Puerto Rico Safe Drinking Water Treatment Revolving Loan FundState Government

Finding No. 2024-001 – Allowable Activities - Loans Repayments Federal Program ALN 66.468 - Capitalization Grants for Drinking Water State Revolving Funds Name of Federal Agency U.S Environmental Protection Agency Pass-through Entity Puerto Rico Department of Health (DOH) Category Compliance/Significant Deficiency on Internal Control Criteria Under the Safe Drinking Water Act, Puerto Rico Capitalization Grants for Drinking Water State Revolving Funds (DWSRF) 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 Puerto Rico Capitalization Grants for Drinking Water State Revolving Funds are outlined in Title 40 of the Code of Federal Regulations (40 CFR), specifically in Part 35, Subpart L. Under § 35.3520 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 DWSRF debt obligations, e) Loan guarantees for “sub-State revolving funds, f) Earn interest on fund accounts and g) DWSRF administrative expenses. Loans may be awarded only if: (i)All principal and interest payments on loans are credited directly to the DWSRF;(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 September 2, 2022, the Puerto Rico Infrastructure Authority (PRIFA) (in its capacity as operating agent for the Revolving Fund), the Puerto Rico Department of Health (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 September 2, 2022 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, 2052”. 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 35.3550 (i) Specific capitalization grant requirements - Use generally accepted accounting principles, establishes the following requirement: “(i) The accounting system used for the DWSRF program must allow for proper measurement of: (1) revenues earned and other receipts, including but not limited to, loan repayments, capitalization grants, interest earnings, state match deposits, and net bond proceeds”. Condition Found Principal and interest have 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 September 2, 2022. 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. Cause Due to administrative errors and delays, the P.R. Department of Health, as administrator of the Revolving Fund, did not monitor or enforce financial covenants established in loan agreements. In addition, PRASA failed to communicate with the P.R. Department of Health 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 35.3585(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 Regional Administrator (RA) may take corrective action as provided under this section”. Also, the 40 CFR 35.3585(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 State rotatory fund (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 de-obligated and reallotted to other States”. Questioned Cost None. No balance or reimbursement is owed to the U.S Environmental Protection Agency 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 $38,915 as of July 1, 2023. ID Proyect Description Loan Amount Final Acceptance of Completion PWSID 3924(a) Toa Vaca WTP, Villalba $ 4,477,679 September 2, 2022 Identification of a repeat finding This is not a repeated 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 48-49. Recommendation We recommend that the PR Department of Health and PRIFA institute and reenforce communication 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 Revolving Fund should be proactive in understanding and fulfilling their obligations to maintain compliance. It is essential for PRASA and the Revolving Fund to prioritize compliance with federal regulations to avoid consequences and maintain their integrity.

Federal Program ALN 66.468 - Capitalization Grants for Drinking Water State Revolving Funds Name of Federal Agency U.S Environmental Protection Agency Pass-through Entity Puerto Rico Department of Health (DOH) Category Other matter Criteria 2 CFR § 200.465 - Rental costs of real property and equipment states that: “Rental costs are allowable to the extent that the rates are reasonable in light of such factors as costs of comparable rental properties; market conditions in the area; alternatives available; and the type, life expectancy, condition, and value of the property leased. Rental arrangements should be reviewed periodically to determine if circumstances have changed and if other options are available.” Condition Found When renewing the rental contract for the administration of the Revolving Fund, the DOH, as the Revolving Fund administrator, complied with statutory laws and procedures governing contract renewal. However, under the applicable regulations, if a contract renewal does not include a fee increase, there is no statutory requirement to evaluate comparable rental properties or conduct a periodic market study to assess potential changes in market conditions. As a result, the Revolving Fund lacks, within its existing processes and documentation, established policies and procedures for performing and documenting such assessments and did not conduct the evaluation required under 2 CFR § 200.465 in a timely manner. However, during discussions with the auditors, the required evaluation was performed, demonstrating that the rental costs remain reasonable in accordance with federal regulations. Cause The DOH, as administrator of the Revolving Fund, followed the statutory provisions of the Office of Management and Budget of Puerto Rico and the Revisory Board of the Real Property of Puerto Rico, governing the rent contract renewals, which do not require a periodic assessment of possible changes in market conditions. Effect The absence of policies and procedures for evaluating and documenting rental reasonableness may limit the Revolving Fund’s ability to demonstrate that rental costs remain aligned with market conditions over time. Without periodic assessments, there is a risk that rental agreements may not reflect the most cost-effective options available, potentially leading to inefficiencies in the use of funds. Establishing a formal process for conducting and documenting these evaluations would enhance transparency and support compliance with 2 CFR § 200.465. Questioned Cost None. No balance or reimbursement is owed to the U.S Environmental Protection Agency because of this finding. Context The Revolving Fund currently incurs an annual rental cost of $160,424, which includes rent, utilities, security services, maintenance and parking spaces, among other. Identification of a repeat finding This is not a repeated 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 48-49. Recommendation We recommend implementing a periodic assessment of rental rates that could help ensure that the Revolving Fund continues to allocate resources efficiently and in alignment with 2 CFR § 200.465.

Finding No. 2022-001 Audit Requirements for Auditees ? Report Submission Federal program Drinking Water State Revolving Funds Cluster: ALN 66.468 Capitalization Grants for Drinking Water State Revolving Funds Name of federal agency U.S. Environmental Protection Agency (EPA) Pass-through entity Puerto Rico Department of Health 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 the necessary steps 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 Drinking Water State Revolving Funds Cluster: ALN 66.468 Capitalization Grants for Drinking Water State Revolving Funds Name of Federal Agency U.S. Environmental Protection Agency (EPA) Pass-through Entity Puerto Rico Department of Health 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 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 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 46. 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.

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