Pend Oreille CountyLocal Government

SCHEDULE OF FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Pend Oreille County January 1, 2021 through December 31, 2021 2021-001 The County?s internal controls were inadequate for ensuring compliance with activities allowed and allowable costs requirements for the Coronavirus State and Local Fiscal Recovery Funds program. CFDA Number and Title: 21.027 ? COVID-19 Coronavirus State and Local Fiscal Recovery Funds Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: N/A Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Questioned Cost Amount: $268,774 Description of Condition The purpose of the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) is to respond to the COVID-19 pandemic?s negative effects on public health and the economy, provide premium pay to essential workers during the pandemic, provide government services to the extent COVID-19 caused a reduction in revenues collected, and make necessary investments in water, sewer or broadband infrastructure. In 2021, the County spent $578,254 in program funds across these four categories. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. For the SLFRF program, recipients may use program funds to meet pandemic-response needs and rebuild a strong, more equitable economy as the country recovers. All costs recipients charge to the SLFRF program must comply with program requirements and be supported by proper documentation demonstrating costs are specifically related to eligible uses listed in the U.S. Department of the Treasury?s Interim Final Rule. Recipients may not use funds to contribute to rainy day funds, financial reserves or similar funds. Additionally, under Uniform Guidance, 2 CFR 200, Subpart E ? Cost Principles, payments into an equipment replacement reserve are not an allowable cost. Our audit found the County did not have adequate internal controls and its review process was ineffective for ensuring the expenditures it charged to the SLFRF program were for allowable activities. Specifically, the County transferred $268,774 of its SLFRF award to its Equipment Rental and Revolving (ER&R) fund, which was not an allowable use of funds since it was a deposit into a financial reserve fund. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. The issue was not reported as a finding in the prior audit. Cause of Condition The SLFRF program was a new type of federal funding for the County. As such, the County created an American Rescue Plan Act (ARPA) Committee to review all proposed uses of federal funds for COVID-19-related awards and determine if they were for allowable purposes. The ARPA Committee approved the proposal to transfer funds to the ER&R fund to pay back funds that were not transferred during a ?payment holiday,? which was declared since the fund had ample resources for five or more years. The Committee incorrectly determined the vehicles managed by the ER&R fund were performing an allowable governmental service to qualify for revenue recovery under the SLFRF program. Further, County management and staff thought the ER&R fund did not constitute a rainy day fund because all excess reserves in the ER&R fund are tied to specific assets. Effect of Condition and Questioned Costs The County expended $268,774 for an unallowable purpose and, therefore, these funds were not available for spending under other categories. As a result, we are questioning these costs. Recommendation We recommend the County strengthen its internal controls to ensure all expenditures it charges to the SLFRF program are allowable. We also recommend the County consult with the federal grantor to determine whether it needs to repay the questioned costs. County?s Response Pursuant to RCW 36.32.120(6) the Board of County Commissioners have the care of county property and the management of county funds and business. The Board of County Commissioners adopted Resolution No. 2020-98 on October 6, 2020, declaring a payment holiday for the Equipment Rental and Revolving (ER&R) Fund. The ER&R fund is an internal service fund that provides vehicle rental services for the Road Department and other funds of the County as authorized by the County Commissioners. The effect of Resolution 2020-98 allowed specific monthly replacement charges related to the ER&R fund to be deferred by the user departments during the months of March, April, August and September of 2021 until the end of the replacement schedule which was anticipated through at least 2025. The deferral of charges was to provide relief for anticipated budget shortfall for 2021 due to the impacts of the COVID pandemic. We respectfully disagree with the Auditor?s characterization of our internal controls as explained below. The Budgeting, Accounting and Reporting System (BARS) Cash Manual prescribes accounting and reporting for local governments in accordance with RCW 43.09.200. Its purpose is to provide (1) uniform accounting and financial reporting to allow for meaningful use and comparison of financial data; (2) accounting and reporting instructions as a resource for local government managers; and (3) a consistent framework for financial reporting to intended users, including managers, governing bodies, granting and regulatory agencies, the state Legislature, and the general public. This manual is designated for all cash basis cities, counties and special purpose districts. See, https://sao.wa.gov/bars-annual-filing/bars-cash-manual/ 1. Equipment Rental & Revolving Fund (ER&R) Chapter 36.33A RCW outlines the requirements of the Equipment Rental and Revolving Fund. RCW 36.33A.010 provides that, ?every county shall establish, by resolution, an ?equipment rental and revolving fund?, hereinafter referred to as ?the fund?, in the county treasury