the President's Council on Integrity and Efficiency (PCIE) initiated the Computer Systems Integrity Project. The project is a multi-task effort focusing on controls, security, and other integrity issues of the data processing systems life cycle. The objectives of the overall project are to assess the integrity of Federal computer systems and develop recommendations for governmentwide improvements in standards, procedures, documentation, and operations affecting computer systems integrity.

PCIE Task 4, which focuses on application software maintenance, was coordinated by the EPA OIG and included participation by six other Inspectors General offices. This area was selected because (1) controls over application software modifications are vital to maintaining the reliability and integrity of sensitive and mission-critical application systems in all Federal agencies, and (2) Federal managers have historically undervalued the economic importance of a sound, comprehensive software maintenance program.

Application Software Maintenance Requires OMB Attention

Findings in Brief

Federal departments and agencies do not properly identify and account for software maintenance costs. Also, controls and oversight of software maintenance contracts, contractors, and software changes were inadequate.

Background

The primary objectives of PCIE Task 4 were to identify common software maintenance problems across Federal agencies and make government-wide recommendations to oversight agencies. The EPA OIG had overall responsibility for coordinating this task with the Department of Housing and Urban Development, Department of State, National Aeronautics and Space Administration, National Science Foundation, Railroad Retirement Board, and the Social Security Administration's Inspectors General offices.

We Found That

Federal departments and agencies do not properly identify and account for software maintenance costs. For example, agencies do not consistently include the costs of administrative and clerical salaries, materials, computer usage, telecommunications, overhead costs, and Federal employee salaries. In addition, agencies do not and in some cases cannot accurately distinguish software maintenance costs from development and operations. Further, agencies reported cost-benefit analyses are not consistently prepared, updated, or maintained for application systems. For many systems, contractor estimates to determine the level of effort and costs involved with a proposed modification, if performed at all, were solicited after the requested modification had been approved. As a result, agencies are not in a position to make informed budgeting and planning decisions regarding systems operations and maintenance, and software maintenance expenses are being inaccurately reported to OMB.

The types of contracts used by agencies for software maintenance do not adequately protect the government's interests. Agencies are not awarding performance-based contracts on a regular basis for software maintenance work, but instead are using labor hour contracts which place the government at higher risk because of the lack of adequately defined work requirements. Use of these contracts as the sole contracting vehicle minimizes the contractor's incentive to perform well and control costs. In addition, the monitoring of these contracts resulted in unstructured, poorly controlled management of maintenance for critical government applications. Some Contracting Officer Representatives had not received appropriate training, some failed to adequately monitor the technical performance of contractors, and others did not know how to assure the government received what it needed through its software maintenance contracts. Consequently, agencies lack control over software maintenance activities and rely too heavily on contractors.

Federal departments and agencies are not adequately managing the software change control and configuration management processes. Specifically, weaknesses were cited with the change request process, change review and approval, and testing. For example, (1) agencies were not using standardized change control request forms, or used no form at all; (2) there was minimal evidence to support that software changes were formally reviewed, approved, or closed; and (3) test plans were not developed, test results were not analyzed, and proper test methodologies were not followed. As a result, agencies lack assurance that applications will perform as intended, and management controls will adequately safeguard the integrity of the applications.

We Recommended That

The Office of Management and Budget:

Emphasize to Federal agencies the need to accurately identify and account for all software maintenance costs.

Emphasize the need for using performance-based contracting methods; developing formal, measurable performance standards; and monitoring software maintenance contractors.

Encourage Federal agencies to consistently follow Federal and agency software maintenance policies, standards, and procedures for change control management.

What Action Was Taken

The final report was issued to OMB on September 26, 1996. OMB plans to circulate the report to Agency heads and to the Chief Information Officers Council. The actions prescribed for OMB, together with the agency-specific actions recommended by the respective individual Inspectors General reports, should substantially strengthen application software maintenance governmentwide.

Program Management

The Inspector General Act requires the OIG to initiate reviews and other activities to promote economy and efficiency and to detect and prevent fraud, waste, and mismanagement in EPA programs and operations. Internal and performance audits and reviews are conducted to accomplish these objectives largely by evaluating the economy, efficiency, and effectiveness of operations. During this semiannual reporting period, the OIG conducted a number of major reviews of EPA programs. The following are the most significant internal audit, performance audit, and special review findings and recommendations pertaining to Agency management resulting from our efforts during this semiannual reporting period.

Inadequate Oversight of Drinking Water Programs Puts Children at Risk

Findings in Brief

Region 3 did not require states to provide information about their lead and copper monitoring of small public water systems (PWS) which delayed the enforcement actions intended to require removal of excessive lead from drinking water consumed by children and infants. Also, reviews of states' drinking water programs were ineffective.

Background

The Safe Drinking Water Act of 1974 (SDWA) required EPA to establish drinking water standards that the nation's water systems must meet. States are required to report all violations of monitoring requirements and drinking water standards to EPA. SDWA's Lead and Copper Rule (LCR) requires states to report each PWS that exceeded the prescribed lead and copper standard.

We Found That

EPA did not require the states to provide information about small schools and day care centers with excessive lead in their drinking water. In total, 40 percent of the small schools and day care centers we reviewed did not comply with various aspects of the LCR, yet the states did not inform EPA until almost two years later. Without this information, EPA was unaware of the violations and that smaller PWSs did not complete actions to remove excessive lead and copper from their drinking water. As a result, the Agency was not able to take enforcement action or to apply pressure to require states to enforce the SDWA.

EPA also could not evaluate whether PWSs were reducing lead in their drinking water. One school provided more than 500 children, teachers, and others with drinking water that had more than four times the lead allowed by the LCR. The state informed EPA about the excessive lead in the drinking water, but EPA did not know if the school completed the corrosion control treatment study to eliminate the excessive lead. In addition, states did not inform EPA that several PWSs had excessive copper in drinking water.

Region 3's reviews of the states' drinking water programs need to be improved. We identified several adverse conditions with the states' drinking water program that EPA should have addressed during its reviews. For example, Pennsylvania issued guidance and used testing procedures for monitoring lead and copper that differed from the procedures required by the LCR. Also, both Maryland and Pennsylvania did not provide EPA information concerning violations, enforcement actions, and the dates that PWSs completed corrective measures, and quarterly grant reports were not sufficiently detailed or timely.

We Recommended That

The Regional Administrator, Region 3:

Require states to submit the necessary information for all small PWSs, as required by the SDWA.

Require Region 3 employees to take enforcement action when states provide information concerning violations.

Monitor the corrective actions taken by the states to eliminate the discrepancies.

What Action Was Taken

The final report (6100310) was issued to the Regional Administrator, Region 3, on September 30, 1996. In response to the draft report, the Agency generally agreed with most of our findings and recommendations. Region 3 did not agree that states were required to provide information concerning small PWSs. A response to the final report is due by December 29, 1996.

State LUST Programs Need To Focus More On Most Hazardous Sites

Findings in Brief

Although states have made progress cleaning up Leaking Underground Storage Tank (LUST) sites, oversight and enforcement were inadequate on some of the most hazardous sites. In addition, cost recoveries were often not pursued and state activity reports were potentially misleading.

Background

Leaking underground storage tanks pose significant environmental risks throughout the country. The Superfund Amendments and Reauthorization Act of 1986 created a $500 million LUST Trust Fund, which had grown to more than $1.5 billion by 1995, to finance the cleanup of petroleum releases from underground storage tanks. States operate the LUST Program under cooperative agreements with EPA. As of the end of fiscal 1995, states had spent $361 million of the more than $545 million of Trust Fund monies which had been appropriated to EPA by Congress.

