City of Fresno

Finding 2021-003 ? Coronavirus Relief Fund Subrecipient Monitoring (Significant Deficiency) Program: Coronavirus Relief Fund (CRF) Assistance Listing No.: 21.019 Federal Agency: U.S. Department of the Treasury (Treasury) Passed Through: N/A ? Direct Program Award Year: Fiscal Year 2020-2021 Compliance Requirement: Subrecipient Monitoring Questioned Costs: $5,048,975 Criteria Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) ?200.303 states that the non-Federal entity (City) must establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in ?Standards for Internal Control in the Federal Government? issued by the Comptroller General of the United States or the ?Internal Control Integrated Framework,? issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). establish and maintain effective internal control over the Federal awards. Per ?200.331, a pass-through entity (the City) must make case-by-case determinations whether each agreement it makes for the disbursement of Federal program funds casts the party receiving the funds in the role of a subrecipient or a contractor. A pass-through entity (the City) with subrecipients is required to evaluate each subrecipient?s risk of noncompliance with Federal statutes, regulations, and the terms and conditions of the subaward for purposes of determining the appropriate subrecipient monitoring. Depending upon the pass-through entity?s assessment of risk posed by the subrecipient, the entity must develop techniques/tools to ensure proper accountability and compliance with program requirements and achievement of performance goals by the subrecipient. Furthermore, ?200.332(a) states that a pass-through entity (the City) must ensure that every subaward is clearly identified to the subrecipient as a subaward and includes the required award information so that the Federal award is used in accordance with Federal statutes, regulations and the terms and conditions of the Federal award. Condition During our testing of compliance with the subrecipient monitoring requirement, we noted the City did not have formal, written subrecipient monitoring policies or procedures in place during FY 2021. In addition, the preliminary SEFA provided by the City overstated the amounts passed through to subrecipients by $5,048,975. Furthermore, the City did not clearly identify to the subrecipients the Federal award information required under ?200.332(a). Cause of Condition The City?s existing internal control system is not properly designed to meet the control objectives under subrecipient monitoring. Repeat Finding Yes. Effect of Condition There is increased risk of noncompliance with the subrecipient monitoring requirement as set forth in the U.S. Office of Management and Budget (OMB) Compliance Supplement, which can jeopardize future federal funding as well as result in the payback of federal awards. Recommendation We recommend the City design and implement internal control activities over the subrecipient monitoring compliance requirement under the Uniform Guidance. We also recommend the City reevaluate policies and procedures in its determinations whether each agreement it makes for the disbursement of CARES Act funds casts the party receiving the funds in the role of a subrecipient or a contractor. Management Response and Corrective Action Plan As of July 1, 2022, the City has in place a formal Subrecipient Monitoring policy. The City created this policy to identify and administer subawards consistent with the requirements established by Office of Management and Budget (OMB) in the section federal regulation 2 CFR part 200 ?Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.? The City has also created a Grants Management Unit in the Finance Department. This Unit is charged with implementing and enforcing the Subrecipient Monitoring policy, including conducting risk assessments with the subrecipients, working with them to address any internal control deficiencies, and monitoring subrecipient activity to insure compliance with the Uniform Guidance. The City has not had a dedicated Grants Management Unit for many years. The creation of such a unit is tangible proof of the commitment the City has toward managing its grants in compliance with the Uniform Guidance. The implementation of this policy will facilitate adequate monitoring of the accountability and adherence to the program requirements for subrecipients.