to be used as a revolving fund for the purchase, maintenance, and repair of county road department equipment; for the purchase of equipment, materials, supplies, and services required in the administration and operation of the fund; and for the purchase or manufacture of materials and supplies needed by the county road department.? RCW 36.33A.020 grants the legislative body of any county the authority by resolution, the use of the equipment rental and revolving fund by any other department of the county government or any other governmental agency for similar purposes. RCW 36.33A.030 outlines the administration of the fund. RCW 36.33A.050 addresses the deposits into the ER&R fund and provides, ?the legislative authority of the county may, from time to time, place moneys in the fund from any source lawfully available to it and may transfer equipment, materials, and supplies of any office or department to the equipment rental and revolving fund with or without charge consistent with RCW 43.09.210. Charges for the rental of equipment and for providing materials, supplies, and services to any county office or department shall be paid monthly into the fund. Proceeds received from other governmental agencies for similar charges and from the sale of equipment or other personal property owned by the equipment rental and revolving fund, which is no longer of any value to or needed by the county, shall be placed in the fund as received.? RCW 36.33A.060 also provides that ?moneys accumulated in the equipment rental and revolving fund shall be retained therein from year to year; shall be used only for the purposes stated in this chapter; and shall be subject to the budgetary regulations in chapter 36.40 RCW.? Per Section 3.9.7.10 of the BARS Cash manual, ER&R funds are ?internal service funds and should operate on a cost reimbursement basis?.? Section 3.1.7.50 of the BARS Cash manual outlines the different type of governmental, proprietary and fiduciary funds. Internal services funds are designated by the BARS Cash manual as proprietary funds. ?Internal service funds may be used to report any activity that provides goods or services to other funds, departments or agencies of the government, or to other governments, on a cost-reimbursement basis. Internal service funds should be used only if the reporting government is the predominant participant in the activity. Otherwise, the activity should be reported in an enterprise fund. See, https://sao.wa.gov/bars_cash/accounting/accounting-principles-and-internal-control/fund-types-and-accounting-principles/#Code500 2. ARPA Funds The American Rescue Plan Act (commonly known as ?ARPA? or ?ARP?) was signed into law on March 11, 2021 to provide additional financial relief in the wake of the COVID-19 pandemic. ARPA included a significant amount of ?Coronavirus State and Local Fiscal Recovery Funds? (SLFRF) for state and local governments to use over a period of several years. The local portion of these federal funds is referred to as the Coronavirus Local Fiscal Recovery Fund (LFRF). The U.S. Treasury Department distributed LFRF funds in two equal installments, or ?tranches,? with the first distribution occurring in mid-2021 and the second occurring in mid-2022. LFRF funds may be used to cover qualifying costs obligated between March 3, 2021 and December 31, 2024 and expended by December 31, 2026. The funds may be used for the following purposes: ? To respond to the public health emergency or its negative economic impacts, including assistance to households (such as affordable housing, job training, and childcare), small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality; ? To respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers; ? For the provision of government services to the extent of the reduction in revenue due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year prior to the emergency; and ? To make necessary investments in water, sewer, or broadband infrastructure. The U.S. Treasury Department published an interim rule on May 17, 2021, providing more details about these funding areas (see 86 FR 26786). On January 27, 2022, the Treasury Department adopted the interim rule as final, with amendments providing more flexibility on certain issues (see 87 FR 4338). The final rule took effect April 1, 2022, but Treasury stated that recipients could choose to take advantage of its flexibilities earlier if desired. Local governments may not use LFRF funds for: ? Deposit into any pension fund; ? Debt service, even if the expenses would otherwise be eligible (such as broadband infrastructure); ? Replenishing financial reserves such as rainy day funds; ? Satisfaction of settlements or judgments, unless the settlement requires the recipient to provide services or incur other costs that are an eligible use of LFRF funds; ? Programs, services, or capital expenditures that undermine efforts to stop the spread of COVID-19; or ? Expenses that violate the award terms and conditions or other laws and regulations (such as laws regarding procurement, contracting, conflicts of interest, environmental standards, or civil rights) a. Treatment of Loans (87 FR 4436) The interim final rule allowed recipients to use SLFRF funds to make loans for uses that are otherwise eligible (for example, for small business assistance). Subsequent guidance clarified how recipients must track and dispose of program income from loans, consistent with the statutory requirements for the timing of SLFRF expenditures. SLFRF funds must be used to cover ``costs incurred?? by the recipient between March 3, 2021 and December 31, 2024. The interim final rule provided that SLFRF funds must be obligated by December 31, 2024 and expended by December 31, 2026. In using SLFRF