CITY OF MUKILTEO

The City?s internal controls were inadequate for ensuring compliance with federal requirements for allowable activities and costs. CFDA Number and Title: 21.019 ? COVID 19 ? Coronavirus Relief Fund Federal Grantor Name: U.S. Department of the Treasury Federal Award/Contract Number: N/A Pass-through Entity Name: Washington State Department of Commerce Pass-through Award/Contract Number: 20-6541C-259 Questioned Cost Amount: $300,000 Background The purpose of the Coronavirus Relief Fund (CRF) is to provide payments to state, territorial, tribal, and certain eligible local governments to cover necessary expenditures incurred because of the COVID-19 pandemic. In 2020, the City spent $960,750 in CRF funds to cover additional costs the City incurred due to the pandemic, including teleworking equipment and payroll. Additionally, the City established a program that provided assistance payments to 55 local businesses financially affected by COVID-19. These assistance payments ranged between $2,500 and $10,000. While the City receives federal funds each year, it has not previously spent more than $750,000 in federal funds, which is the threshold requiring a federal Single Audit. 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 CRF program, the costs that recipients submit for federal reimbursement must have been necessary for responding to the COVID-19 pandemic and not previously included in budgets prior to March 27, 2020. All costs recipients charge to the CRF program must comply with program requirements and be supported by proper documentation demonstrating costs are specifically related to COVID-19 activities. Description of Condition The City established 14 eligibility criteria for local businesses to receive assistance payments, but it did not have a process for verifying that businesses met all these criteria. City employees did verify that businesses met three of the 14 criteria. However, for the remaining required criteria, City employees relied on each businesses? application and self-attestations without verifying the information was accurate to ensure businesses were eligible to receive assistance payments. Additionally, the City issued program rules describing allowable and unallowable uses of its assistance payments. Program rules required local businesses to submit a report to the City by November 30, 2020, detailing how they used assistance funds and the outcomes they experienced. However, the City did not enforce the requirement to submit these reports, and City employees did not review any documentation to ensure local businesses spent assistance payments on allowable uses. 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 Many businesses experienced sudden financial hardship due to the COVID-19 pandemic. To help preserve its local economy, the City acted quickly by providing assistance payments to businesses. However, the CRF program was a new type of federal funding for the City. The City has not previously used federal funds to provide direct assistance payments to its residents or local businesses. As such, City employees lacked adequate experience and needed training to know that they should have independently verified each business met all eligibility criteria before awarding assistance and followed up on the established reporting requirement. Effect of Condition and Questioned Costs Because the City did not obtain documentation verifying that local businesses met all the eligibility criteria, we could not determine whether these businesses were eligible to receive assistance payments. We also cannot determine whether local businesses spent assistance payments on allowable purposes because the City did not receive and review reports from them. Additionally, we found that the City awarded $5,000 of program funds to one business, even though it operated outside of City limits. As a result of these circumstances, we are questioning the $300,000 of local business assistance payments that the City charged to the CRF program. Recommendation We recommend the City provide adequate training to staff responsible for administering federal programs and dedicate the necessary resources to ensure compliance with all program requirements. This includes verifying that all funding recipients meet all of the City?s eligibility criteria and other program requirements. City?s Response The City of Mukilteo appreciates the opportunity to respond to the Washington State Auditor?s Office?s (SAO) conclusions. We would like to thank the audit staff for the open communication throughout the audit. The City is committed to establishing and following effective internal controls for administering federal grant requirements and compliance with federal uniform guidance for grant administration. During 2020 the City endeavored to distribute Coronavirus Relief Funds as expeditiously as possible into the community where the support was needed due to the devastating impact on residents and businesses of the COVID-19 pandemic. Eligibility and reporting requirements were established for businesses to apply for and receive assistance payments. In the rush to get the grant money into the community as quickly as possible, the City did not confirm by requesting documentation from businesses that eligibility requirements were met as stated in the assistance guidelines and application process, but instead relied upon self-certification of eligibility requirements by businesses. Going forward, if similar circumstances exist in the future, the City will require assistance payment recipients provide documentation of meeting any stated eligibility requirements, and that any subsequent reporting requirements the City might have are complied with. The City would like to note that other eligible costs were incurred in excess of the questioned cost amount of $300,000 in the areas of public safety, public health and other expenses. This does not relieve the City of the necessity to make sure assistance payments meet eligibility and reporting requirements, but the City would like to make clear that many other expenses were incurred during the pandemic that would have also been eligible costs under the Coronavirus Relief Fund, in excess of the $300,000 questioned cost amount. Auditor?s Remarks We appreciate the steps the City has taken to resolve this issue and will review the condition 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 42 U.S. Code of Federal Regulations (CFR) Part 801, Coronavirus Relief Fund establishes allowable costs of the program. 2 CFR Part 200, Subpart E, cost principles do not apply to the Coronavirus Relief Fund. Therefore, auditors refer to guidance and FAQs from the U.S. Department of the Treasury and the pass-through agency, the Washington State Department of Commerce, as the criteria when testing the allowability of costs under the Fund. Guidance and FAQs from both the U.S. Dept. of the Treasury and the Washington State Dept. of Commerce can be found at https:www.commerce.wa.gov/serving-communities/local-government/covid-resiliency-grants/. These documents speak to the grantors? expectation that local governments obtain documentation which supports how businesses met eligibility criteria.