We Found That

Enforcement and oversight of corrective action to protect human health and the environment was not adequate at 126 (one-half) of the 249 high risk sites reviewed, including those with petroleum-contaminated groundwater. Most states had procedures focusing corrective action on high risk sites, but they did not always follow them. For example, one state was aware of a leaking underground tank but took no action for 12 years. The state then discovered that the site was near a public water supply and posed a significant threat. Another state did not identify some sites that were the most environmentally threatening to groundwater.

There were major differences in results among state cost recovery programs, which primarily provide incentives for owners and operators to clean up releases from their own tanks. Of the states reviewed, two had effective programs that recovered significant amounts from owners and operators, three achieved partial recoveries, and two did not have cost recovery programs. When states do not recover costs from responsible parties, the states relieve the responsible parties of their financial obligation and shift the burden of clean-up costs to the Federal government.

State activity reports were generally unreliable, potentially misleading, and usually overstated program results. For example, one state overstated cleanups completed by 47 percent. The reports are used to make nationwide funding decisions, to report program results to Congress, and to report performance measures in EPA's financial statements.

We Recommended That

The Assistant Administrator for Solid Waste and Emergency Response implement management controls to ensure that:

States provide adequate oversight and enforcement at high risk sites.

States develop and implement cost recovery programs.

Reliable and timely information is obtained, maintained, reported, and used for decisionmaking.

What Action Was Taken

The final report (6100264) was issued to the Assistant Administrator for Solid Waste and Emergency Response on August 6, 1996. In responding to the draft report, the Assistant Administrator generally disagreed with our findings, but either agreed with the recommendations or presented alternative actions that met the intent of our recommendations. A response to the final report is due by November 4, 1996.

Air Program Goals Impaired by Limited Emission Factor Development

Findings In Brief

While EPA has significantly increased the number of emission factors for sources of air pollution, many have still not been developed, while others are outdated and unreliable, thereby reducing the effectiveness of government and industry efforts to control air pollution.

Background

Emission factors are used to estimate a source's air pollutant emissions when more reliable data are not available. These estimates play a key role in planning and implementing air pollution control programs at the Federal, state, local, and industry level. The Clean Air Act, as amended in 1990 (CAA), required EPA to review and revise all emission factors for ozone precursors, develop factors for sources where factors did not exist, and establish a public participation process for factor development.

We Found That

EPA's Office of Air Quality Planning and Standards (OAQPS), Office of Air and Radiation (OAR), has increased the number of emission factors for stationary and area sources from 2,073 in 1985 to over 16,000 in 1996. However, 7,840 factors were not rated and the vast majority were not published. Also, 4,865 published factors were rated below average or poor for reliability. Further, EPA has not published emission factors for specific activities within the wood products, food processing, agricultural related, and chemical processes industries. Significant funding reductions to the emission factor development program, and air programs in general ( available resources have steadily decreased since 1992), have materially affected EPA's ability to meet the increased demand for quality emission factors. As a result, air pollution control programs may not achieve their goals.

OAQPS initiated an Adopt-a-Factor program to supplement its factor development program and offset reduced resources. OAR allocated grant funds to state air pollution control agencies for emission factor development. However, the majority of the states did not use the funds allocated by OAR for factor development because EPA grant guidance was not timely or specific enough to implement the program. In addition, the amount of money going to one state would not normally be enough to completely develop new or revised emission factors for a particular source category, and there is no guarantee that states would receive future grant money to complete these long-term projects.

OAQPS also initiated partnerships with interested industries to obtain assistance in emission factor development even though such partnerships present an increased risk that biased or unrepresentative emission factors may be developed. Industries have a financial motive to use emission factors that produce low emission estimates, since such factors may allow a source to avoid obtaining a permit or pay lower annual fees. In addition, funding cuts have diminished OAQPS' ability to provide oversight of these partnerships.

We Recommended That

The Assistant Administrator for Air and Radiation:

Report emission factor development as an Agency material weakness, unless adequate resources are assigned to this function.

Evaluate the process for issuing Section 105 grant allocation guidance to determine whether the guidance can be issued before EPA Regions and states begin their grant negotiation process.

Work with EPA Regions, states, and state and local organizations to develop a flexible grant system while ensuring that important national priorities are completed.

What Action Was Taken

We issued the final report (6100318) to the Assistant Administrator for Air and Radiation on September 30, 1996. In the October 11, 1996, response to our draft report, the Agency agreed with our conclusion that the emission factor development program is critical for air programs at all levels of government and private industry. The Assistant Administrator agreed to reexamine the emission factor development program for any management or financial integrity weaknesses, as part of the Agency's decisionmaking process for reporting under the Federal Managers Financial Integrity Act. Also, the Agency agreed to work toward improving the process for grant allocations, including increased involvement in this process by key stakeholders. A response to the final report is due by December 29, 1996

Improvements Needed in EPA and State Air Enforcement Programs

Findings in Brief

Although Regions 5 and 6 and the states we reviewed had effective aspects of their air enforcement programs, penalties often lacked an economic benefit component, enforcement actions were seldom publicized, and air enforcement data were incomplete, inconsistent, and untimely.

Background

The Clean Air Act, as amended in 1990 (Act), gives EPA authority to set national standards to protect human health and the environment from emissions that pollute the air. The Act also defines EPA's air enforcement authority and includes both civil and administrative remedies. If an EPA region, a state, or a local authority learns a company has violated a regulation, it can bring an enforcement action against the company.

We Found That

The Air and Radiation Division (ARD), Region 5, and Michigan assessed the economic benefit violators gained from noncompliance. In marked contrast, Indiana, Illinois, and Wisconsin usually did not recover the economic benefit because: (1) Indiana and Illinois officials did not have information request authority; and (2) Illinois and Wisconsin officials did not have administrative penalty authority.

In Region 6, neither Texas nor Louisiana generally computed economic benefits when assessing fines due to a lack of procedures (Texas) or because of an Administrative Law Judge ruling (Louisiana). Penalties lacking an economic benefit component are not effective, since it may be less expensive for a company to violate the law than to comply with it. Also, recovering the economic benefit for a violation serves as a deterrent to companies that may contemplate violating the law.

Enforcement actions were seldom publicized by Region 5, Indiana, and Michigan to deter companies from violating air pollution regulations. The Office of Public Affairs (OPA) did not issue many press releases because they were not approved timely by the Region. Also, press releases may not have been used by the news media because the press releases lacked clear explanations of the violations or the impact on the community. Indiana and Michigan enforcement officials were reluctant to publicize enforcement actions to avoid drawing attention to their programs from state legislators. Region 6 did not adequately publish the results of enforcement actions since the Air Enforcement Section was not in the habit of issuing press releases, and because External Affairs had not decided on a press release format. Only two of the ten cases we reviewed were published by Texas, and Louisiana did not issue any press releases. Consequently, companies may have had less incentive to achieve or maintain compliance with regulations without the pressure of public opinion generated by publicity.

The Aerometric Information Retrieval System Facility Subsystem (AFS) was not used by Region 5 or its states. They developed their own systems because AFS was difficult to use, resource intensive, and there were differences in how Region 5 and the states defined and tracked enforcement data. As a result, enforcement data in AFS for Region 5 were incomplete, duplicative, or internally inconsistent with data from states. Region 6 air enforcement data were also incomplete, inconsistent, and untimely. Region 6 and the states did not correctly identify significant violators and used inconsistent definitions. Consequently, the reported data in Region 6 were unreliable and program staff relied on manual reports from separate, duplicate databases and supplemental information rather than the AFS.

