FEMA Should Recover 

$2.4 Million in Investment 

Gains Pennsylvania 

Improperly Earned on 

Federal Disaster Funds 

November 8, 2016 

OIG-17-07-D 
 

 

 

 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

November 8, 

2016 

Why We 

Did This 

Audit 

During the course of a 

related audit, we learned 

that the Commonwealth 

invested disaster funds 

drawn down months and, 

in some cases, years in 

advance of the actual 

need, but did not remit the 

investment gains to the 

Federal Government. 

What We 

Recommend 

FEMA should collect 

$2.4 million from the 

Commonwealth for 

investment returns 

earned on Federal 

disaster assistance 

funds. FEMA should also 

determine whether any 

additional Federal funds 

were invested and take 

steps to collect earnings 

that may exist. 

For Further Information: 

Contact our Office of Public Affairs at 

(202) 254-4100, or email us at 

DHS-OIG.OfficePublicAffairs@oig.dhs.gov 

What We Found 

Contrary to Federal regulations and the 

Pennsylvania Emergency Management Agency’s 

(PEMA) own policies and procedures, PEMA 

drew down all available Federal disaster 

assistance funds for all (both large and small) 

public assistance projects on two disasters in 

2004 and 2005. The Commonwealth of 

Pennsylvania (Commonwealth) invested these 

funds, earning $2.4 million. PEMA did not report 

to the Federal Emergency Management Agency 

(FEMA) that it drew down funds prematurely. 

The investment gains were not remitted to 

FEMA, as required by Federal regulations. 

PEMA made the drawdowns available to the 

Commonwealth’s subgrantees for their projects, 

regardless of project completion. PEMA did not 

monitor the subgrantees’ use of these funds. 

As a result, FEMA should collect $2.4 million of 

investment gains the Commonwealth earned on 

Federal disaster funds. Additionally, we 

recommend that FEMA work with PEMA to 

determine whether any of the funds disbursed to 

the other subgrantees were invested and, if so, 

collect any investment returns. 

FEMA’s Response 

FEMA Region III officials agreed with our two 

recommendations and identified corrective 

actions sufficient to record our 

recommendations as resolved and open. FEMA’s 

written response is included as appendix B. 

www.oig.dhs.gov 2 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Washington, DC 20528 / www.oig.dhs.gov 

November 8, 2016 

MEMORANDUM FOR: MaryAnn Tierney 

Regional Administrator, Region III 

Federal Emergency Management Agency 

~1M·~ 

FROM: Thomas M. Salmon 

Assistant Inspector General 

Office of Emergency Management Oversight 

SUBJECT: FEMA Should Recover $2.4 Million in Investment Gains 

Pennsylvania Improperly Earned on Federal Disaster 

Funds 

For your action, attached is our final report, FEMA Should Recover $2.4 Million 

in Investment Gains Pennsylvania Improperly Earned on Federal Disaster Funds. 

We incorporated the comments provided by your office. 

The report contains two recommendations aimed at correcting conditions that 

existed as a result of the Pennsylvania Emergency Management Agency's cash 

management of disaster funds. Your office concurred with both of our 

recommendations. Based on information provided, we consider 

recommendations 1 and 2 resolved and open. 

Consistent with our responsibility under the Inspector General Act, we will 

provide copies of our report to congressional committees with oversight and 

appropriation responsibility over the Department of Homeland Security. We will 

post the report on our website for public dissemination. 

Please call me with any questions, or your staff may contact Paul Wood, 

Director of the Emergency Management Oversight, National Capital Region 

Office, at (202) 254-4100. 

www.oig.dhs.gov 3 OIG-17-07-D 
 

 

 

 

Total Public 

Disaster Date Disaster Period Federal 

Assistance 

Dollars 

Number Declared Beginning Ending Share Obligated 

1557 9/19/2004 9/17/2004 10/1/2004 75% $ 85,266,595 

1587 4/14/2005 4/2/2005 4/23/2005 75% $ 18,759,804 

Total Public Assistance Funding $104,026,399 

Source: Prepared by DHS Office of Inspector General (OIG) using data from FEMA.gov 

 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Background
 

The Commonwealth of Pennsylvania (Commonwealth) experienced five 

consecutive disasters from August 2004 to June 2006. These five disasters 

caused considerable damage from heavy rains, flooding, and mudslides. The 

Pennsylvania Emergency Management Agency (PEMA) explained that Tropical 

Storm Ivan (disaster 1557) was the third storm to hit the Commonwealth 

during a six-week period. After the first two disasters, the situation across the 

Commonwealth was rapidly deteriorating when Ivan (disaster 1557) severely 

damaged infrastructure statewide. 