Finding 2021-004 ? Economic Adjustment Assistance Subrecipient Monitoring (Significant Deficiency) Program: Economic Adjustment Assistance Assistance Listing No.: 11.307 Federal Agency: U.S. Department of Commerce Passed Through: N/A ? Direct Program Award Year: Fiscal Year 2020-2021 Compliance Requirement: Subrecipient Monitoring Questioned Costs: None Criteria Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) ?200.303 states that the non-Federal entity (City) must establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in ?Standards for Internal Control in the Federal Government? issued by the Comptroller General of the United States or the ?Internal Control Integrated Framework,? issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) establish and maintain effective internal control over the Federal awards. Per ?200.331, a pass-through entity (the City) must make case-by-case determinations whether each agreement it makes for the disbursement of Federal program funds casts the party receiving the funds in the role of a subrecipient or a contractor. A pass-through entity (the City) with subrecipients is required to evaluate each subrecipient?s risk of noncompliance with Federal statutes, regulations, and the terms and conditions of the subaward for purposes of determining the appropriate subrecipient monitoring. Depending upon the pass-through entity?s assessment of risk posed by the subrecipient, the entity must develop techniques/tools to ensure proper accountability and compliance with program requirements and achievement of performance goals by the subrecipient. Per ?200.502, the determination of when a Federal award is expended must be based on when the activity related to the Federal award occurs; for amounts passed through to subrecipients, the basis is when the disbursement is made. Condition During our testing of compliance with the subrecipient monitoring requirement, the City noted that this requirement was not applicable during FY 2021. Cause of Condition The City?s existing internal control system is not properly designed to meet the control objectives under subrecipient monitoring. Per review of the SEFA as of June 30, 2021, the City reported $1,684,839 passed through to subrecipients under assistance listing 11.307. Per inquiry of City personnel, these amounts were provided to Cen-Cal Business Finance Group (Cen-Cal), but the City determined that Cen-Cal?s status was that of an independent contractor and therefore did not have the required subrecipient monitoring procedures in place. Per review of Cen-Cal?s audit report as of September 30, 2021, Cen-Cal identified $1,557,363 in Federal expenditures, passed through the City of Fresno under assistance listing 11.307. Upon review of the Agreement for Administration of City of Fresno Revolving Loan Fund made and entered into effective November 22, 2019, and review of the amendment made and entered into as of September 24, 2020, we noted characteristics that support the classification of Cen-Cal as a subrecipient of the City?s 11.307 funds. Per auditor judgment, Cen-Cal is a subrecipient of the City?s 11.307 funds and the subrecipient monitoring compliance requirements under the Economic Adjustment Assistance program were applicable to the City during the fiscal year ended June 30, 2021. Effect of Condition There is increased risk of noncompliance with the subrecipient monitoring requirement as set forth in the U.S. Office of Management and Budget (OMB) Compliance Supplement, which can jeopardize future federal funding as well as result in the payback of federal awards. Repeat Finding No. Recommendation We recommend the City design and implement internal control activities over the subrecipient monitoring compliance requirement under the Uniform Guidance. Although Cen-Cal had a Single Audit performed as of their fiscal year ended September 30, 2021, the City should develop techniques/tools to ensure proper accountability and compliance with program requirements by the subrecipient. We also recommend the City reevaluate policies and procedures in its determinations whether each agreement it makes for the disbursement of federal funds casts the party receiving the funds in the role of a subrecipient or a contractor. Management Response and Corrective Action Plan After reviewing the auditors? rationale and conclusions, the City agrees that Cen-Cal is a subrecipient as defined by the Uniform Guidance. As such, the City will use its Subrecipient Monitoring policy (implemented as of July 1, 2022) to govern the interactions between Cen-Cal and the City in the use of monies in the Fresno Revolving Loan Fund.