Region 5 had reorganized, in part, to emphasize compliance assistance, and had conducted some compliance assistance activities such as educational outreach. However, the Region had not yet developed a core program infrastructure of clear direction, priorities, or performance measures, and was unable to communicate a consistent compliance assistance approach. Region 6 worked with states to develop and maintain active compliance assistance programs, but did not complete enforcement actions timely against significant violators. The Region and Texas took an average of 635 and 651 days, respectively, to complete enforcement actions, which far exceeded EPA's timeliness goal of 180 days. When enforcement actions are not timely, the Region and its states do not send out a strong message to other potential violators.

We Recommended That

The Regional Administrator, Region 5, direct the:

Enforcement and Compliance Team to develop a compliance assistance program infrastructure, with a clear program direction, priorities, and performance measures.

ARD and OPA to work together to develop a policy for air enforcement

press releases.

ARD to discuss their AFS concerns with Office of Enforcement and Compliance Assurance officials, to begin the process of trying to change the data requirements.

The Regional Administrator, Region 6, direct the Compliance Assurance and Enforcement Division to:

Encourage states to document, compute, and recover the economic benefit of non-compliance.

Place more emphasis on publicizing the results of Region 6 and state enforcement actions.

Coordinate with the Multimedia Planning and Permitting Division to continue to work with states to assure the accuracy and completeness of AFS data, as well as to ensure that Region 6 lead cases are properly coded and accurate in AFS.

What Action Was Taken

The final report (6100284) was issued to the Regional Administrator, Region 5, on September 13, 1996. In response to the draft report, the Agency agreed with all of our findings and recommendations. The final report (6100309) was issued to the Regional Administrator, Region 6, on September 26, 1996. The Acting Assistant Regional Administrator for Management and the Director, Compliance Assurance and Enforcement Division, responded that they basically accepted the principal findings and agreed with the recommendations, with comments, since the recommendations were consistent with the Region's implementation of the air enforcement program. A response to the final report is due by December 26, 1996.

Clear and Timely EPA Guidance Needed for State Air Implementation Plans

Findings in Brief

Without timely, organized, or consistent Agency guidance, EPA and states did not always meet Clean Air Act deadlines for submitting and processing State Implementation Plans (SIP). Thus, it may take longer to achieve desired air quality results.

Background

EPA, states, and local governments are required under the Clean Air Act to implement measures to prevent and control air pollution, with the majority of responsibility resting with the states. The major mechanism used to attain the standards in individual areas is a SIP, which is a collection of the regulations a state will use to clean up polluted areas.

We Found That

Of the 56 SIPs we reviewed, the lack of EPA guidance was the cause mentioned most often for late SIP submission and processing along with delays in bringing policy issues to closure, extended state regulatory review processes, and limited regional resources. As a result, states faced sanctions for submitting SIPs after statutory deadlines, and the Agency faced potential lawsuits for not processing SIPs within 18 months.

EPA's SIP guidance was not timely or organized, and continually changed. State officials could not determine if they had all applicable guidance for developing a SIP because several different EPA offices issued guidance in numerous forms without any centralized listing or numbering system. In addition, the Agency continually changed guidance to address policy and technical issues. State officials, confused and frustrated, delayed submission of SIPs.

State officials also believed that inequities existed in how EPA administered its SIP program, and that some states were held to less stringent standards. We were not able to substantiate these concerns, but determined that a lack of communication between regions and states caused the perceived inequities which resulted in strained relationships, lost credibility, and state legislatures changing or delaying SIPs.

We Recommended That

The Assistant Administrator for Air and Radiation:

Establish a forum to allow states to address concerns of inequities in EPA's treatment of states. This may include working with already established state organizations.

Request that Regional air directors coordinate early on those SIPs that span regional or state lines.

Build in extra time for developing and reviewing complex SIPs, when EPA has some authority in setting deadlines.

Develop a centralized numbering system for all SIP guidance and, as recommended by the Workgroup, develop a computerized listing of specific types of SIPs, with cross references to guidance, policies, and regulations.

What Action Was Taken

We issued the final report (6400100) to the Assistant Administrator for Air and Radiation on September 30, 1996. In responding to the draft report, Agency officials agreed in principle with many of the audit recommendations and provided information on activities which was responsive to the recommendations. A response to the final report is due by December 29, 1996.

Initiatives Proved Successful at Superfund "Mega-Site"

Findings in Brief

Region 9 accelerated the cleanup process and made more consistent site decisions at the South Indian Bend Wash (SIBW) Superfund site by using the Agency's Presumptive Remedy and Plug-in ROD Superfund reform initiatives.

Background

The Superfund Program: The traditional procedure for cleaning up Superfund hazardous waste sites involves a series of steps, including a feasibility study to evaluate alternative cleanup remedies and costs, and issuance of a record of decision (ROD) detailing the selected remedy for the site.

South Indian Bend Wash: SIBW covers a three square mile area in Tempe, Arizona. Ground water was contaminated with volatile organic compounds (VOCs) coming from contaminated soil at several businesses.

Presumptive Remedy: Presumptive remedies are the result of EPA analyses showing the same remedies have been repeatedly selected for certain categories of sites. The Agency has identified presumptive remedies for several site categories, including landfills, wood-treating facilities, and soils contaminated with VOCs. If a site currently under investigation falls within one of these categories, then the Agency presumes what the appropriate remedy will be instead of considering clean up alternatives for each site.

Plug-in ROD: Plug-in ROD is a technique developed by Region 9 for use at Superfund sites that contain many contamination sources ("mega-sites"), such as SIBW. Each source is considered a "subsite."

Under the Plug-in approach, EPA selects a specific remedy for the entire site regardless of the number of subsites. If a subsite meets predetermined contamination and risk related criteria established in the ROD, then it plugs-in to the remedy selected in the ROD for immediate cleanup.

We Found That

Using the Presumptive Remedy of Soil Vapor Extraction for VOCs-contaminated soils, Region 9 minimized redundant investigative steps and made more consistent site decisions.

The Plug-in approach to mega-site remediation accelerated the cleanup process at SIBW by eliminating the need for a feasibility study and ROD for each subsite. EPA investigated the subsites individually and simultaneously, so no single site held up the overall cleanup.

Over the past several years, the OIG has frequently identified problems in the Agency's award and administration of contracts, interagency agreements, and assistance agreements at various offices and facilities. During this semiannual reporting period, the OIG conducted major reviews to examine EPA's programs for overseeing research funds provided to universities, controlling assistance agreements, and overseeing grants. We audited the records and performance of individual contractors and assistance recipients. These audits determine whether costs claimed by contractors and assistance recipients are eligible, supported by documentation, necessary, and reasonable. The following section summarizes the most significant findings and recommendations reported during this semiannual period.

Establishment of Supercomputing Center Violated Laws and Potentially Wasted Millions

Findings in Brief

EPA violated laws, manipulated the procurement process, and may have cost the government an additional $3.8 million by having an Agency contractor lease a building for the National Environmental Supercomputing Center (NESC) instead of acquiring a facility through the General Services Administration (GSA).