PEMA further explained that, during the performance of the recovery efforts for 

Ivan (disaster 1557), the Commonwealth Coordinating Officer made a decision 

to pay the full Federal share to applicants of large public assistance projects as 

soon as funds were available. This decision carried over to the next 

presidentially declared disaster (disaster 1587), a storm that brought severe 

weather and flooding to the Commonwealth in April 2005. 

Table 1 - Pennsylvania Disasters DR 1557 and 1587 

Results of Audit 

Contrary to Federal regulations and PEMA’s own policies and procedures, 

PEMA drew down all available Federal disaster assistance funds for all (both 

large and small1) public assistance projects on two disasters in 2004 and 2005. 

PEMA took these funds as soon as FEMA approved the projects and obligated 

the funds without regard of actual costs incurred. Project funds awarded to 

departments and agencies of the Commonwealth (state agencies), not 

immediately needed to pay current obligations, were held in the general fund. 

The Commonwealth’s Treasurer invested the excess general fund account 

balances through the Commonwealth Investment Program. Under this 

program, the Commonwealth’s Treasury created two separate investment 

1 Federal regulations in effect at the time of these disasters set the large project thresholds at 

$54,100 for disaster 1557 and $55,500 for disaster 1587. For small projects, payment is made 

at the time of project approval. For large projects, funds generally are made available to the 

applicant as costs are incurred and work is completed. 

www.oig.dhs.gov 4 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

 

options, called pools, each with its own distinct investment strategies, goals, 

and holdings. 

Subgrantees, other than Commonwealth agencies, such as counties, cities, 

towns, and boroughs, (other subgrantees) promptly received the full Federal 

share of their disaster assistance awards. The Single Audit for Fiscal Year 2005 

reported that PEMA had no procedures in place to monitor other subgrantees 

for excess cash on hand during project performance. 

Charts 1 and 2 demonstrate the timing relationship between the drawdowns, 

reported expenditures of all subgrantees, and the expenditures of the 

Commonwealth agencies. 

Chart 1 - Cumulative Drawdowns Compared to Cumulative Transfers 

of the Funds for All Subgrantees 

$0 

$50,000,000 

$100,000,000

 Cumulative Drawdown Subgrantee Expenses 

Source: Prepared by DHS OIG using data from PEMA 

Chart 1 shows that the drawdowns equaled the reported expenses for all 

subgrantees (both Commonwealth agencies and other subgrantees). This 

occurred because PEMA withdrew the full-approved Federal share of the 

project and reported this amount as the current expense when it initiated the 

drawdowns. As a result, PEMA took all of the available, approved funds for the 

two disasters by the summer of 2006. 

Chart 2 shows that all available Federal funds awarded to Commonwealth 

agencies were drawn down as soon as the projects were approved and obligated 

by FEMA. The blue line on the graph demonstrates that the Commonwealth 

took all available funds before June 2006. All funds that remained after the 

Commonwealth paid the current expenses were held in the general fund 

account. These funds are the source of the excess balances invested by the 

Commonwealth. The red line represents the expenditures of the 

www.oig.dhs.gov 5 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

 

 

 

Commonwealth agencies as they used the funds to pay for current expenses. 

Consistent progress on the projects began after June 2008, and most of the 

funds were used by the end of 2009. 

Chart 2 - Commonwealth Agencies Drawdowns and Expenses 

$25,000,000 

$20,000,000 

$15,000,000 

$10,000,000 

$5,000,000 

$0 

Excess of drawdowns 

over expenses 

Cumulative Drawdowns Expenses 

Source: Prepared by DHS OIG using data from PEMA 

PEMA’s Actions Violated the Cash Management Improvement Act of 1990 

These actions did not follow PEMA’s normal procedure of initiating drawdowns 

and violated the Cash Management Improvement Act of 1990 (CMIA), that 

require: 

(a) a State and a Federal Program Agency ... minimize the time elapsing 

between the transfer of funds from the United States Treasury and the 

State’s payout of funds for Federal assistance program purposes, 

whether the transfer occurs before or after the payout of funds2; and 

(b) a State and a Federal Program Agency ... limit the amount of funds 

transferred to the minimum required to meet a State’s actual and 

immediate cash needs.3 

2 31 Code of Federal Regulations (CFR) § 205.11(a) 

3 31 CFR § 205.11(b) 

www.oig.dhs.gov 6	 OIG-17-07-D 
Average Quarterly Invested Amount $25,000,000 

$20,000,000 

$15,000,000 

$10,000,000 

$5,000,000 

$0 

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Quarters During the Investment Period 

Source: Prepared by DHS OIG using the Commonwealth’s Comptroller data 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

PEMA Accumulated Cash Balances, Invested the Excess Cash, Earning 

$2.4 million 

PEMA’s withdrawal of the full Federal share resulted in substantial invested 

cash balances. These cash balances averaged approximately $12 million per 

year, and PEMA held these balances over a period of 6 years. The highest cash 

balance was more than $19.4 million in early 2006. 

