CITY OF BIRMINGHAMLocal Government

Compliance and Significant Deficiency in Internal Control over Compliance with Reporting

Significant Deficiencies: 2022-002: Compliance and Significant Deficiency in Internal Control over Compliance with Special Tests and Provisions (Obligation, Expenditure and Payment Requirements) Federal agency: U.S. Department of Housing and Urban Development Pass-through agency: None Title: Emergency Solutions Grant Program, including Covid-19 CFDA Number: 14.231 Award Year: 2022 Award Number: E21MC0100002 & EC0MW010002 Criteria: As indicated in the April 2022, OMB Compliance Supplement, Emergency Solutions Grant (ESG) funds allocated to metropolitan cities must be obligated within 180 days after the date that the U.S. Department of Housing and Urban Development (HUD) signs the grant agreement with the metropolitan city. Emergency Solutions Grant COVID-19 (ESG-CV) funds must be obligated within 240 days from the date HUD signs the agreement. Grant recipients must also expend ESG funds to subrecipients for allowable costs within 30 days after receiving the subrecipient?s complete payment request. Condition and perspective: During the course of our testing for compliance with the Obligation, Expenditure and Payment Requirements applicable to the Emergency Solutions Grant (ESG), we noted that the ESG funds awarded to the City of Birmingham (City) were not expended to subrecipients within the required timeframes specified by HUD. Management for the City determined that a subrecipient payment request acknowledged by the Community Development Director represented a complete payment request. Our testing found that for five of the thirty-five (35) payments included in our sample, the subrecipient was not reimbursed within 30 days after the City received the subrecipient?s complete payment request. We found where each of these five subrecipients were paid at least 40 days late. Cause: The City has been overwhelmed with several grant awards with short and similar requirements for spending deadlines while also coping with delays in services due to staffing shortages, shutdowns and restricted services caused by the COVID-19 pandemic. Effect: HUD recaptured over $260,000 in ESG-CV grant funds from the City during the fiscal year as a result of the City?s failure to expend at least 20% of the grant by September 30, 2021, as instructed. The City?s failure to remit timely payments to subrecipients is not in compliance with the terms of the ESG grant agreement, as per 24 CFR ? 576.203(C). Questioned Cost: No questioned costs identified. Recommendation: Directors over the City's ESG federal program should consider revamping their spending plan and develop mechanisms to accelerate service levels to improve spending patterns to ensure that the City meets the award requirements for both ESG and ESG-CV funds. Further, there is a need to identify alternative service mechanisms and devote additional resources (which includes identifying additional service providers), to enhance management?s service capacity levels. Management?s response: Management has arranged for grants training for relevant employees. Directors over the City?s ESG federal program will develop procedures with the City?s Finance Department in order to ensure that the City meets the award requirements for both ESG and ESG-CV funds.

2022-003: Compliance and Significant Deficiency in Internal Control over Compliance with Reporting (Financial Reporting) Federal agency: Department of Treasury Pass-through agency: None Title: Emergency Rental Assistance, including Covid-19 CFDA Number: 21.023 Award Year: 2022 Award Number: ERA-2101123809 & ERA2-0213 Criteria: As indicated in the April 2022, OMB Compliance Supplement, recipients of Emergency Rental Assistance (ERA) awards are required to submit the Federal Financial Report, SF-425, each quarter. Recipients of ERA1 (awarded pursuant to section 501 of the Consolidated Appropriations Act, 2021) and ERA2 (awarded pursuant to section 3201 of the Consolidated appropriations act) funds must submit separate quarterly reports for each ERA award. The requirement to upload the SF-425 form ended with the quarter ended March 31, 2022, and recipients were directed to submit financial reporting data directly into the ERA portal. Condition and perspective: We selected for testing the quarterly reports submitted for the periods ended September 30, 2021 and December 31, 2021. During our testing, it was noted that the City did not have effective internal controls in place to ensure accurate and complete reporting. Applicable backup documentation provided by management did not support the amounts included in each of the submitted reports included in our testing. Cause: The City did not ensure that the individuals preparing and approving financial reports for the ERA program were knowledgeable of how to accurately complete the required financial form. Effect: The City did not have effective internal controls in place to ensure that financial reports were accurate, complete, and sufficiently reviewed prior to submission. This lack of ineffective controls resulted in incomplete and inaccurate reporting. Questioned Cost: No questioned costs identified. Recommendation: We recommend the City design and implement controls that allow for the accurate preparation and adequate approval of financial reporting information prior to its submission. -12- CITY OF BIRMINGHAM, ALABAMA SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) YEAR ENDED JUNE 30, 2022 Management?s response: Management in the Finance and Community Development Departments will work together to ensure that appropriate training is provided to all individuals responsible for the preparation and approval of financial reporting information.