Program: Coronavirus Relief Fund (CRF) CFDA No.: 21.019 Federal Agency: U.S. Department of the Treasury (Treasury) Passed Through: N/A ? Direct Program Award Year: Fiscal Year 2019-2020 Compliance Requirement: Activities Allowed or Unallowed and Allowable Cost/Cost Principles Questioned Costs: $188 to $446,875 Criteria Activities Allowed or Unallowed: The CARES Act provides that payments from the CRF may only be used to cover costs that: 1. Are necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019 (COVID?19); 2. Were not accounted for in the budget most recently approved as of March 27, 2020 (the date of enactment of the CARES Act) for the State or government; and 3. Were incurred during the period that begins on March 1, 2020, and ends on December 31, 2021. Allowable Cost/Cost Principles: Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) ? ?200.303 states that the non-Federal entity (City) must establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in ?Standards for Internal Control in the Federal Government,? issued by the Comptroller General of the United States, or the ?Internal Control Integrated Framework,? issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and establish and maintain effective internal control over the Federal awards. Allowable Cost/Cost Principles and Subrecipient Monitoring: ? ?200.510(b) states that the auditee (the City) must prepare a Schedule of Expenditures of Federal Awards (SEFA) for the period covered by the auditee?s financial statements, which must include the total federal awards expended as determined in accordance with ?200.502. At a minimum, the schedule must include the total amount provided to subrecipients from each Federal program under ?200.510(b)(4). ? Per ?200.502, the determination of when a Federal award is expended must be based on when the activity related to the Federal award occurs; for amounts passed through to subrecipients, the basis is when the disbursement is made. The control objective related to the activities allowed or unallowed and allowable cost/cost principles compliance requirements is to provide reasonable assurance that Federal awards are expended only for allowable activities and that the costs of goods and services charged to Federal awards are allowable and in accordance with applicable cost principles. Condition During our testing of controls over compliance with the activities allowed or unallowed and allowable cost/cost principles for non-payroll expenditures, we noted the following deviations from the City?s established controls: ? 2 out of 40 samples were for payments processed outside of the City?s policies and procedures for purchases, including the provisions under the City?s Emergency Services Ordinance. The 2 payments for $79,904 and $94,500 exceeded the limit for decentralized purchases, which therefore required a purchase order number from the City?s Purchasing Division to ensure the accountability of procurements and qualification of new vendors. However, the payments were made via direct wire transfer, circumventing the City?s established policies and procedures over procurements. In addition, the wire transfer requests for these payments were initiated and authorized by the same individual; said individual was not the Director of Emergency Services or a member of the City Council. We also noted the following instances of noncompliance with the activities allowed or unallowed and allowable cost/cost principles for non-payroll expenditures: ? 1 out of 40 samples were costs for food items. It was noted in the documents provided by the City that the costs were for ?COVID EOC Lunch meetings ? Round Table Pizza and Chipotle, and snack provisions from Walmart and Grocery Outlet,? under the criteria, ?Any other necessary COVID-19 expense.? Based on the Guidance issued by the Treasury, the costs ($188) do not appear to be eligible expenditures under the CRF. ? 1 out of 40 samples was a transfer of $750,000* related to funds passed by the City to a subrecipient during the fiscal year; this was not included in total amount provided to subrecipients on the City?s preliminary SEFA as required under ?200.510(b)(4). This was also not in compliance with the Subrecipient Monitoring requirement; see details under Finding 2020-005. ? 4 out of 40 samples were amounts passed through to subrecipients after fiscal year-end, and the disbursements were improperly recorded as CRF expenditures during the audit period and included in the City?s preliminary SEFA; these samples totaling $446,875* were not in conformance with ?200.502. These samples were also not in compliance with the Subrecipient Monitoring requirement; see details under Finding 2020-005. The preliminary SEFA provided by the City for the year ended June 30, 2020, reported CRF total expenditures of $13,462,437 and $0 passed-through to subrecipients. After audit adjustments for the amounts (*) above and adjustments of $719,195 identified by the City, CRF expenditures total $13,734,757 and $750,000 passed-through to subrecipients. Cause of Condition The City?s existing internal control system is not designed, or operating as designed, to prevent or detect and correct noncompliance of CRF expenditures on a timely basis. However, this appears to be isolated to transactions made by members of the City?s CARES Action Team and