Background

In 1990, Congress authorized the EPA to acquire a supercomputer and stipulated that it would be located in the vicinity of Bay City, Michigan. In fiscal 1991, Congress earmarked $8.7 million for the supercomputer, but did not grant authority or funds for EPA to acquire a facility to house it. The Agency tasked a contractor to establish and staff the supercomputer center. In 1995, Congress rescinded the provision that required the supercomputer to be located in the vicinity of Bay City.

We Found That

EPA circumvented GSA, violated several laws, and acted without legislative authority by using a contractor to acquire a building for the NESC independent of GSA. If the Agency had used the services of GSA and purchased the building, EPA could have saved approximately $3.8 million over the five-year lease.

The Agency pre-selected a supercomputer site in Bay City which was twice as large as needed, and then manipulated the procurement process to have its contractor lease the building. This action resulted in the Agency excluding from competition a second building located in the Bay City vicinity which may have been acquired at far less cost. The Agency stated that the Conference Report contained contradictory language regarding the supercomputer location. However, the Appropriation Act stipulated very clearly that the supercomputer would be located in the Bay City vicinity. Also, EPA violated acquisition regulations by disclosing source selection data five months before the procurement was advertised for competition, and dealing directly with a real estate agent representing the building owner.

EPA exceeded its authority and violated Federal law by obligating the government to reimburse its contractor $3.7 million for a lease that ran over four and one-half years longer than the Agency's available appropriation. The Antideficiency Act prohibits government employees from involving the government in a contract before money is appropriated to pay for that contract.

The building selected to house the NESC required significant renovation to meet current building codes, as well as additional improvements necessary to accommodate the computer. In effect, the Agency gave government property to the developer by approving permanent improvements to the NESC building as part of lease costs charged to the contract. The developer, who had purchased the building only one day after EPA's contractor signed the lease, recouped the initial investment early in the lease, a factor that contributed heavily to the $3.8 million in excess lease costs.

The Agency's administration of the NESC subcontract also violated Federal laws and regulations. The subcontract contained a provision prohibited by law stipulating that the lease price would be adjusted by cost plus 82.5 percent for material modifications to the renovation specifications. In addition, the Contracting Officer and Project Officer did not ensure that $5 million of government equipment, including the supercomputer, that was furnished to the contractor was recorded on property records. The Project Officer promptly added the equipment to the records during the audit.

The Agency did not create and preserve documentation of significant decisions and activities related to the establishment of the NESC, as required by Federal laws to protect the legal and financial rights of the government. The majority of records we used during the audit were provided through subpoenas issued to contractors, subcontractors, and other organizations.

We Recommended That

The Deputy Administrator:

Coordinate with EPA's Office of the Comptroller to meet the reporting requirements for a violation of the Antideficiency Act. The Administrator must report all relevant facts and a statement of the action taken to the Congress and to the President through the Director, Office of Management and Budget.

Review whether any employee conduct violations occurred and whether disciplinary action is warranted.

Provide training to the Agency's senior level managers on the applicable statutes, regulations and Agency policies and procedures.

Hold senior managers accountable for proper implementation of statutory and regulatory requirements, including ensuring that adequate management controls are in place and followed pursuant to OMB Circular A-123.

What Action Was Taken

The final report (6100306) was issued to the Deputy Administrator on September 30, 1996. In responding to the draft report, the Acting Assistant Administrator for Administration and Resources Management (OARM) disputed many of our findings, but agreed to implement the majority of recommendations. Most of the disputed areas concerned interpretations of laws and regulations, and documents that should have been used for final Agency decisions. Specifically, OARM disagreed that GSA was a viable option for obtaining space. OARM believes that tasking a contractor to establish the supercomputer center was a legally viable option and that EPA lacked the legal authority or appropriation to lease or purchase a building. OARM also disagreed that the subcontract for the lease of the building resulted in a violation of the Antideficiency Act, since the Agency is not a party to or bound by the subcontract. A response to the final report is due by December 30, 1996.

Lack of Oversight Resulted In Millions of Assistance Funds Being Misspent

Findings In Brief

As a result of EPA's lack of oversight and failure to implement requirements for earmarked assistance agreements, center objectives were not attained and millions of dollars were expended on unauthorized or questionable projects.

Background

Each fiscal year, EPA receives funds earmarked by Congress for specific academic institutions. Between fiscal 1991 and 1995, EPA academic earmarks (primarily for research) totaled over $171 million. Although the Agency normally uses competition in assistance awards to university centers to ensure the quality of recipient staffs and work products, earmarks are implemented by establishing centers that fund individual projects through a competitive, second-order grant process.

We Found That

The Agency and/or university had not fully implemented assistance agreement requirements that related to the establishment of a working second-order grant process for the center at four of the five university centers we reviewed. EPA awarded the earmarked assistance noncompetitively, as directed by Congress, but did not always ensure that university proposals were consistent with applicable laws, since key terms and conditions in the assistance agreements differed significantly from those for competitively awarded research centers. Also, the Agency assigned insufficient resources to oversee center operations properly. As a result, center objectives were not always attained and $5 million was spent on questionable projects. Further, we identified projects at two Superfund centers that did not relate to Superfund.

EPA accepted and implemented nonstatutory earmarks (five of the six earmarks reviewed were only included in congressional conference reports) that had unclear scopes and no specific authorizing statutes, and attempted to match them with existing authorized programs. However, significant inconsistencies existed between the earmark awards and the selected authorizing statute in at least two instances. In addition, EPA based earmark awards to one university on proposals and workplans that were outside the scope of the applicable appropriation and authorizing statutes. As a result, this recipient expended millions of dollars in EPA assistance for unauthorized purposes. The Agency also continued to fund one earmark, included in an authorizing statute, up to $11 million in excess of the statutory funding limit based on subsequent nonstatutory earmarked funding.

EPA elected to use cooperative agreements for earmarked assistance awards without the required level of Agency involvement. Project officers of the earmarked agreements did not monitor recipient progress, assess recipient compliance with agreement conditions, and ensure proper use of assistance, largely contributing to the deficiencies of earmarked recipients.

We Recommended That

The Acting Assistant Administrator for Administration and Resources Management, in coordination with other appropriate Assistant Administrators:

Ensure that second-order grant processes for earmarked centers are fully implemented.

Model the structure and requirements for earmarked centers after similar competitive centers.

Seek rescission of earmarks with unclear scopes and no relevant authorizing statutes.

Ensure that authorizing statutes and recipient proposals are consistent with the earmark purpose and applicable appropriation.

Require project officer involvement and oversight that matches the assistance instrument selected and is sufficient to determine recipient compliance and proper use of Agency funds.

What Action Was Taken

The final report (6100313) was issued to the Acting Assistant Administrator for Administration and Resources Management on September 30, 1996. In responding to the draft report, Agency officials agreed that improvements in the management of earmarked assistance agreements are needed. Also, the Agency generally agreed with the intent of our recommendations and had either initiated or completed substantive corrective actions, or agreed to initiate appropriate actions, in response to the recommendations. A response to the final report is due by December 30, 1996.

Sole Source Procurement Was Improper and Costly

Findings in Brief

EPA awarded a sole source contract for Geographical Information System (GIS) software without adequate support or justification that cost EPA $1.9 million more than originally estimated.

Background

The OIG received an allegation that the Enterprise Technology Services Division (ETSD), Office of Administration and Resources Management, was trying to steer a purchase of GIS software to the incumbent contractor and that the Agency's past GIS software procurement practices may not have been cost-effective.