2020-003: Federal financial reporting (repeat finding) Federal agency: U.S. Department of Transportation; U.S. Department of Justice Pass-through agency: None Title: National Infrastructure Investments; COVID-19 - Coronavirus Emergency Supplemental Funding Program CFDA Number: 20.933; 16.034 Award Year: 2017 (20.933 National Infrastructure Investments); 2020 (16.034 COVID-19 - Coronavirus Emergency Supplemental Funding Program) Award Number: 5822-2017-1 (20.933 National Infrastructure Investments); 2020-VD-BX-1458 (16.034 COVID-19 - Coronavirus Emergency Supplemental Funding Program) Criteria: 2 CFR 200.303 requires the City to establish and maintain internal controls over compliance with federal awards. The City is required to submit accurate and timely SF-425 Federal Financial Reports each quarter in accordance with the grant agreements. Federal Financial Reports are due 30 days after the end of the quarter. Condition and perspective: During our testing we noted the following: i. National Infrastructure Investments, 5822-2017-1: The quarterly Federal Financial Reports filed to the Federal Transit Administration did not reconcile to the accounting records, and source documents used to complete the reports were not saved. Based on the accounting records through June 2020, the cumulative federal cash receipts and disbursements were $15,909 more than reported, the cumulative federal share of expenditures was $308,307 more than reported, the cumulative recipient share of expenditures was $682,754 less than reported, and the recipient share of unliquidated obligations was $84,548 less than reported. The City?s cumulative recipient share was less than reported due to the inclusion of ineligible expenditures in that line; however, the City?s actual recipient share still meets the matching requirements of the grant. Additionally, one of the quarterly Federal Financial Reports was filed 18 days after the due date. ii. COVID-19 - Coronavirus Emergency Supplemental Funding Program, 2020-VD-BX-1458: The cumulative federal portion of expenditures reported on the June 30, 2020 Federal Financial Report was $14,147 higher than documented in the financial records. Source documents used to complete the reports were not saved. Cause: The City has not been regularly retaining source documentation used to complete the Federal Financial Reports, and the reports have not been subjected to separate preparation and review. Effect: The financial reports filed to the grantor included amounts that did not reconcile to the accounting records. Questioned Cost: No questioned costs identified. Recommendation: City management should retain source documentation used to complete any financial reporting to a grantor. This documentation should illustrate how the amounts reported reconcile to the City?s accounting records. Reports should be subjected to review. Management?s response: The Finance Department has undergone a reorganization, which has resulted in acquiring 4 additional staff members, in the Cost section, which used to be a part of the Planning Engineering & Permits Department. Some of the larger capital projects that the Cost section administers are U.S. Department of Transportation funded. Similarly, the Grants division, which was formerly a part of the Mayor?s Office, was transferred to the Finance Department. That move resulted in three additional professional level grants staff positions, in Finance. In addition, a Senior Accountant was added to the Grants division, primarily for the purpose of reconciling grants activity. The additional staffing should help us to ensure that federal awards are regularly reconciled in the accounting software, supporting the federal expenditures reported on the Federal Financial Report filings under the required basis of accounting.

Federal agency: U.S. Department of Homeland Security; U.S. Department of Transportation Pass-through agency: None Title: Assistance to Firefighters Grant; National Infrastructure Investments CFDA Number: 97.044; 20.933 Award Year: 2018 (97.044 Assistance to Firefighters Grant); 2017 (20.933 National Infrastructure Investments) Award Number: EMW-2018-FO-04970 (97.044 Assistance to Firefighters Grant); 5822-2017-1 (20.933 National Infrastructure Investments) Criteria: 2 CFR 200.303 requires the City to establish and maintain internal controls over compliance with federal awards. The City must follow the requirements identified in 2 CFR 200.313(c)-(e) for management over federally funded equipment, which includes maintaining detail property records, performing a physical inventory every two years, having a control system over safeguarding the assets, and evaluating federal requirements over disposals. Real property acquired by the City is subject to requirements at 2 CFR 200.311, which states that real property must be used for its authorized purpose and cannot be encumbered. The City would be required to obtain instructions from the awarding agency to dispose the asset from its authorized purpose. Condition and perspective: Management was able to identify property acquired with the current year major programs; however, based on discussions with management, the City does not have a central listing of all assets greater than $5,000 purchased with federal funding. Cause: Management stated that the fixed asset software in use does not have a mechanism for tracking federally funded property and equipment. Effect: The City could dispose, encumber, or lose federally funded equipment without following federal regulations over disposals. Questioned Cost: No questioned costs identified. Recommendation: Directors over each of the City's federal programs should provide a listing of all federally acquired assets and provide to the central grants accountant. Management should ensure that the City tracks these assets and performs a physical inventory account at least once every two years. Management?s response: Management has arranged for grants training for relevant employees. A process will be put into place to ensure that we are in compliance with 2 CFR 200.313 ( c ) ? ( e ) as well as the requirements set forth in 2 CFR 200-311 for all assets that cost $5,000 or more when purchased with grant funds. When fully implemented the process will outline how assets are entered into the asset system as well as set forth the guidelines for performing the physical inventory of assets purchased with federal funds.