Table 2 – Excess Federal Funds Held as Cash Balances 

and Invested by the Commonwealth 

The Pennsylvania Department of Conservation and Natural Resources (DCNR) 

received disaster assistance for the repair and restoration of the Delaware 

Canal, a National Historic Landmark. DCNR was slow to begin the restoration 

project because the back-to-back storms created the need for repeat survey 

work and slowed the completion of historic and environmental reviews. As a 

result, PEMA and DCNR did not see a measurable reduction in the excess 

balances until mid-2008, after which the work progress increased and the 

balances began to decline until all projects were completed in 2011. 

We first learned that the Commonwealth invested the excess balances during 

our audit DA-13-25, Pennsylvania Department of Conservation and Natural 

Resources Appropriately Expended $33.6 Million of FEMA Public Assistance 

Funds, dated September 2013. During that audit, a DCNR official asked us for 

guidance on the appropriate handling of investment returns earned on FEMA 

funds held by the Commonwealth. We received an electronic spreadsheet, 

which detailed investment gains totaling approximately $2.4 million. 

www.oig.dhs.gov 7 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

 

 

FEMA Was Aware of PEMA’s Actions to Take Funds Early But Did Not 

Know the Commonwealth Invested the Funds 

FEMA Region III officials were aware of PEMA’s practice of drawing down the 

available Federal disaster assistance funds as soon as the funds were 

obligated. DHS OIG issued a limited review report, OIG-S-23-08, in September 

2008 following an analysis of the Commonwealth’s Single Audit for Fiscal Year 

Ending June 30, 2005. The Single Audit noted that PEMA was drawing the full 

Federal share of total eligible costs on the approved projects rather than actual 

costs. FEMA Regional staff worked with PEMA to address the issues identified 

in that report. In addition, FEMA Region III implemented procedures in 2015 

that would identify any excess drawdowns. 

Due to staff turnover, current FEMA Region III staff was not familiar with the 

Commonwealth disasters covered by our audit. FEMA Regional officials told us 

they were not aware that PEMA invested the Federal funds. 

PEMA Does Not Agree with the Amount of Investment Returns We 

Claimed Was Due 

We shared our preliminary findings with PEMA officials on March 4, 2016, and 

March 31, 2016, and encouraged them to contact FEMA to resolve the 

outstanding investment issue. PEMA sent a letter to FEMA Region III, 

addressing our preliminary finding. In its letter, PEMA acknowledged that the 

Commonwealth drew down the entire amount of obligated Federal disaster 

funds in advance of actual expenditures. PEMA also acknowledged that the 

Commonwealth invested the money in two separate investment funds4 created 

by the Treasury for its Commonwealth Investment Program. The funds had 

separate investment strategies, goals, and holdings that accommodated 

differing needs for income, cash flows, and investment risk tolerance. PEMA 

did not agree with the amount of investment gains we calculated and provided 

summary totals for a lower investment gain totaling $1,834,550. Since PEMA 

did not provide details to support its investment gains calculation, we could 

not verify PEMA’s computations. PEMA’s letter to FEMA Region III is included 

as appendix C to this report. See appendix D for further comments. 

FEMA Region III officials told us they would support PEMA’s own calculations 

for repayment if it could support the numbers. While we commend PEMA’s 

initiative to resolve this issue, we are concerned with the potentially adverse 

message that a decision to accept PEMA’s position may have. This could have 

future implications for other recipients of disaster assistance. That message 

could include some, if not all, of the following elements: 

4 During our audit, we were unable to ascertain how much of the money was directed to each 

fund. Disaster assistance funds comingled in the general fund become untraceable. 

www.oig.dhs.gov 8 OIG-17-07-D 
 

 

 

 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

	 There are no consequences to disregarding policies and procedures, 

regulations, and laws that relate to the receipt of disaster assistance; 