We Found That

EPA awarded a $3.7 million sole source GIS software contract for ARC-INFO® without adequate support that the contractor was the only source that could satisfy the procurement requirements. The Agency did not issue a Request for Comment or Proposal and other GIS vendors were not given a chance to compete or to demonstrate their software products. The specifications were unduly restrictive and unnecessary which inhibited competition. EPA had no assurance that it acquired the most cost- and job-effective GIS system available, especially since the cost was subsequently increased by $1.9 million to $5.6 million.

In addition, the Agency inappropriately modified the existing contract to non-competitively acquire a separate desktop mapping system called ARC-VIEW® without adequate justification. The Agency contended that ARC-VIEW® was a technical upgrade to ARC-INFO®. However, the contractor said they were two separate software products.

The Agency plans to use a "tier approach" for the next GIS procurement which may limit competition. This approach would result in a sole source award since the highest tier could be won only by the incumbent contractor. Further, EPA does not use benchmarking (live demonstration testing) to determine the capability of a software product, even though it is standard procedure within the GIS community and all Federal agencies we contacted use it as their main technical evaluation tool.

We Recommended That

The Acting Assistant Administrator for Administration and Resources Management:

Direct that all future GIS procurements follow full and open competitive procedures, as required by the Federal Acquisition Regulation.

Involve the GIS user community in the procurement process, as appropriate.

Use benchmarking of vendor products during the procurement process

What Action Was Taken

The Agency agreed to conduct future GIS procurements as full and open competitive procurements and to include benchmarks. However, the Agency disagreed that there was inadequate justification for not conducting the original procurement to obtain full and open competition. We issued our final report (6400096) on September 18, 1996. An Agency response to the final report is due by December 17, 1996.

Hazardous Materials Grantee Did Not Obtain Best Prices or Share Discounts

Findings In Brief

The Center for Hazardous Materials Research (CHMR) disregarded Federal procurement regulations for all purchases made under two assistance agreements by not obtaining adequate competition. In addition, CHMR did not satisfy cost sharing of nearly $500,000, as required by the agreements.

Background

EPA awarded a $1,083,000 grant and cooperative agreement to CHMR, a nonprofit entity, for a comprehensive pollution prevention program in Pennsylvania, and for testing a system for removing heavy metals from contaminated soils and solids.

We Found That

CHMR completed more than 100 procurements valued at about $500,000 under both agreements. None of the 50 procurements we reviewed (totaling $255,000) complied with Federal regulations or CHMR's procurement procedures requiring competitive price quotations or analysis. Therefore, it appeared that obtaining a specific contractor was the priority rather than getting the best competitive prices. Moreover, CHMR provided erroneous procurement certifications to EPA.

In addition, CHMR did not satisfy the cost sharing requirements for the two agreements reviewed. As a standard practice, CHMR used vendor discounts as their cost share, instead of extending the benefit to EPA. Federal regulation specifies that recipients must credit all purchase discounts to the government. Further, CHMR improperly billed EPA for ineligible meals, entertainment, and travel under the agreements.

We Recommended That

The Director, Grants Administration Division:

Determine whether the prices paid by CHMR. were reasonable. If this cannot be determined, EPA should recover costs for the procurements awarded under these agreements.

Instruct CHMR that discounts are not reimbursable and that benefits received from discounts must be credited to EPA.

What Action Was Taken

We issued the final report (6400064) to the Director, Grants Administration Division, on June 20, 1996. The Agency response was due by September 20, 1996. As of September 30, 1996, a response had not been received.

Financial Management

Over the years, the OIG has expressed serious concerns about financial management in EPA. Historically, EPA did not give financial management the attention it needed. In response to these concerns, EPA has taken a number of corrective actions. Since the 1994 OIG/Agency review of EPA's financial management, the OIG has focused on identifying problems related to those issues needing attention to improve financial, budget, and performance management in the Agency. During this reporting period, the OIG reviewed financial statements for EPA's trust funds and requirements under the Chief Financial Officier's (CFO) Act, and Agency performance data established under the Government Performance and Results Act . We also reviewed budget and accounting practices for regional personnel resources, and accounting procedures for EPA's leased real properties. The following section summarizes the most significant findings and recommendations during this period.

EPA Needs More Reliable Budgeting and Accounting

Findings in Brief

A pattern of errors in EPA's budgeting and accounting practices for personnel resources made financial management information unreliable for ensuring that EPA complied with congressional intent. As a result, Agency managers relied on inaccurate information in developing budget requests.

Background

The Chief Financial Officers Act of 1990 provides for improved financial management and internal controls to ensure accurate, reliable, and timely financial information. The Government Performance and Results Act (GPRA) holds program managers accountable for program results and ties program budgeting and spending to results. EPA is developing a Planning, Budgeting, and Accountability system to link strategic planning, annual performance planning, budgeting, and performance reporting.

We Found That

EPA's budget practices and procedures were generally effective at the appropriation level and ensured compliance with statutory requirements for funds control. However, the Agency used outdated workload models to allocate personnel resources resulting in the regions not receiving resources where they planned to use them, nor were resources reprogrammed by the regions for their planned needs.

Regional personnel costs were inaccurately accumulated and reported. The five regions we reviewed did not always correctly charge workyears and personnel costs to the program element directly supporting the employee's activities. We noted significant errors in two of the regions' charging of personnel costs causing misstatements used to develop subsequent program budgets.

For example, Regions 4 and 7 mischarged more than 41.7 workyears and $2.1 million of management and support costs to environmental programs in fiscal 1994. In addition, Region 4 also mischarged 21.6 workyears and $1.06 million in fiscal 1995.

Although the Agency had comprehensive reprogramming procedures, it did not require central National Program Manager (NPM) notification for changes to program budgets for which the NPM had overall responsibility. Regions overspent personnel resources for some programs and underspent for others, and reconciled the differences at the end of the fiscal year by reprogramming personnel resources to reflect actual spending. We noted several errors in implementing the fiscal 1994 and 1995 reprogrammings, and justifications did not consistently identify the program impact on the losing program. These errors diminished the usefulness of the related program information. Further, EPA did not obtain required congressional approval of one fiscal 1994 reprogramming for $730,000.

The Agency's ad hoc creation of program elements over time reduced the consistency and comparability of budget and financial data for internal management purposes. Also, EPA has not developed a common definition of management and support activities for consistent accounting and evaluation of those costs across the Agency. The current budget structure cannot efficiently capture the information required to implement GPRA because the activities, for which goals and related measures are being proposed, do not always align with existing program elements.

EPA held $53 million in reserve for contingencies and as fiduciary reserves in the initial fiscal 1995 operating plan. Of this amount, $28 million, in 11 accounts ranging from $71,000 to $6.6 million, remained in reserve at the end of fiscal 1995. The Budget Division was unable to provide support that Congress was notified of the contingency reserves as required by the Impoundment Control Act. The Budget Division also was not able to provide support for the rationale and methodology for specific reserve calculations.

We Recommended That

The Acting Chief Financial Officer (CFO) ensure that:

Program budget and cost information used for budgeting and performance measurement is accurate, timely, and useful.

EPA's budget practices and procedures address the need for accurate and reliable program information, are consistently implemented, and include controls to identify procedures not followed.

What Action Was Taken

The final report (6100300) was issued to the Acting CFO on September 25, 1996. In responding to the draft report, Agency officials agreed with most of the recommendations. The Budget Division has taken actions to correct some of the procedural problems. The Agency plans to redesign the program element structure as part of its Planning, Budgeting, and Accountability system design. A response to the final report is due by December 26, 1996.

