CAPITALIZATION GRANTS FOR DRINKING WATER STATE REVOLVING FUND. U. S. Environmental Protection Agency

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1 APRIL CAPITALIZATION GRANTS FOR DRINKING WATER STATE REVOLVING FUND State Project/Program: DRINKING WATER STATE REVOLVING FUND U. S. Environmental Protection Agency Federal Authorization: Safe Drinking Water Act: Pub. L , Section 1452 NC Department of Environment and Natural Resources Division of Water Infrastructure Agency Contact Person Program Linda Ward Address Confirmation Letters To: Linda Ward NC Department of Environment and Natural Resources-Division of Water Infrastructure 1633 Mail Service Center Raleigh, NC The auditor should not consider the Supplement to be safe harbor for identifying audit procedures to apply in a particular engagement, but the auditor should be prepared to justify departures from the suggested procedures. The auditor can consider the supplement a safe harbor for identification of compliance requirements to be tested if the auditor performs reasonable procedures to ensure that the requirements in the Supplement are current. The grantor agency may elect to review audit working papers to determine that audit tests are adequate. Auditors may request documentation of monitoring visits by the State Agencies. I. PROGRAM OBJECTIVES The primary objective of the Drinking Water State Revolving Fund Program is to provide revolving loans to qualified applicants for public water supply systems infrastructure costs needed to achieve or maintain compliance with the Safe Drinking Water Act requirements and protect the public health objectives of the Act. II. PROGRAM PROCEDURES The Environmental Protection Agency (EPA) makes capitalization grants available to the State. The State provides 20% in matching State funds. However, grants awarded under the American Recovery and Reinvestment Act of 2009 (ARRA) do not require a State match. Local governments may request loan funds from the North Carolina Department of Environment and Natural Resources (DENR). A number of steps are followed in determining which local governments qualify to receive funding. Meetings are held with local government representatives, if requested. Recipients must complete an application package including an environmental review, if applicable, which is submitted to DENR for approval by September 30. After reviewing the applications, B

2 DENR issues a priority list which becomes part of the State s Intended Use Plan (IUP) and is approved by EPA. Public meetings are held and the list is revised as necessary. DENR sends the appropriate portion of package to the Local Government Commission who approves the loan amount, sets the interest rate and repayment terms. DENR sends a loan offer (Part A) which includes 10% contingency to recipient. This agreement outlines the terms of the loan and a loan origination fee of 2% to be paid to DENR by the applicant. DENR reviews the bid packet (a component of Part B of the offer) checking for minority businesses, debarred list, etc. DENR approves standard set of documents and authorization to award contract to lowest responsible bidder. If bids are more than 10% over the loan offer, a revised application must be approved by the LGC and DENR. Recipient issues Notice to Proceed which establishes accrual date for interest. Interest accrues from the scheduled completion date. Actual completion date establishes first repayment date on either May 1 or November 1, whichever is at least 6 months after the actual completion date. Memo is sent by DENR to Local Government Commission (LGC) requesting Preliminary Promissory Note which is sent to recipient. During construction, requests for payment are made to DENR with accompanying invoices which are reviewed and approved by DENR engineers and administrative staff. Modifications in the payment request are made for items over budget or contract or unallowed costs. Any change orders are adjusted from the contingency budget. DENR sends a memo to LGC with actual completion date which determines the due date of first loan repayment. LGC prepares a final repayment schedule. Source of Governing Requirements The program is authorized under Section 1452 of the Public Health Service Act (Title XIV), commonly known as the SDWA (42 USC 300j-12), and ARRA (Pub. L. No ) and Conference Report The implementing regulations for the program can be found at 40 CFR part 35, subpart L. Availability of Other Program Information Other general information about the program is available on the EPA Drinking Water State Revolving Fund home page ( Information regarding EPA s ARRA activity is available at III. COMPLIANCE REQUIREMENTS In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirement, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and the look to Parts 3 and 4 for the details of the requirements. A. Activities Allowed or Unallowed Compliance is thoroughly checked by the State during the application process and during the disbursement process, as well as through on-site construction inspections. There is no need for the CPA to do further testing. B