	 It is an acceptable practice to draw down Federal funds for which 

there is not an immediate need and to hold these funds as excess 

balances; 

	 It is an acceptable practice to invest Federal funds in an investment 

tool that does not provide the most conservative and highest possible 

security to the resources of the taxpayers; and 

	 The Federal Government will share in the investment losses of 

recipients of Federal aid.5 

Regulations found in 44 Code of Federal Regulations (CFR) §13.21(i)6 address 

interest earned on advances. Advances are payments received in advance of the 

intended use and are allowed under 44 CFR §13.21 (c). However, we believe by 

taking the funds months and years in advance of the intended use, PEMA 

made unnecessary and inappropriate advances. Paragraph (i) of §13.21 states 

that “grantees and subgrantees shall promptly...remit interest earned on 

advances to the Federal agency.” PEMA did not comply with this provision and 

furthermore did not notify FEMA that it had invested the funds in 

Commonwealth Treasury investment products. 

As a result, FEMA should recover the total amount of investment gains, 

calculated as $2,430,541, using the returns for the most conservative 

investment offered by the Commonwealth Treasurer. 

Recommendations 

We recommend that the Regional Administrator, FEMA Region III: 

Recommendation 1: Collect $2,430,541 from the Commonwealth of 

Pennsylvania for investment gains earned on disaster assistance funds. 

Recommendation 2: Work with PEMA to determine whether any of the funds 

disbursed to the other subgrantees were invested and, if so, collect any 

investment returns. 

5 We noted that one of the investment pools used to invest Federal funds earned a negative
 

return, or lost money, in 27 of the 76 months during the period February 2005 to November
 

2011. 

6 In December 2014, FEMA adopted 2 CFR Part 200, or the “Super Circular,” for disasters 

declared on or after December 26, 2014. For disaster declarations before December 26, 2014,
 

44 CFR Part 13 continues to apply to state and local governments.
 

www.oig.dhs.gov 9	 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

 

 

Management Comments and OIG Analysis
 

We discussed the results of our audit with PEMA, and with FEMA Region III 

officials during our audit. We also provided a summary of our findings and 

recommendations in advance and discussed it with PEMA and the 

Commonwealth officials on March 4, 2016, and March 31, 2016, and with 

FEMA officials on March 17, 2016, and August 4, 2016. We included their 

comments in this report, as appropriate. 

Your office provided a written response dated October 17, 2016 and agreed 

with our findings and recommendations. The response indicated that FEMA 

will work with PEMA to set up a schedule for re-payment of the investment 

returns earned and to determine if any additional investment returns were 

earned by the other subgrantees. FEMA provided an estimated completion date 

of June 30, 2017 for recommendation 1, and September 30, 2017 for 

recommendation 2. Therefore, we consider the report recommendations to be 

resolved and open. Please provide our office documentation necessary to inform 

us about the status of the open recommendations by June 30, 2017, the 

estimated completion date of recommendation 1. 

www.oig.dhs.gov 10 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

 

 

Appendix A 

Objective, Scope, and Methodology 

The Department of Homeland Security (DHS) Office of Inspector General (OIG) 

was established by the Homeland Security Act of 2002 (Public Law 107ï296) by 

amendment to the Inspector General Act of 1978. 

We audited PEMA’s cash management practices relating to FEMA disaster 

assistance funds on two disasters, numbers DR-1557 and DR-1587. Our 

objective was to determine whether Pennsylvania complied with the 

administrative and reporting requirements related to cash management of 

Federal grant funds. 

To accomplish our objective we interviewed PEMA, Commonwealth, and FEMA 

personnel; reviewed PEMA files to confirm excess drawdowns, the timing of the 

drawdowns, the amounts, and investment returns earned. We independently 

calculated interest liability on excess funds based on the U.S. Treasury rates 

for the period and compared this interest to PEMA’s actual investment 

earnings; reviewed related FEMA and PEMA guidance, procedures, and 

documentation; reviewed pertinent rules and regulations relating to cash 

management practices. 

We conducted this audit between February 2015 to August 2016 pursuant to 

the Inspector General Act of 1978, as amended, and according to generally 

accepted government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based upon our audit 

objectives. We believe that the evidence obtained provides a reasonable basis 

for our findings and conclusions based upon our audit objectives. 