More Decisive Action Needed in Planning Goals and Assessing Results

Findings in Brief

Although the Agency has initiated a results-oriented management direction to implement Government Performance and Results Act (GPRA), EPA still needs to finalize environmental goals, develop a clear and complete mission statement, and update its strategic plan. In addition, reliable financial and performance information was not always available to manage EPA's programs effectively.

Background

GPRA was enacted in 1993 to provide for strategic planning and performance measurement in the Federal government. It requires agencies to develop strategic plans, reach a reasonable degree of consensus on desired goals with key stakeholders, and measure and report progress toward achieving those goals. EPA has created a planning, budgeting, and accountability organization to help meet the GPRA requirements by linking long-term environmental planning, resource management, and accountability.

We Found That

The Agency's current mission statement does not clearly establish Agency-wide direction, guidance, and focus. Also, the Agency has missed deadlines for finalizing the National Environmental Goals and has not developed Agency goals to effectively plan, budget for, implement, and assess the results of its environmental programs. Finalization of the Goals has been delayed due to extensive comments received on drafts, and the need to obtain agreement from major stakeholders. The Agency is working with OMB to clear the goals for full government review. Finalizing the Agency's goals and revising its mission statement are also critical to the development of the revised strategic plan that must be submitted to OMB and Congress by September 30, 1997.

Performance plans for three of EPA's five GPRA pilots (LUST, Superfund, and Water) did not include sufficient means to verify and validate performance data. Prior OIG audits have also identified problems with performance data for these program areas. For two of the pilots (Chesapeake Bay and Acid Rain), EPA managers have developed ways to verify and validate reported performance measurement data. In addition, the Agency terminated its Program Evaluation Division without an alternative for obtaining evaluative information necessary for important policy and resource decisions.

Program officials participating in the GPRA performance pilots are tracking program costs in the Agency's accounting system by using program elements which do not provide accurate and complete cost data for specific activities. Also, performance partnership grant recipients are not required to track funding to specific media sources, so it is not clear how the Agency will relate these costs to Agency goals. Agency officials are aware that the accounting structure needs revision to more closely link budget, plans, and results, and are planning to make these changes.

We Recommended That

The Assistant Administrator for Policy, Planning, and Evaluation:

Finalize and publish the Agency's National Environmental Goals.

The Acting Chief Financial Officer:

Revise the Agency-wide strategic plan to incorporate GPRA requirements, finalize the Planning, Budgeting, and Accountability System and Organization Development Draft Workplan, and periodically monitor ongoing efforts to accomplish the scheduled activities by the targeted milestone dates.

Work with the Agency's Chief Information Officer to issue an Agency-wide policy requiring GPRA performance to include a discussion of how performance data will be verified and validated, and develop and issue an Agency-wide policy requiring managers to conduct program evaluations when goals are not being accomplished.

Develop and issue Agency-wide cost accounting policies and procedures which meet Federal cost accounting requirements and allow for the collection of cost information at a level to support GPRA and CFO Act requirements.

In collaboration with the Acting Assistant Administrator for Administration and Resources Management, reevaluate the Agency's financial reporting requirements for Performance Partnership Grants to ensure that states and Tribes are required to provide the financial information needed for the Agency to implement GPRA.

What Action Was Taken

The final report (6100297) was issued on September 25 , 1996. In response to the draft report, Agency officials generally agreed with our findings and recommendations. A response to the final report is due by December 14, 1996.

Further Improvements Needed in Financial Reporting

Findings in Brief

During fiscal 1995, EPA continued to make improvements in its financial systems and processes. However, some remaining weaknesses continue to prevent us from issuing unqualified opinions on all of the Agency's financial statements.

Background

The Chief Financial Officers (CFO) Act of 1990 requires EPA to prepare financial statements for the Superfund, Leaking Underground Storage Tank (LUST), and Oil Spill Trust Funds, the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and Tolerance Revolving Funds, and the Asbestos Loan Program. The CFO Act also requires the Inspector General, or an independent public accounting firm selected by the Inspector General, to audit the financial statements.

We Found That

Following are the results of our work related to the fiscal 1995 financial statements for these funds.

Superfund Trust Fund. We disclaimed an opinion on the financial statements primarily due to weaknesses in the areas of accounting for property, components of net position, reimbursable Superfund oversight costs, grants funded from more than one appropriation, and expenses to show the full cost of the fund. In addition, grantees are not required to provide EPA with information on the amount of expenses they have incurred, but for which they have not requested reimbursement by September 30. Therefore, we could not assess the reasonableness of EPA's estimate of accrued liabilities for grantee expenses.

LUST Trust Fund. We qualified our opinion on the Statement of Financial Position because we could not assess the reasonableness of EPA's estimate of accrued liabilities for grantee expenses. We disclaimed an opinion on the Statement of Operations and Changes in Net Position because we could not assess the reasonableness of EPA's estimate of accrued liabilities for grantee expenses, and because of weaknesses in the area of allocating expenses to show the full cost of the fund.

Oil Spill Trust Fund. We disclaimed an opinion on the financial statements primarily due to weaknesses in the areas of contractor-held equipment, grants funded from more than one appropriation, and allocating expenses to show the full cost of the fund. In addition, we could not assess the reasonableness of EPA's estimate of accrued liabilities for grantee expenses.

Asbestos Loan Program. In our opinion, the Statement of Financial Position is fairly presented. We qualified our opinion on the Statement of Operations and Changes in Net Position due to weaknesses in the area of allocating expenses to show the full cost of the loan program. We qualified our opinion on the Statement of Operations and Changes in Net Position because the allocation of expenses is less significant for the Asbestos Loan Program than it is for the other audited funds.

FIFRA Fund. In our opinion, the Statement of Financial Position is fairly presented. We disclaimed an opinion on the Statement of Operations and Changes in Net Position due to weaknesses in the area of allocating expenses to show the full cost of the fund.

Tolerance Fund. In our opinion, the Statement of Financial Position is fairly presented. We disclaimed an opinion on the Statement of Operations and Changes in Net Position due to weaknesses in the area of allocating expenses to show the full cost of the fund.

Material Internal Control Weaknesses

Superfund Oversight Costs. The Agency does not record as assets Superfund oversight costs recoverable from potentially responsible parties until billings are prepared. Our audit work in Regions 3, 5, 6 and 9 identified $6.7 million in reimbursable oversight costs for 37 active sites that were not recorded as assets. The understatement could be considerably higher if oversight costs for all active sites in all regions were analyzed.

Property. Further improvements are needed in accounting for the Agency's property. We found leases that had not been capitalized, inventories had not been completed at some locations, and some contractors did not provide reports on the value of EPA property in their possession. In addition, we found items that had not been recorded in the Agency's Personal Property Accountability System (PPAS), and differences existed between the PPAS and the Integrated Financial Management System values for capitalized property.

Grant Payments. EPA makes payments for grants funded from more than one appropriation using a first-in first-out (FIFO) method when it does not have information from the recipient showing which appropriation benefitted from the work performed. Under this method, the oldest available funding is used first regardless of which appropriations benefitted from the work performed under the grant. This could result in a material misstatement of expenses for the Agency's various appropriations.

Expense Allocation. As required by the Office of Management and Budget, EPA allocates expenses from its other appropriations to its various funds to show the full cost of these funds. In reviewing these allocations, we found that the information documenting decisions made was minimal. Input on how costs should be allocated was obtained from only one Headquarters program office and none of the regional offices. Policies and procedures identifying which costs should be allocated and the affected funds had not been formalized.

