Puerto Rico Water Pollution Control Revolving Fund

Finding No. 2023-001 Cash Management – Drawdowns of funds Federal Program ALN 66.458 - Capitalization Grants for Clean Water State Revolving Funds Name of Federal Agency U.S Environmental Protection Agency Pass-through Entity Puerto Rico Department of Natural and Environmental Resources (DNER) Category Compliance/Significant Deficiency on Internal Control Compliance Requirements Cash Management – Drawdowns of funds Criteria 2 CFR Section 200.305 (b) establishes the following: For non-Federal entities other than states, payments methods must minimize the time elapsing between the transfer of funds from the United States Treasury or the pass-through entity and the disbursement by the non-Federal entity whether the payment is made by electronic funds transfer, or issuance or redemption of checks, warrants, or payment by other means. The non-Federal entity must be paid in advance, provided it maintains or demonstrates the willingness to maintain both written procedures that minimize the time elapsing between the transfer of funds and disbursement by the non-Federal entity, and financial management systems that meet the standards for fund control and accountability as established in this part. Advance payments to a non-Federal entity must be limited to the minimum amounts needed and be timed to be in accordance with the actual, immediate cash requirements of the non-Federal entity in carrying out the purpose of the approved program or project. The timing and amount of advance payments must be as close as is administratively feasible to the actual disbursements by the non-Federal entity for direct program or project costs and the proportionate share of any allowable indirect costs. The non-Federal entity must make timely payment to contractors in accordance with the contract provisions. Pursuant to § 35.3135(d) The State must agree to expend all funds in the SRF in an expenditious and timely manner. Condition found In two (2) of five (5) drawdowns selected for testing, we found that the disbursements were not transferred to the recipient in a timely manner as follows: Grant award # Date Federal portion Total Date deposited in Revolving Fund bank account Date paid to subrecipient Days elapsed C-72-051-03 10/11/2022 $ 2,723,093.00 $ 2,723,093.00 10/12/2022 10/19/2022 7 C-72-051-03 12/15/2022 1,200,151.81 1,200,151.81 12/16/2022 12/30/2022 14 Cause The delays in the transfer of funds were caused by administrative delays and lack of personnel assigned to carry out these tasks in a timely manner. Effect Advanced funds remained idle at the rotatory fund trust account for an extended amount of time. This also may result in administrative sanctions by the grantor. Questioned Cost None. Context Two (2) of five (5) drawdowns selected for testing were not transferred to the recipient in a timely manner. Identification of a repeat finding This is a not repeat finding from the immediate previous audit. Views of responsible officials and planned corrective actions The management of the Revolving Fund agrees with this finding. Please refer to the corrective action plan section on pages 49-50. Recommendation We recommend management of the Revolving Funds to establish written procedures and proper monitoring that ensure the compliance with the requirements for cash management.

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

Finding No. 2022-001 Audit Requirements for Auditees ? Report Submission Federal program Clean Water State Revolving Fund Cluster: ALN 66.458 Capitalization Grants for Clean Water State Revolving Funds Name of federal agency U.S. Environmental Protection Agency (EPA) Pass-through entity Puerto Rico Department of Natural and Environmental Resources Category Compliance/Internal Control Compliance requirements Other Criteria As required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), ? 200.512 Report submission (a) (1), ? the audit must be completed and the data collection form described in paragraph (b) of this section and reporting package described in paragraph (c) of this section must be submitted within the earlier of 30 calendar days after receipt of the auditors? report(s), or nine months after the end of the audit period. If the due date falls on a Saturday, Sunday, or Federal holiday, the reporting package is due the next business day?. Condition found The data collection form and the reporting package for the year ended on June 30, 2022 was not submitted to the Federal Audit Clearinghouse within the timeframe prescribed by the Uniform Guidance. Cause Accounting and reporting processes are being delayed and thus, the information necessary to complete the financial statement audit procedures was not available within the timeframe prescribed by the Uniform Guidance. Effect As a result of this condition, the EPA may issue warnings and/or impose penalties to the Revolving Fund. Also, the EPA was prevented the use of accurate reporting data, which is critical for the effective administration of the federal program and for EPA budgetary policy analysis. Questioned cost None. Context N/A Identification of a repeat finding This is not a repeat finding from the immediate previous audit. Views of responsible officials and planned corrective actions The management of the Revolving Fund agree with this finding. Please refer to the corrective action plan section on page 44. Recommendation The data collection form and single audit package must be submitted within the required due dates. Also, we strongly suggest the accounting department to take whatever steps necessary to ensure that senior management receives current and accurate financial information on a timely basis. If it is determined that the department is understaffed, steps should be taken to alleviate this problem so that work can remain current without an undue hardship on any one employee. Once up to date, the accounting staff must consistently provide management with the accurate financial reports and information necessary to effectively manage the Revolving Fund?s operations