funds to make loans, recipients must be able to determine the amount of funds used to make a loan and must comply with restrictions on the timing of the use of funds and with restrictions in the Uniform Guidance. SLFRF Final Rule, 87 FR 4436. When SLFRF funds are used as the principal for loans, there is an expectation that a significant share of the loaned funds will be repaid. Thus, recipients may not simply consider the full amount of loaned funds to be permanently expended and must appropriately account for the return of loaned funds. Id. For loans that mature or are forgiven on or before December 31, 2026, the recipient must account for the use of funds on a cash flow basis, consistent with Treasury?s guidance regarding loans made by recipients using payments from the Coronavirus Relief Fund. Recipients may use SLFRF funds to fund the principal of the loan and in that case must track repayment of principal and interest (i.e., ``program income,?? as defined under 2 CFR 200). When the loan is made, recipients must report the principal of the loan as an expense. Id. Repayment of principal may be reused only for eligible uses and is subject to restrictions on the timing of the use of funds. Interest payments received prior to the end of the period of performance will be considered an addition to the total award and may be used for any purpose that is an eligible use of funds under the statute and final rule. Recipients are not subject to restrictions under 2 CFR 200.307(e)(1) with respect to such payments. Id. For loans with maturities longer than December 31, 2026, the recipient must estimate the cost to the recipient of extending the loan over the life of the loan. In other words, at origination, the recipient must measure the projected cost of the loan and may use SLFRF funds for the projected cost of the loan. Recipients have two options for estimating this amount: They may estimate the subsidy cost (i.e., net present value of estimated cash flows) or the discounted cash flow under current expected credit losses (i.e., CECL method). See further guidance issued by Treasury for further explanation. Id. SLFRF Final Rule, Frequently Asked Questions document dated July 27, 2022, also provided guidance on contributions to revolving loan funds. Specifically, it provided that, ?a recipient may contribute funds to a revolving loan fund if the loaned SLFRF funds are restricted to financing eligible uses under the public health emergency/negative economic impacts, premium pay, and necessary water, sewer and broadband categories (or under the government services category if the contribution to the revolving fund is made using revenue loss funds). The funds contributed using SLFRF funds must be limited to the projected cost of loans made over the life of the revolving loan fund, following the Loans funded with SLFRF funds under the revenue loss eligible use category.? https://home.treasury.gov/system/files/136/SLFRF-Final-Rule-FAQ.pdf at pages 34-35. The Treasury guidance further provides, that ?notwithstanding the above, if a recipient uses revenue loss funds to fund a loan, whether or not the maturity of the loan is after December 31, 2026, the loaned funds may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules. Similarly, any contribution of revenue loss funds to a revolving loan fund may also follow the approach of loans funded under the revenue loss eligible use category. approach described above for loans with maturities longer than December 31, 2026.? Id at page 35. 3. Conclusion The County consistent with the authority granted to it in Chapter RCW 36.33A RCW placed money into the ER&R fund from a source lawfully available it to it-namely the LFRF funds. The placement of the LFRF monies was to pay the deferred charges that were deferred pursuant to Resolution 2020-98 in March, April, August and September of 2021. The repayment of the deferred charges to the ER&R fund was based on the anticipated budget shortfall for 2021 due to the impacts of the COVID pandemic on the County. The County?s understanding is that the ER&R fund based on the BARS Cash manual is an internal service fund which operates on a cost reimbursement basis. Furthermore, the County believed that the above use of the LFRF funds was consistent with eligible uses outlined within the American Rescue Plan Act and guidance from the U.S. Treasury Department. LFRF funds were used for costs incurred by the County between March 3, 2021 and December 31, 2024. The reimbursement to the ER&R fund was not a contribution to a rainy-day fund as the County was not saving for future spending needs. The reimbursement to the ER&R fund was for the provision of governmental services (to the extent of reduction in revenue) and was intended to support direct provision of services to our citizens. Auditor?s Remarks Transfers to the ER&R fund are not allowable. ER&R is not a loan fund, but rather, is designed in part as a reserve fund for future equipment purchases. Section 3.9.7.30 of the BARS manual provides that ER&R rates are comprised of four components ? two of which are depreciation of equipment (for equipment replacement) and a surcharge for equipment replacement. Pend Oreille County Resolution 2020-98 further confirms the fund is used in part as a reserve for future equipment purchases. As identified in the Department of Treasury?s Final Rule FAQ 8.1, funds cannot be used to contribute to reserve funds, rainy day funds or other similar funds (see Applicable Laws and Regulations section below). This is further reiterated in Uniform Guidance Cost Principles as well as section 3.9.7.30 of the BARS manual, which states that inclusion of surcharges for equipment replacement in federal reimbursement requests could lead to