Superfund Net Position. The components of Superfund net position continued to be unreconcilable. Historically, accounting transactions for the Superfund Trust Fund were processed in a manner consistent with accounting for appropriated authority. Thus, when finance officials recorded various transactions for non-appropriated budget authority, the affected relationships that should exist between the components of net position were distorted.

We Recommended That

The Acting Chief Financial Officer (CFO):

Implement policies and procedures to accrue Superfund reimbursable oversight costs.

Expedite the revision of the Agency's capitalization procedures, and value all capitalized property at historical cost to the extent possible.

Obtain a legal opinion from the Office of General Counsel on whether it is proper to use the FIFO grant disbursement method, and if it is, whether adjustments are needed at year-end, and use the opinion to implement policies and procedures for accounting for grant disbursements.

Develop policies and procedures for the expense allocation performed to show the full cost of funds and obtain input from regional and Headquarters program offices to help ensure that expenses are accurately and consistently allocated, and complete the necessary analyses and reconciliations of accounts, so the components of net position are auditable.

The Acting Assistant Administrator for Administration and Resources Management:

Ensure that annual physical inventories of capitalized property are completed.

Ensure that property accountable officers timely and accurately record capitalized property in the PPAS.

Ensure that Agency contractors timely submit annual inventory reports.

What Action Was Taken

The final report (6100200) was issued on May 3, 1996. In response to our final report, the Acting CFO concurred with most of our report recommendations or identified alternative corrective actions that EPA would take to resolve the issues discussed in the report. However, on three of the above issues (components of net position, payments for grants funded from more than one appropriation, and EPA's expense allocation method), we expressed concerns to the Acting CFO about the failure to provide milestones for completing corrective actions. We are continuing to work closely with the Acting CFO's staff on these matters. Additionally, the OIG initiated special projects to work with EPA officials on making improvements in two areas, property and the expense allocation process, which should help EPA reach its goal of receiving an unqualified opinion on the Superfund financial statements.

Improper Accounting for Real Property Distorts Financial Statements

Findings In Brief

Although the Agency made progress in accounting for buildings it owns, it overstated depreciation, may not have correctly accounted for leased real property, and did not perform lease-versus-buy comparisons for all leases. As a result, the Agency prepared inaccurate financial statements and missed opportunities to save millions of dollars.

Background

The OIG performed this audit at the request of the Acting Chief Financial Officer.

We Found That

Fiscal 1995 was the first year EPA showed the value of its buildings in its financial statements. However, by applying an arbitrary 25 year useful life to all of its buildings rather than evaluating the useful lives of each building, the Agency overstated the accumulated depreciation for the 46 buildings in our sample by $19 million. Future financial statements will understate the value of EPA's real property and give the appearance that EPA uses fewer resources to accomplish its mission annually than it actually needs.

The Agency could not be sure it accounted for its leased real property correctly because it did not apply OMB criteria for categorizing operating or capital leases. We applied the OMB criteria to six of EPA's real property leases and found that EPA needed to reclassify at least one with an unrecorded value of $10.8 million.

Agency personnel did not perform lease-versus-buy comparisons for four leases because they believed that only leases requiring congressional approval needed a lease-versus-buy analysis, and that they could not get the necessary funding to construct a building. Although the four leases fell below criteria that specifically required such an analysis, three fell within OMB suggested criteria for doing an analysis. Without doing the comparisons to obtain the lowest cost method of acquisition, EPA is missing opportunities for significant savings. EPA may have saved over $3.9 million by purchasing rather than leasing one building.

We Recommended That

The Acting Assistant Administrator for Administration and Resources Management:

Provide the Acting Chief Financial Officer with revised building useful life estimates.

Ensure that supporting documentation for each real property lease provides information needed for proper lease classification.

Perform applicable lease-versus-buy analyses.

The Acting Chief Financial Officer:

Recalculate accumulated depreciation for all buildings based on revised useful life estimates and make any needed adjustments to accounting records.

Reclassify one lease from an operating lease to a capital lease, and evaluate the lease category of all real property leases and make any needed reclassification and accounting adjustments.

What Action Was Taken

The flash report (6400066) was issued to the Acting Chief Financial Officer and the Acting Assistant Administrator for Administration and Resources Management on July 1, 1996. In responding to our report, they stated that they generally agreed with our recommendations and have begun to take action to resolve these issues. However, the Agency is evaluating the practicality of applying the proposed policy on real property leases to existing leases.

Construction Grants

Since EPA was established, the construction grants program has been one of its largest and most successful undertakings. The program was established under the provisions of Public Law 92-500, as amended, and has provided over $52 billion in financial assistance to thousands of communities all over the country. The Agency is now in the process of completing the construction grant program. The goal is to substantially close out the program by September 30, 1997. Fiscal year 1990 was the last year funding was authorized for the program.

The Agency developed, in consultation with the OIG, a Completion/Close-Out Strategy for the program. The goal of the Agency's strategy is to bring the program to a successful completion as expeditiously as possible to assure that the environmental benefits of the program are fully realized and its fiscal and technical integrity are protected.

To assist the Agency in this effort, the OIG, in consultation with the Agency, implemented a revised audit strategy in October 1994 that focuses effort on the most vulnerable grants, based on a risk analysis of each remaining grant subject to audit. As of September 30, 1996, there were 239 grants valued at $4.1 billion which are expected to receive OIG review during the next two and a half years. Summaries of some audits of construction grants with significant issues follow.

$184 Million of Questioned Costs Claimed for San Francisco Projects

Findings in Brief

The City and County Of San Francisco, California, claimed $19.9 million of ineligible architectural engineering costs, project costs allocable to other Federal facilities, and costs outside the scope of the approved project for the design and construction of wastewater treatment facilities. An additional $164.2 million of unreasonable costs were questioned.

We Found That

EPA awarded San Francisco nine construction grants totaling $414,711,579 for the design and construction of wastewater treatment facilities pertaining to the Southwest Ocean Outfall Project, the Southeast Water Pollution Control Plant, the Oceanside Water Pollution Control Plant, and Bayside pump stations, force mains, and outfall consolidation projects. The grantee claimed $19,907,586 of ineligible costs under the grants, including:

$7,328,179 of construction, engineering, and other costs

that were outside the scope of the approved project;

$6,868,100 of construction, engineering, and other costs

claimed in excess of the State Water Resources Control Board's approved amount;

$3,040,102 of engineering and other costs allocable to the ineligible portion of the projects;

$2,467,345 of construction, engineering, and other costs

allocable to Federal facilities; and

$203,860 of engineering overhead costs claimed in excess of the incurred amount.

We also questioned as unreasonable $164,198,771 of project costs related to underused facilities. Although the Southwest Ocean Outfall Project (SWOOP) and the Oceanside Water Pollution Control Plant were designed with a 450 million gallons per day capacity, only 5 percent of the capacity was being used due to a failure to construct a Crosstown Transport Project to convey wastewater effluent to SWOOP.

We Recommended That

The Regional Administrator, Region 9, not participate in the Federal share of ineligible costs ($13,465,054), assess the grant eligibility of the Federal share of the unreasonable costs ($123,149,078), and recover the applicable amount from the grantee.

What action was taken

Two audit reports (6200011 and 6200014) were issued to the Regional Administrator, Region 9, on May 30 and July 16, 1996. Responses were due by August 30 (6200011) and October 15, 1996 (6200014). As of September 30, 1996, a response to 6200011 had not been received.