Emergency Operations Center (EOC), as there is inadequate segregation of duties among those who initiate payments and those who approve payments. Effect of Condition The inability to properly identify and track federal expenditures or to detect misstatements in the SEFA increases the likelihood that federal expenditures would not be fairly reported. There is increased risk of noncompliance with the requirements set forth in the U.S. Office of Management and Budget (OMB) Compliance Supplement which can jeopardize future federal funding as well as result in the payback of federal awards. In addition, Section 601(f)(2) of the Social Security Act provides that if the Treasury Office of Inspector General (OIG) determines that a recipient of payments from the CRF has failed to comply with the use of funds provisions of Section 601(d), the amount equal to the amount of funds used in violation of such subsection shall be booked as a debt of such entity owed to the federal government. Recommendation Although we recognize that the City was under intense pressure to procure goods and services quickly during the COVID-19 public health emergency and took steps to maximize reimbursement under the CRF, we recommend the City design and implement internal control policies and procedures to ensure that all transactions related to payments from the CRF, especially those made by members of the City?s CARES Action Team and EOC, are in compliance with the requirements outlined under the CRF. We also recommend the City improve segregation of duties over CRF expenditures to ensure that no one person can initiate and approve a transaction. If segregation of duties is not practical, management should develop alternative, compensating control activities in the form of independent verification to ensure proper review and approval at all levels. In addition, we recommend adherence to the City?s written policy regarding the centralization of purchases through the City?s Purchasing Division, and special attention should be given to any deviation from the City?s established policies and procedures over procurements. Management Response and Corrective Action Plan The City would like to comment on various aspects of this finding: In reference to the wires for two purchases ($79,904 and $94,500): The City disagrees that these purchases violated the City?s internal control practices. In the matter of the individual requesting the wire, the City agrees that one individual was listed as requesting and authorizing the wire. However, two other individuals were responsible for booking and approving the journal, thus maintaining segregation of duties and internal control. City staff also had the authority to make these purchases without going through the Purchasing Unit based on the following Municipal Code section: SEC. 2-506. - POWERS AND DUTIES OF DIRECTOR OF EMERGENCY SERVICES DURING DISASTER, EMERGENCY OR STATE OF EMERGENCY. In the event of the proclamation of a disaster or emergency as herein provided or by the proclamation of a state of emergency by the Governor or the State Director of Emergency Services, the Director, or City Council by majority vote (except for subsections (a), (b), and (o) below), is hereby empowered to: (j) Obtain vital supplies, equipment, and such other properties found lacking and needed for the protection of life and property of the people, and bind the City for the fair value thereof, and if required immediately, to commandeer the same for public use. Any expenditures made in such connection with emergency service activities, including mutual aid activities, shall be deemed conclusively to be for the direct protection and benefit of the inhabitants and property of the City. In reference to EOC Meals ($188): The City believes this is an eligible expense. Instruction that City staff received regarding expenses eligible for CARES reimbursement was to use Federal Emergency Management Agency (FEMA) guidelines in the absence of clear CRF guidance. At the time that the EOC meals expense was incurred, there was no guidance regarding meal reimbursement for CRF expenditures. Based on the FEMA Public Assistance Program and Policy Guide (V3.1) for April 2018, City staff felt that the expenses fit the following criteria: 8. Meals Applicants often provide meals for emergency workers. Provision of meals, including beverages and meal supplies, for employees and volunteers engaged in eligible Emergency Work, including those at EOCs, is eligible provided the individuals are not receiving per diem and one of the following circumstances apply: ? Meals are required based on a labor policy or written agreement that meets the requirements of Chapter 2:V.A.1; ? Conditions constitute a level of severity that requires employees to work abnormal, extended work hours without a reasonable amount of time to provide for their own meals; or ? Food or water is not reasonably available for employees to purchase. FEMA only reimburses the cost of meals that are brought to the work location and purchased in a cost-effective and reasonable manner, such as bulk meals. FEMA does not reimburse costs related to group outings at restaurants or individual meals. In reference to SEFA reporting: The City agrees with the findings and associated recommendations. The handling of the SEFA reporting has been updated.