questioned costs. We reaffirm our finding and will review the corrective action taken during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303 Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 31 CFR Part 35, Pandemic Relief Programs, and U.S. Department of the Treasury?s Final Rule FAQs describe the ineligible uses of the program funds. Title 31 CFR Part 35, Pandemic Relief Programs, and U.S. Department of the Treasury?s Final Rule FAQs, Section 8.1: 8.1. May recipients use funds to replenish a budget stabilization fund, rainy day fund, or similar reserve account? No. Funds made available to respond to the public health emergency and its negative economic impacts are intended to help meet pandemic response needs and provide immediate stabilization for households and businesses. Contributions to rainy day funds and similar reserve funds would not address these needs or respond to the COVID-19 public health emergency, but would rather be savings for future spending needs. Similarly, funds made available for the provision of governmental services (to the extent of reduction in revenue) are intended to support direct provision of services to citizens. Contributions to rainy day funds are not considered provision of government services, since such expenses do not directly relate to the provision of government services. Title 2 CFR Part 200, Uniform Guidance, Subpart E, Cost Principles, establishes requirements for determining allowable costs and supporting costs allocated to federal programs. The Budgeting, Accounting and Reporting System (BARS) Manual, 3.9.7.30, Equipment Rental and Revolving (ER&R) Fund ? Rate Setting, states in part: Rental rates are typically composed of four components: 1. Expenses due to maintenance and operation (e.g., employee wages, building rental, equipment repair, supplies, etc.). 2. Depreciation of equipment (for equipment replacement). 3. A surcharge for equipment replacement. Replacement cost is that amount that is anticipated to replace the existing asset above the cost being recovered through depreciation. It is extremely important to have a system in place that separates charges for replacing equipment from the other components. Most federal grants allow only actual costs to be submitted for reimbursement. Surcharges for equipment replacement are an estimate and not allowable under the Uniform Guidance, 2 CFR 200, Subpart E ? Cost Principles. Inclusion of surcharges for equipment replacement in federal reimbursement requests could lead to questioned costs. Pend Oreille County Resolution No. 2020-98 states in part: WHEREAS, the rental rates are set to cover the costs of vehicle maintenance, fuel, overhead and to provide for vehicle replacement [?] WHEREAS, it has been determined that the ER&R cash balance is larger than that necessary to maintain the operation of ER&R, maintain reasonable reserves, and replace the vehicles as anticipated through at least 2025 [. . .] WHEREAS, declaring a payment holiday for the monthly replacement charges during 2021 would reduce the cash balance and be equitable and fair to all users of the ER&R fund [. . .]

SCHEDULE OF FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Pend Oreille County January 1, 2020 through December 31, 2020 2020-001 The County lacked adequate internal controls for ensuring compliance with federal procurement requirements. CFDA Number and Title: 20.205 Highway Planning and Construction Grant 20.224 Federal Lands Access Program Federal Grantor Name: Federal Highway Administration Department of Transportation Federal Award/Contract Number: N/A Pass-through Entity Name: Washington State Department of Transportation Pass-through Award/Contract Number: STPR-Z926(001), STPR-Z926(002), 6905671940022, and 6905671940002 Questioned Cost Amount: $0 Description of Condition During fiscal year 2020, the County spent $1,150,814 in Federal Highway Administration grant funds. The County used program funding on four projects during fiscal year 2020. Federal regulations require recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Additionally, federal regulations require grant recipients to follow their own written procurement procedures, which must reflect the most restrictive of applicable federal, state or local laws. These procedures must conform to federal procurement standards (2 CFR 200.318-327) to ensure recipients follow the most restrictive thresholds and methods when using federal funds. The County?s written procurement policy included applicable state and local requirements, but did not include federal procurement requirements specifically outlining federal regulations for architectural and engineering services and public works contracts. Additionally, federal grant regulations require recipients to maintain written standards of conduct covering conflicts of interest and governing the actions of employees engaged in the selection, award or administration of contracts procured with federal funds. The County did not establish written standards of conduct, as federal regulations require. We consider these internal control deficiencies to be a material weakness, which led to material noncompliance. This issue was reported as a finding in the prior audit as finding 2019-001. Cause of Condition The County has been working toward completing and approving a new procurement policy as a result of the recommendations our Office issued during the 2019 audit. However, an updated policy was not approved until October of 2020, which was after the County procured the public works contracts and architecture and engineering services. Effect of Condition Without updated written policies and procedures, the County is at a greater risk of noncompliance with the most restrictive of federal, state