Finding No. 2020-001 Audit Requirements for Auditees ? Report Submission Federal Program Clean Water State Revolving Funds Cluster: ALN 66.458 Capitalization Grants for Clean Water State Revolving Funds Name of Federal Agency U.S. Environmental Protection Agency (EPA) Pass-through Entity Puerto Rico Department of Natural and Environmental Resources Type of Finding Compliance/Internal Control Category Significant Deficiency Compliance Requirements Other Criteria As required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), ? 200.512 Report submission (a) (1), ? the audit must be completed and the data collection form described in paragraph (b) of this section and reporting package described in paragraph (c) of this section must be submitted within the earlier of 30 calendar days after receipt of the auditor's report(s), or nine months after the end of the audit period. If the due date falls on a Saturday, Sunday, or Federal holiday, the reporting package is due the next business day?. Condition found The data collection form and the reporting package for the year ended on June 30, 2020, was not submitted to the Federal Audit Clearinghouse within the timeframe prescribed by the Uniform Guidance. Cause Accounting and reporting processes are being significantly delayed and thus, the information necessary to complete the financial statement audit procedures was not available within the timeframe prescribed by the Uniform Guidance. Effect As a result of this condition, the EPA may issue warnings and/or impose penalties to the Revolving Fund. Also, the EPA was prevented from the use of accurate reporting data, which is critical for the effective administration of the federal program and for EPA budgetary policy analysis. Questioned cost None. Context The data collection form and single audit reporting packages for the two years before this report (fiscal years 2018 and 2019) have also been submitted after the abovementioned prescribed timeframe. Identification of a repeat finding This is a repeat finding from the immediate previous audit and was reported as finding number 2019-001. Views of responsible officials and planned corrective actions The management of the Revolving Fund agree with this finding. Please refer to the corrective action plan section on page 47. Recommendation The data collection form and single audit package must be submitted within the required due dates. Also, we strongly suggest the accounting department to take whatever steps necessary to ensure that senior management receives current and accurate financial information on a timely basis. If it is determined that the department is understaffed, steps should be taken to alleviate this problem so that work can remain current without an undue hardship on any one employee. Once up to date, the accounting staff must consistently provide management with the accurate and timely financial reports and information necessary to effectively manage the Revolving Fund?s operations.

Finding No. 2019-001 Audit Requirements for Auditees ? Report Submission Federal Program Clean Water State Revolving Funds Cluster: ALN 66.458 Capitalization Grants for Clean Water State Revolving Funds Name of Federal Agency U.S. Environmental Protection Agency (EPA) Pass-through Entity Puerto Rico Department of Natural and Environmental Resources Type of Finding Compliance/Internal Control Category Significant Deficiency Compliance Requirements Other Finding No. 2019-001 Audit Requirements for Auditees ? Report Submission ? (continued) Criteria As required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), ? 200.512 Report submission (a) (1), ? the audit must be completed and the data collection form described in paragraph (b) of this section and reporting package described in paragraph (c) of this section must be submitted within the earlier of 30 calendar days after receipt of the auditor's report(s), or nine months after the end of the audit period. If the due date falls on a Saturday, Sunday, or Federal holiday, the reporting package is due the next business day?. Condition found The data collection form and the reporting package for the year ended on June 30, 2019 was not submitted to the Federal Audit Clearinghouse within the timeframe prescribed by the Uniform Guidance. Cause Accounting and reporting processes are being significantly delayed and thus, the information necessary to complete the financial statement audit procedures was not available within the timeframe prescribed by the Uniform Guidance. Effect As a result of this condition, the EPA may issue warnings and/or impose penalties to the Revolving Fund. Also, the EPA was prevented from the use of accurate reporting data, which is critical for the effective administration of the federal program and for EPA budgetary policy analysis. Questioned cost None. Context The data collection form and single audit reporting packages for the two years before this report (fiscal years 2017 and 2018) have also been submitted after the abovementioned prescribed timeframe. Identification of a repeat finding This is a repeat finding from the immediate previous audit and was reported as finding number 2018-002. Views of responsible officials and planned corrective actions The management of the Revolving Fund agree with this finding. Please refer to the corrective action plan section on page 53. Recommendation The data collection form and single audit package must be submitted within the required due dates. Also, we strongly suggest the accounting department to take whatever steps necessary to ensure that senior management receives current and accurate financial information on a timely basis. If it is determined that the department is understaffed, steps should be taken to alleviate this problem so that work can remain current without an undue hardship on any one employee. Once up to date, the accounting staff must consistently provide management with the accurate and timely financial reports and information necessary to effectively manage the Revolving Fund?s operations.

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