3 B. Allowable Costs/Cost Principles Allowable project costs are limited to the actual costs of the works described in the project application. Unallowable costs are expenditures for repairs, or operation and maintenance of any water supply system projects. Items not covered or allowed in the definition of construction costs as defined in G.S.159G-3(4) are disallowed. For more details, see the EPA document, Drinking Water State Revolving Fund Program Rules, 40 CFR, August, Audit Objectives Ascertain whether charges made to the awarded proceeds were for allowable costs. Suggested Audit Procedures Test a sample of transactions for conformance with the allowability of cost provisions of or limitations in the offer and the project review and cost summary document. Verify that costs are allowable. C. Cash Management All funds loaned pursuant to North Carolina General Statute 159G shall be expended solely for carrying out the approved project and an audit shall be performed in accordance with G.S , as amended. The applicant will expend all of the requisitioned funds for the purpose of paying the costs of the project within three (3) banking days following the receipt of the funds from the State. Please note that the State is not a party to the construction contract(s) and the loan recipient is expected to uphold its contract obligations regarding timely payment. D. Davis Bacon Act All laborers and mechanics employed by contractors and sub contractors on projects funded directly by or assisted in whole or in part by and through the Federal government pursuant to ARRA shall be paid wages at rates not less than those prevailing on projects of a character similar in the locality as determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of Title 40, USC. The non-arra portion of this program is not subject to the Davis-Bacon Act. G. Matching, Level of Effort, Earmarking 1. Matching a. States are required to deposit into the DWSRF from State monies an amount equal to 20 percent of each non-arra grant payment. The match is required to be made on or before the time that EPA funds are drawn. When a letter of credit (LOC) mechanism or similar financial arrangement is used for the State match, payments to the LOC account must be made proportionally on the same schedule as payments for the capitalization grant. Monies from this State match LOC must be drawn into the DWSRF as monies are drawn on the Federal automated clearinghouse account. A State may issue general obligation or revenue bonds to derive the State match. If the State provides a match in excess of the required amount, the excess balance may be banked toward subsequent match requirements (40 CFR section (g)). No State match deposit is required for funds provided under ARRA. b. In the case of the State Program Management set-aside, the State must also provide an amount equal to 100 percent of said payments. A State is authorized to use the amount of State funds expended on its Public Water System Supervision (PWSS) program in fiscal year 1993 (including PWSS match) as a B

4 credit toward meeting its match requirement. The value of this credit can be up to, but not greater than, 50 percent of the amount of match that is required. A State must provide the additional funds necessary to meet the remainder of the match requirement. The sources of these additional funds can be State monies (excluding PWSS match) or documentation of in-kind services. Although required PWSS match cannot be used as a source of additional State monies, State overmatch can be used (40 CFR sections (d)(2) and (h)). 2. Level of Effort Not Applicable 3. Earmarking a. Up to 31 percent of the allotment can be earmarked for set-aside activities as follows: (1) Administrative Expenses Not to exceed 4 percent of the cumulative allotment (40 CFR section (b)). (2) Technical Assistance to Small Systems Not to exceed 2 percent of the cumulative allotment (40 CFR section (c)). (3) State Program Management Not to exceed 10 percent of the cumulative allotment (40 CFR section (d)). (4) Local Assistance and Other State Programs Not to exceed 15 percent of the capitalization grant and no more than 10 percent is used on any one of the defined activities (40 CFR section (e)). b. A State cannot use more than 30 percent of any particular fiscal year s capitalization grant to provide subsidies in the form of principal forgiveness or negative interest rate loans to communities meeting the State s definition of disadvantaged, or communities the State expects to become disadvantaged as a result of the project (40 CFR section (b)). c. States may earmark DWSRF funds awarded under ARRA for the set-asides described in 3.a.(1), (2), and (3) above; however, no funds may be used for the Local Assistance set-aside described in 3.a.(4). d. In addition, ARRA includes the following requirements: (1) Notwithstanding the requirements of Section 1452 (f) of the SDWA, States shall use not less than 50 percent of the amount of its ARRAfunded capitalization grants to provide additional subsidization to eligible recipients in the form of forgiveness of principal, negative interest loans, or grants, or any combination of these (ARRA, Title VII). (2) To the extent that there are sufficient eligible project applications, not less than 20 percent of the funds appropriated shall be for projects to address green infrastructure, water or energy efficiency improvements or other environmentally innovative activities (ARRA, Title VII). H. Period of Availability of Federal Funds Grant payments from a capitalization grant, which increase the ceiling of funds from which a State may draw cash for eligible costs, shall begin no earlier than the quarter in which the grant is awarded, and generally end no later than eight quarters after the grant is awarded, not to exceed 12 quarters from the date of allotment of grant funds to the States. State must obligate funds for eligible projects within one year of accepting a payment. States disburse, or liquidate, grant funds for projects in accordance with construction schedules. Funds are disbursed for set-aside activities in accordance with costs being incurred under approved workplans (40 CFR sections (e) and ). EPA DWSRF grant funds under ARRA must be committed to eligible projects that are under contract or construction in an amount equal to the full value of the ARRA assistance agreement B