2019-003: Wage Rate Requirements Federal agency: U.S. Department of Transportation Pass-through agency: Alabama Department of Transportation (Road to Recovery: MTGR-3700) Title: National Infrastructure Investments CFDA Number: 20.933 Award Year: 2012 Award Number: Road to Recovery: MTGR-3700 Criteria: 2 CFR 200.303 requires the City to establish and maintain internal controls over compliance with federal awards. Federally funded construction contracts in excess of $2,000 are subject to Wage Rate Requirements. Under these requirements, the contractor or subcontractor must submit weekly certifications to the City stating that the wages are in compliance with Wage Rate Requirements. Condition and perspective: During the year, the City?s Road to Recovery program had an active contract subject to Wage Rate Requirements. Personnel could not locate the weekly payroll certifications from the contractor. Cause: Former City management instructed the City?s Planning, Engineering & Permits department to have grant-funded contractors send their weekly payroll certifications to a secretary in a different department, who would not have been in a position to determine if all payroll certifications were provided as required. The payroll certifications were discarded in error prior to locating the 2019 certifications for the Road to Recovery program. Effect: The City could not provide evidence that the contractor provided the weekly payroll certifications throughout the contract. Questioned Cost: Questioned cost could not be determined. Recommendation: Each department with federally funded construction should implement a process for ensuring that weekly payroll certifications are received and retained. Management?s response: Payroll certifications are now sent to the Cost section of Finance, who process payments for construction contracts on all capital projects. These payroll certifications are reviewed, logged in, and maintained as documentation in project files.

2019-004: Federal financial reporting Federal agency: U.S. Department of Transportation Pass-through agency: Alabama Department of Transportation (Road to Recovery: MTGR-3700) Title: National Infrastructure Investments CFDA Number: 20.933 Award Year: 2012, 2017 Award Number: Road to Recovery: MTGR-3700; Bus Rapid Transit: 5822-2017-1 Criteria: 2 CFR 200.303 requires the City to establish and maintain internal controls over compliance with federal awards. The City is required to submit accurate and timely quarterly SF-425 Federal Financial Reports in accordance with the grant agreements. Federal Financial Reports are due 30 days after the end of the quarter. Condition and perspective: During our testing we noted the following: i. Road to Recovery: MTGR-3700: In accordance with the grant agreement, the City is required to submit quarterly Federal Financial Reports to the Federal Highway Administration. As of January 2020, the most recently filed Federal Financial Report was for the period ending March 2018. In addition, the program?s accounting records were not being regularly reconciled by accounting staff, which is critical for completing these reports accurately and for documenting that the matching funds identified on the Federal Financial Reports are correct. ii. Bus Rapid Transit: 5822-2017-1: The quarterly Federal Financial Reports filed to the Federal Transit Administration did not reconcile the accounting records. In addition, the reports appeared to be prepared on a cash basis rather than an accrual basis. The cumulative federal potion of expenditures reported on the June 30, 2019 Federal Financial Report was $816,659. The accounting records reported $964,956 in award-to-date expenditures, which includes $141,889 in payables accrued to the program after filing the report. Cause: The City has faced turnover in the personnel assigned to manage both awards identified above. Prior program managers were completing the Federal Financial Reports based on internal spreadsheets rather than the accounting records. Effect: The Federal Financial Reports failed to be filed for over a year for the Road to Recovery MTGR-3700 report, and accounting records were not being reconciled regularly to be able to promptly file the reports when the late filing was identified. The Federal Financial Report for Bus Rapid Transit 5822-2017-1 was understated by $ 149,297 as of June 30, 2019, which was primarily due to an accrual recorded after the City had filed the report. Questioned Cost: No questioned costs identified. Recommendation: City management should ensure that federal awards are regularly reconciled in the accounting software in order to support the federal expenditures reported on the Federal Financial Report filings under the required basis of accounting. Management?s response: The Finance Department has undergone a reorganization, which has resulted in acquiring 4 additional staff members, in the Cost section, which used to be a part of the Planning Engineering & Permits Department. Some of the larger capital projects that the Cost section administers are U.S. Department of Transportation funded. Similarly, the Grants division, which was formerly a part of the Mayor?s Office, was transferred to the Finance Department. That move resulted in three additional professional level grants staff positions, in Finance. In addition, a Senior Accountant was added to the Grants division, primarily for the purpose of reconciling grants activity. The additional staffing should help us to ensure that federal awards are regularly reconciled in the accounting software, supporting the federal expenditures reported on the Federal Financial Report filings under the required basis of accounting.