Over $18 Million of Questioned Costs Claimed by WSSC

Findings in Brief

The Washington Suburban Sanitary Commission (WSSC) claimed $7,481,336 of ineligible construction, engineering, and administrative costs for modifications to wastewater treatment facilities. An additional $10,723,814 of unreasonable and unsupported costs were questioned.

We Found That

EPA awarded two construction grants totaling $45,053,170 to WSSC for the construction of modifications to the existing facility to provide an advanced wastewater treatment plant, and additions to the Western Branch wastewater treatment plant for additional solids and liquid handling facilities. WSSC claimed $7,481,336 of ineligible costs under the grants, including:

$3,837,980 of administrative and architectural engineering fees incurred prior to the grant award or after the contract/construction completion date;

$1,596,524 of indirect costs applied to ineligible force account costs;

$1,553,923 of construction costs claimed in excess of the eligible bids and change orders;

$345,733 of engineering costs that exceeded the engineering agreement upset limits;

$147,175 of costs outside the scope of the project, force account costs which duplicated services provided by the construction management engineer, and costs applicable to ineligible portions of the project.

We also questioned as unsupported $8,897,656 of construction change orders that had not received an eligibility determination, delay costs that could not be verified, and miscellaneous costs for which the grantee could not provide documentation. Additionally, we questioned $1,826,158 as unreasonable costs related to facility segments and equipment that had been abandoned.

We Recommended That

The Regional Administrator, Region 3, not participate in the Federal share of ineligible costs ($6,189,595), determine the eligibility of the Federal share of unsupported and unreasonable costs ($7,566,823), and recover the applicable amount from the grantee.

What Action Was Taken

We issued the final reports (6300037 and 6300038) to the Regional Administrator, Region 3, on September 23, 1996. A response to the audit reports is due by November 5, 1996.

Over $11 Million of Questioned Costs Claimed by Wallingford, Connecticut

Findings In Brief

Wallingford, Connecticut, claimed ineligible administrative, construction, and engineering costs of $9,692,205 for the expansion and upgrading of its wastewater treatment facilities. An additional $1,621,321 of unsupported and unreasonable costs were questioned.

We Found That

EPA awarded Wallingford, Connecticut, three grants totaling $19,075,142 for preparation of the facilities plans, construction plans and specifications, and expansion and upgrading of the wastewater treatment facilities, including the low-level pump station and sewer system rehabilitation. The grantee claimed $9,692,205 of ineligible costs under the grants, including:

$4,361,571 of construction costs attributable to Connecticut Department of Environmental Protection (CTDEP) disallowed change orders, CTDEP disallowance based on application of the reserve capacity cost ratio adjustment, incremental cost of upsizing the low-level pump station, interest costs related to settlement of contract disputes, and settlement costs for contract rework;

$3,373,618 of ineligible administrative expenses attrbutable to work considered outside the scope of the grant and costs disallowed by the CTDEP during its final payment review;

$1,259,615 of project inspection fees disallowed by CTDEP, overbilled engineering overhead, services related to unacceptable construction delays, application of the construction eligibility factor; architectural engineering (AE) basic fees disallowed due to costs incurred after completion of project work, forfeited bid deposits not credited to the grant, and CTDEP final payment review disallowances;

$550,737 of design and construction phase engineering services related to the low-level pump station, ultraviolet disinfection, influent sewer, and fire and security work disallowed based on CTDEP reviews, overbilled engineering overhead, unallowable construction contract time extensions, and application of the construction eligibility ratio;

$146,664 of overtime incurred by the grantee's consulting engineer determined to be ineligible by CTDEP, project certification costs disallowed based on application of the reserve capacity cost ratio, application of the construction eligibility proration factor, overhead billed by the engineer in excess of the amount actually incurred, and other AE fees attributable to costs disallowed by CTDEP.

We also questioned $1,581,323 of unsupported costs, including $1,325,363 of the consulting engineer's unsupported overhead rate proposals and $255,960 of unsupported dispute claims settlement. Additionally, we questioned $39,998 of unreasonable costs related to the negotiated project portion of a fixed-price engineering contract.

We Recommended That

The Regional Administrator, Region 1, not participate in the Federal share of ineligible costs ($5,337,562), and evaluate whether to participate in the funding of the Federal share of unsupported costs ($869,728) and unreasonable costs ($29,999).

What Action Was Taken

We issued the final report (6100229) to the Regional Administrator, Region 1, on June 12, 1996. A final response from Region 1 has been deferred pending resolution of other matters.

Seattle Claimed Over $10 Million of Questioned Costs

Findings In Brief

Seattle, Washington, claimed $3,481,818 of ineligible equipment, construction and engineering costs for a wastewater treatment facility and sewer project. An additional $7,102,524 of unsupported costs were questioned.

We Found That

EPA awarded Seattle two grants totaling $30,444,033 for the planning, design, and construction of the West Point Wastewater Treatment facility and the Fort Lawton Tunnel Project. The grantee claimed $3,481,818 of ineligible costs under the grants, including:

$1,891,750 in salvage value for tunnel boring equipment purchased under the grant but which had not been offset against the grant expenses;

$966,624 for ineligible construction costs; and

$623,444 of engineering costs that were outside the scope of the approved project.

We also questioned $7,102,524 of unsupported planning and force account costs that were not supported by source documentation.

We Recommended That

The Regional Administrator, Region 10, not participate in the Federal share of ineligible costs ($1,915,000), determine the grant eligibility of the Federal share of unsupported costs ($5,210,026), and recover the applicable amount from the grantee.

What Action Was Taken

We issued the final audit report (6300024) to the Regional Administrator, Region 10, on July 8, 1996. A response to the audit report is due by October 8, 1996.

Nearly $9 Million of Questioned Costs Claimed for Baltimore Projects

Findings in Brief

Baltimore, Maryland, claimed $8,331,723 of ineligible construction, engineering, and administrative costs for improvements at a wastewater treatment facility. An additional $499,744 of unsupported costs were questioned.

We Found That

EPA awarded Baltimore, Maryland, two construction grants totaling $31,673,100 for the construction of filtration and nitrification facilities at the Back River Wastewater Treatment Plant. The grantee claimed $8,331,723 of ineligible costs under the grants, including:

$6,023,745 of construction costs that exceeded eligible bid and change order amounts;

$1,151,958 of administrative, engineering, and construction costs allocable to ineligible portions of the projects, and indirect costs that were not supported by an indirect cost rate agreement;

$499,922 for costs applicable to an indexing factor where the grantee did not reduce its claim to account for incremental costs due to delays in awarding subagreements more than 12 months after the grant award;

$447,408 for costs incurred after the approved cutoff dates, and miscellaneous unallowable administrative and engineering costs;

$208,690 of engineering costs that exceeded the engineering agreement, and costs determined to be outside the scope of the project or normal operating expenses not allocable to the grants.

In addition, we questioned $499,744 of unsupported engineering and construction costs.

We Recommended That

The Regional Administrator, Region 3, not participate in the Federal share of ineligible costs ($6,248,792), determine the eligibility of the Federal share of unsupported costs ($374,808), and recover the applicable amount from the grantee.

What Action Was Taken

The final reports were issued to the Regional Administrator, Region 3, on August 19 (6300027) and September 3, 1996 (6300033). Responses to the audit reports are due by October 21 and November 6, 1996, respectively.

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