5 by February 17, 2010 (one year after enactment of ARRA). Each State must certify in writing, and forward to EPA, not later than March 1, 2010, that projects funded under its ARRA grant have met these requirements. I. Suspension and Debarment: Non-Federal entities are prohibited from contracting with or making subawards under covered transactions to parties that are suspended or debarred or whose principals are suspended or debarred. Audit Objectives Determine whether the non-federal entity obtained the required certifications for covered contracts and subawards. Suggested Audit Procedures 1. Test a sample of contracts and ascertain if the required suspension and debarment certifications were received for subawards and covered contracts. 2. Test a sample of contracts to the List of Parties Excluded From Federal Procurement or Nonprocurement Programs, issued by the General Services Administration and ascertain if contracts were awarded to suspended or debarred parties. J. Program Income The State may charge fees to process, manage, or review an application for Federal assistance. Such fees may be collected in an account outside the DWSRF and used to supplement administrative expenses and for other allowable purposes for which a grant is awarded under 42 USC 300j-12. However, if these fees are deposited into the DWSRF, they are subject to the uses of the DWSRF, which do not include the use of funds for administrative purposes (40 CFR section (b)). L. Reporting 1. Financial Reporting a. SF-270, Request for Advance or Reimbursement Not Applicable b. SF-271, Outlay Report and Request for Reimbursement for Construction Programs Not Applicable c. SF-425, Federal Financial Report Applicable 2. Performance Reporting Not Applicable 3. Special Reporting Not Applicable 4. Section 1512 ARRA Reporting Applicable 5. Subaward Reporting under the Transparency Act Applicable to non-arra funds M. Subrecipient Monitoring The local governments do not subaward any monies to any subrecipients and thus the State is monitoring the local governments as subrecipients. No additional testing is needed by the local CPA. B

6 N. Special Tests and Provisions All projects to which a loan or grant have been committed will be audited in accordance with G.S A copy of the audit must be filed with the Department of Environment and Natural Resources-Controller s Office Audit Objectives Ensure audits are prepared and project expenditures tie to DENR s records. Suggested Audit Procedures Since the State maintains records on a project-to-date basis, a schedule of project-to-date revenues and project-to-date expenditures should be included in the audit report. Please see attachment A for suggested format. Verify that project-to-date expenditures tie to audited numbers. B

7 APRIL 2014 ATTACHMENT A Audit Report Project Description (Ex: Municipal Water Facility) Project No. Municipality For the Period to Statement of Revenues Source of Funds: $ Local (Cash) Bond Sale Proceeds State Funds Federal Funds Identify Fed. Program (grant or loan?) Other Sources Identify $ ============== Statement of Expenditures Construction Cost $ 1. Contract I 2. Contract II Engineering Fee Administrative Expense 1. Identify Legal Fees 1. Identify Other 1. Land 2. Interest, etc. $ ============= B