The Office of Emergency Management Oversight’s major contributors to this 

report are Paul Wood, Director; John McPhail, Supervisory Program Analyst; 

Ken Valrance, Auditor-in-Charge; and Stuart Josephs, Independent Referencer. 

www.oig.dhs.gov 11 OIG-17-07-D 
 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix B 

FEMA Region III Audit Response 

www.oig.dhs.gov 12 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix B (continued) 

www.oig.dhs.gov 13 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix C 

Correspondence from PEMA to FEMA Region III 

www.oig.dhs.gov 14 OIG-17-07-D 
 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix C (continued)
 

www.oig.dhs.gov 15 OIG-17-07-D 
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Department of Homeland Security 

Appendix C (continued)
 

www.oig.dhs.gov 16 OIG-17-07-D 
 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix C (continued)
 

www.oig.dhs.gov 17 OIG-17-07-D 
 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix C (continued)
 

www.oig.dhs.gov 18 OIG-17-07-D 
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Department of Homeland Security 

Appendix C (continued)
 

www.oig.dhs.gov 19 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix D 

Our Interpretation of PEMA’s Interest Computation 

Table 3 – Investment Gains and Interest Liability 

Amount 

PEMA Computed Investment Gains $ 1,834,550 

OIG’s Computed Accrued Interest Liability $ 2,013,350 

OIG’s Computed Investment Gains $ 2,430,541 

PEMA’s Calculation of Investment Returns Includes Investment Losses 

PEMA did not provide details to support its calculation of the investment gains; 

as a result, we are unable to compare PEMA’s calculations of investment gains 

with our calculations. 

PEMA acknowledged the funds were invested in two separate investment pools 

created by the Treasury for its Commonwealth Investment Program. PEMA 

further explained the pools had “distinct investment strategies, goals, and 

holdings that reflect the differing needs ... for income, liquidity, and investment 

risk tolerance”. We noted that one of the investment pools earned a negative 

return, or lost money, in 27 of the 76 months during the period February 2005 

to November 2011. 

OIG’s Calculation of the Interest Liability Accrual and Investment Returns 

Our computation of the CMIA interest liability accrual resulted in a liability of 

$2,013,350. This computation is based on the CMIA rules and regulations and 

uses interest rates obtained from U.S. Treasury sources, as agreed to by PEMA 

via their signed U.S. Treasury agreement. The CMIA interest liability accrual is 

the minimum amount PEMA owes the Federal Government. 

We computed investment earnings of $2,430,541 using PEMA’s returns on 

investment Pool 99 and PEMA’s balance of excess FEMA disaster funds. The 

earnings period is from November 2005 to November 2011. Commonwealth’s 

investment Pool 99 is described in the Treasurer’s investment policy as 

designed to provide a high degree of liquidity and safety and benchmarked 

against 3-month Treasuries. 

Initially, we reported to PEMA investment earnings of $2,387,262 based on the 

principal and interest rate data PEMA provided. Upon verification of PEMA’s 

data, we revised the investment earnings to $2,430,541. As per paragraph (i) of 

§13.21 which states that “grantees and subgrantees shall promptly...remit 

interest earned on advances to the Federal agency.” This is the amount PEMA 

must remit as the interest earned or the investment return. 

www.oig.dhs.gov 20 OIG-17-07-D 
 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix D (continued) 

Finally, since regulations in 44 CFR §13.21(b) and (c) require that “methods 

and procedures for payment shall minimize the time elapsing between the 

transfer of funds and the disbursement by the grantee or subgrantee”, we 

believe Federal funds should not be held for investment. However, if they are, 

regulations in 31 CFR §205.19(b) set a standard of the “annualized rate equal 

to the average equivalent yields of 13-week Treasury Bills” for interest 

liabilities, which are considered to be among the most conservative and secure 

investments available. 

www.oig.dhs.gov 21 OIG-17-07-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix E 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

General Counsel 

Executive Secretary 

Chief Financial Officer 

Under Secretary for Management 

Assistant Secretary for Office of Policy 

Assistant Secretary for Office of Public Affairs 

Assistant Secretary for Office of Legislative Affairs 

Chief Privacy Officer 

Audit Liaison, DHS 

Federal Emergency Management Agency 

Administrator 

Chief of Staff 

Chief Financial Officer 

Chief Counsel 

Associate Administrator for Policy, Program Analysis and International 

Affairs 

Director, Risk Management and Compliance 

Audit Liaison, FEMA (Job Code G-14-047) 

Audit Liaison, FEMA Region III 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees 

External 

Director – Pennsylvania Emergency Management Agency 

Pennsylvania Auditor General 

www.oig.dhs.gov 22 OIG-17-07-D 
 

 

 

 

 

 

 

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