Program: Coronavirus Relief Fund (CRF) CFDA No.: 21.019 Federal Agency: U.S. Department of the Treasury (Treasury) Passed Through: N/A ? Direct Program Award Year: Fiscal Year 2019-2020 Compliance Requirement: Subrecipient Monitoring Questioned Costs: $625,000 Criteria ?200.510(b) under the Uniform Guidance states that the auditee (City) must prepare a SEFA for the period covered by the City?s financial statements, which must include the total federal awards expended as determined in accordance with ?200.502. Per ?200.502, the determination of when a Federal award is expended must be based on when the activity related to the Federal award occurs; for amounts passed through to subrecipients, the basis is when the disbursement is made. At a minimum, the schedule must include the total amount provided to subrecipients from each Federal program under ?200.510(b)(4). In addition, ?200.331 states that a pass-through entity (the City) must make case-by-case determinations whether each agreement it makes for the disbursement of Federal program funds casts the party receiving the funds in the role of a subrecipient or a contractor. A pass-through entity (the City) with subrecipients is required to evaluate each subrecipient?s risk of noncompliance with Federal statutes, regulations, and the terms and conditions of the subaward for purposes of determining the appropriate subrecipient monitoring. Depending upon the pass-through entity?s assessment of risk posed by the subrecipient, the entity must develop techniques/tools to ensure proper accountability and compliance with program requirements and achievement of performance goals by the subrecipient. Furthermore, ?200.332(a) states that a pass-through entity (the City) must ensure that every subaward is clearly identified to the subrecipient as a subaward and includes the required award information so that the Federal award is used in accordance with Federal statutes, regulations and the terms and conditions of the Federal award. Condition The City did not include the total amount of $750,000 provided to subrecipients in the preliminary SEFA for the year ended June 30, 2020. We also noted the City included amounts disbursed to subrecipients subsequent to year-end within the total amount of CRF expenditures in the preliminary SEFA for the year ended June 30, 2020; the amounts in question totaled $625,000, which includes $446,875 noted in Finding 2020-004. Furthermore, the City did not ensure that every subaward was clearly identified to the subrecipients or perform monitoring procedures as required under the Uniform Guidance. Cause of Condition The City?s existing internal control system is not properly designed to meet the control objectives under subrecipient monitoring. The City appropriated CARES Act monies to create various programs (Housing Retention Grant Program, Save Our Small Business Program, and Farm to Family Program) to provide economic support in connection with the COVID-19 public health emergency, and payments were made to various agencies to administer those programs. Per discussion with management, due to the covered period outlined in the initial guidance released by the Treasury on April 22, 2020, management was pressed to expend the City?s CRF allocation by December 30, 2020. Effect of Condition There is increased risk of noncompliance with the subrecipient monitoring requirement as set forth in the U.S. Office of Management and Budget (OMB) Compliance Supplement, which can jeopardize future federal funding as well as result in the payback of federal awards. Recommendation We recognize that the City took steps to maximize reimbursement under the CRF program and there were numerous revisions to the Treasury?s CRF program guidance subsequent to actions already taken by the City. We also noted that the City conducted spot audits to ensure that the agencies were following eligibility requirements outlined for the various programs created with CRF funds, but the subrecipient monitoring requirements under the Uniform Guidance were overlooked. Management has since expressed their intentions to improve accountability, so as part of ongoing efforts, we recommend management within the City?s Finance Department design and implement internal control activities over the subrecipient monitoring compliance requirement under the Uniform Guidance. We also recommend the City create policies and procedures for making required communications to the subrecipients and monitoring the subrecipients? activities as required. In addition, we recommend that a responsible member of management reviews costs charged to the CRF in accordance with applicable grant agreements and cost principles. Management Response and Corrective Action Plan Given the health emergency and the (then) CARES Act deadline of December 30, 2020, the City did not (and does not) believe that it was feasible to conduct a subrecipient risk assessment prior to funds being disbursed and still meet the then CARES Act deadlines. City staff did audit subrecipients after funds were disbursed. While the City acknowledges that not evaluating the subrecipients? risk is a technical violation, the City does not believe it is a material violation given the factors mentioned previously. With grants that have a longer time frame for expenditure, the City will conduct a risk assessment per the Uniform Guidance.

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