2019-005: Journal Entry Approval Federal agency: U.S. Department of Transportation Pass-through agency: Alabama Department of Transportation (Road to Recovery: MTGR-3700) Title: National Infrastructure Investments CFDA Number: 20.933 Award Year: 2012, 2017 Award Number: Road to Recovery: MTGR-3700; Bus Rapid Transit: 5822-2017-1 Criteria: 2 CFR 200.303 requires the City to establish and maintain internal controls over compliance with federal awards. Condition and perspective: During the year, the City recorded two journal entries to charge costs to the National Infrastructure Investments. The entries totaled $354,969. Each of the journal entries lacked evidence of separate preparation and review. In addition, the accounting records for these program were not being regularly reconciled or reviewed during the year for improper entries. Cause: The City has faced turnover in the personnel assigned to manage both awards identified above. Prior program managers were maintain their own grant cost records separate from the accounting software. Also, certain employees at the City have system access to prepare and post their own journal entries. Effect: Journal entries totaling $354,969 lacked evidence of review by a separate person. Questioned Cost: No questioned costs identified. Recommendation: City management should ensure that expenses charged to grant programs are subject to review by appropriate personnel. City management should ensure that federal awards are regularly reconciled in the accounting software. Management?s response: An emphasis has been placed on the segregation of duties in the journal entry process within the Finance Department. Reviews will be done at some point by the Principal Auditor, our departmental internal auditor, to test these controls. Management wants to ensure that all journal entries are reviewed and approved by appropriate personnel.

2019-006: Property management (Repeat Finding) Federal agency: U.S. Department of Transportation Pass-through agency: Alabama Department of Transportation (Road to Recovery: MTGR-3700) Title: National Infrastructure Investments CFDA Number: 20.933 Award Year: 2012, 2017 Award Number: Road to Recovery: MTGR-3700; Bus Rapid Transit: 5822-2017-1 Criteria: 2 CFR 200.303 requires the City to establish and maintain internal controls over compliance with federal awards. The City must follow the requirements identified in 2 CFR 200.313(c)-(e) for management over federally funded equipment, which includes maintaining detail property records, performing a physical inventory every two year, having a control system over safeguarding the assets, and evaluating federal requirements over disposals. Real property acquired by the City is subject to requirements at 2 CFR 200.311, which states that real property must be used for its authorized purpose and cannot be encumbered. The City would be required to obtain instructions from the awarding agency to dispose the asset from its authorized purpose. Condition and perspective: Based on discussion with management, the City does not have a central listing of all assets greater than $5,000 purchased with federal funding. Management was able to identify property acquired with the current year major programs, which generally represented real property and excluded equipment acquisitions. Cause: Management stated that the fixed asset software in use did not have a mechanism for tracking federally funded property and equipment. Effect: The City could dispose, encumber, or lose federally funded equipment without following federal regulations over disposals. Questioned Cost: No questioned costs identified. Recommendation: Directors over each of the City's federal programs should provide a listing of all federally acquired assets and provide to the central grants accountant. Management should ensure that the City tracks these assets and performs a physical inventory account at least once every two years. Management?s response: Management has arranged for grants training for relevant employees. A process will be put into place to ensure that we are in compliance with 2 CFR 200.313 ( c ) ? ( e ) as well as the requirements set forth in 2 CFR 200-311 for all assets that cost $5,000 or more when purchased with grant funds. When fully implemented the process will outline how assets are entered into the asset system as well as set forth the guidelines for performing the physical inventory of assets purchased with federal funds.

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