or local procurement methods and requirements when using federal funds to procure contractors. Although the County did not update its written policy before procuring, it did comply with federal requirements for the solicitation and awarding of public works contracts and architecture and engineering services for the Smackout Pass Bridge Replacement and Flowery Trail projects. The updated policy the County approved in October of 2020 includes the required language for written standards of conduct covering conflicts of interest and governing the actions of employees engaged in the selection, award or administration of contracts procured with federal funds. Recommendation We recommend the County update its written procurement policy and ensure it conforms to federal procurement standards (2 CFR 200.318-327). County?s Response The County has completed and adopted an updated Procurement Policy in October 2020 that includes the required language for written standards of conduct covering conflicts of interest and governing the actions of employees engaged in the selection, award or administration of contracts procured with federal funds. The County will update the specific wording required for federal procurement requirements specifically outlining federal regulations for architectural and engineering services and public works contracts, in place of the link referenced to the federal guidelines. Auditor?s Remarks Insert here Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303 Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 2 CFR Part 200, Uniform Guidance, section 318 General procurement standards, establishes requirements for documented procurement procedures which reflect applicable state, local, and federal laws and regulations.

SCHEDULE OF FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Pend Oreille County January 1, 2019 through December 31, 2019 2019-001 The County did not have adequate internal controls in place to ensure compliance with federal procurement requirements. CFDA Number and Title: 20.205 Highway Planning and Construction Grant Federal Grantor Name: Federal Highway Administration Department of Transportation Federal Award/Contract Number: N/A Pass-through Entity Name: Washington State Department of Transportation Pass-through Award/Contract Number: STPR-L261 (003), STPR-F260 (004), and STPR-Z926 (001) Questioned Cost Amount: $0 Description of Condition During fiscal year 2019, the County spent $1,151,554 in federal grant funds awarded by the Federal Highway Administration and passed through by the Washington State Department of Transportation. The County used program funding on three projects during fiscal year 2019. Federal regulations require recipients to establish and follow internal controls to ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Federal regulations also require grant recipients to follow their own written procedures, which must reflect the most restrictive of applicable state, local, and federal laws. The procedures must conform to federal procurement requirements to ensure recipients follow the most restrictive of federal, state, or local procurement thresholds and methods when using federal funds. The County's written policy includes applicable state and local requirements but does not include federal procurement requirements specifically outlined in federal regulations. In addition, federal grant regulations require recipients to maintain written standards of conduct covering conflicts of interest and governing the actions of employees engaged in the selection, award, or administration of contracts procured with federal funds. The County did not establish written standards of conduct, as required by federal regulations. We consider these control deficiencies to be a material weakness. This issue was reported as part of a finding in the prior audit as finding 2018-001. Cause of Condition The County was aware of the requirement to update its written policies and procedures for procurement and standards of conduct to comply with federal regulations. The County has been working toward revising these policies for the past two years. However, due to staffing changes, scheduling conflicts between County departments and lack of staff, the policies have not been approved. Effect of Condition and Questioned Costs Without written procedures, the County is at greater risk that it will not comply with federal procurement and standards of conduct requirements when procuring contractors paid with federal funds. Although polices for procurement and standards of conduct were not updated, the County complied with federal requirements to solicit competitive bids or proposals, as applicable. Recommendations We recommend the County establish internal controls to ensure it meets federal procurement requirements by: ? Updating its procurement policy to conform to federal procurement requirements ? Establishing and following written standards of conduct procedures to ensure compliance with federal regulations County?s Response Although not adopted in a timely fashion due to staffing changes, scheduling conflicts and lack of staff, the county has recently (9/22/2020) completed and adopted a procurement policy with written standards of conduct included to ensure compliance with federal regulations. Auditor?s Remarks We appreciate the County?s commitment to resolving the issues noted and will follow up during the next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 2 CFR Part 200, Uniform Guidance, section 303 internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 318, General procurement standards, establishes the requirements for procurement and standards of conduct policies.

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