Management Advisory -

CalRecycle, a California 

State Agency, Needs 

Assistance to Ensure that 

$230 Million in Disaster 

Costs are Valid 

March 6, 2017 

OIG-17-44-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 


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


March 6, 2017 


MEMORANDUM FOR: Dr. Ahsha Tribble 

Acting Regional Administrator, Region IX 

Federal Emergency Management Agency ' 

~?Vt·~ 

FROM: 	 Thomas M. Salmon 

Assistant Inspector General 1 

Office of Emergency Management Oversight 

SUBJECT: 	 Management Advisory - CalRecycle, a California State 

Agency, Needs Assistance to Ensure that $230 Million 

in Disaster Costs Are Valid 

Report Number OIG-17-44-D 

Attached for your action is our final management advisory report, CalRecycle, a 

California State Agency, Needs Assistance to Ensure that $230 Million in 

Disaster Costs Are Valid. We incorporated the formal comments provided by 

your office. We are currently auditing the California Department of Resources 

Recycling and Recovery (CalRecycle), a California state agency, to determine 

whether its policies, procedures, and business practices are adequate to 

manage Federal Emergency Management Agency (FEMA) grant funds. However, 

during our audit work we observed an issue that required management's 

attention. 

Our advisory contains two recommendations aimed at directing the California 

Office of Emergency Services (California), to continue providing technical 

assistance to, and ensure compliance with all applicable Federal regulations to 

avoid improperly funding any of the $230 million it expects to claim for debris 

removal cost. Your office concurred with both recommendations. Based on 

information provided in your response to the draft advisory, we consider both 

recommendations resolved but open. We will close these recommendations 

when we receive and review documentation that FEMA has completed its 

proposed corrective actions. Please email closeout documentation and request 

to Humberto.Melara@oig.dhs.gov. 

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. 

OIG- 17-44-D 
OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Management Advisory 

CalRecycle, a California State Agency,
 

Needs Assistance to Ensure that $230 

Million in Disaster Costs Are Valid
 

Through this management advisory, we are bringing to your attention a 

condition that we identified during our current audit of FEMA Public 

Assistance grant funds awarded to the California Department of Resources 

Recycling and Recovery (CalRecycle). Our full audit will include a review of four 

contracts awarded by CalRecycle valued at about $223 million to perform 

disaster-related work. 

CalRecycle expects debris removal work will cost about $230 million, and has 

received invoices totaling $200 million from two contractors. However, the 

invoices included documentation with numerous discrepancies that did not 

fully support the invoiced costs as Federal regulations require. Therefore, 

FEMA has little assurance that these costs are valid and eligible. 

This condition occurred because CalRecycle did not maintain a contract 

administration system adequate to ensure contractors complied with contract 

terms for submitting invoices. We discussed the deficiencies in supporting 

documentation with CalRecycle officials, and they are working with their 

contractors to correct the deficiencies and locate adequate support. 

Our advisory contains two recommendations aimed at directing the California 

Office of Emergency Services (California), to continue providing technical 

assistance to, and ensure compliance with all applicable Federal regulations to 

avoid improperly funding any of the $230 million it expects to claim for debris 

removal cost. 

Background 

In September 2015, two California wildfires destroyed over 146,000 acres and 

2,876 structures. The President declared the disaster on September 22, 2015. 

Lake and Calaveras counties applied for Public Assistance to help them with 

debris removal and disposal of hazardous trees and vegetation that are within 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

the Counties’ rights-of-way. CalRecycle, however, applied for FEMA’s Public 

Assistance to remove debris from private properties damaged by the fires. 

California, a FEMA grant recipient, awarded CalRecycle two large projects 

(Projects 36 and 37) totaling $142.7 million (net of $22.9 million in estimated 

insurance proceeds) to fund debris removal work resulting from the 2015 

wildfires. The award provides 75 percent Federal funding. FEMA plans to 

provide additional funding for the two large projects because CalRecycle 

expects debris removal costs to reach about $230 million. By September 2016, 

California had paid CalRecycle about $68.1 million in Public Assistance 

funding for disaster-related work.1 

Documentation Did Not Fully Support Costs 

CalRecycle expects it will cost about $230 million to complete debris removal 

work, and has received invoices totaling $200 million from two contractors 

performing the work. As part of this management advisory, we conducted a 

limited review of the associated costs and noted numerous discrepancies with 

the invoices that did not fully support the invoiced cost as required by Federal 

cost principles and procurement standards. 

Moreover, as of September 8, 2016, CalRecycle had paid its contractors about 

$186.4 million of the $200 million in invoiced costs, but had not completed its 

review of invoices nor collected all missing support records.2 FEMA and 

California, therefore, should continue to assist CalRecycle in assuring that all 

costs are valid and eligible. 

Federal regulations require grant recipients and subrecipients to maintain 

records that identify the source and application of funds for federally funded 

activities and maintain source documentation to support those accounting 

records (2 CFR 200.302(a) and (b)(3)). CalRecycle, however, has not fully 

complied with these requirements. 

During our review of cost data and documentation that CalRecycle provided, 

we observed several instances where documentation was not sufficient to 

support costs. We brought this issue to CalRecycle officials’ attention who said 

they were aware of the deficiencies and were working toward resolving them. 

These officials further explained that while reviewing initial invoice support 

1 California calculated the $68,144,980 cost reimbursement as follows: $100,955,526 claimed 

costs less 10 percent for retention, multiplied by 75 percent Federal cost share.
 2 California law requires CalRecycle to pay all undisputed aspects of the invoices (California 

Government Code section 927 et seq.).
 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

records, they identified significant deficiencies including, but not limited to, the 

following: 

x costs for debris removed from locations not identified in the contract; 

x contract labor costs without timesheets; 

x costs for standby crews and equipment with no justification or support 

records; and 

x lodging expenses without support records. 

In one instance, CalRecycle determined that about $1.5 million (60 percent) of 

a $2.5 million invoice lacked proper support. CalRecycle officials stated that 

most deficiencies in the invoiced support documentation occurred because the 

prime contractors were not thoroughly reviewing the records before submitting 

them for payment. As a result, CalRecycle is working with the prime 

contractors to substantiate the deficient invoices. However, we determined that 

the most likely cause of the deficiencies is that CalRecycle did not always — 

x	 maintain an adequate contract management system; and 

x	 ensure contractors comply fully with the terms, conditions, and 

specifications of the awarded contracts as Federal regulations require 

(2 CFR 200.318(b)). 

CalRecycle awarded four contracts for debris removal work to the two prime 

contractors. The terms of these contracts stipulate that the contractors must — 

x submit invoices that are itemized and supported with documentation 

such as receipts, timesheets, etc. and 

x ensure that all costs are reasonable, allocable, actual, and allowable. 

However, CalRecycle did not initially hold the two contractors responsible for 

complying with these contract terms. The prime contractors often did not 

submit all receipts and timesheets with invoices or identify eligible work sites 

to support all of the costs of debris removed. CalRecycle officials said that upon 

identifying these discrepancies in the cost support records, they implemented 

corrective action by — 

x hiring consultants to assist in reviewing invoiced support records; 

x working directly with the prime contractors to help them resubmit 

adequate or missing invoiced support documentation; 

x rejecting specific undocumented costs in lieu of rejecting entire invoices 

and returning them to the contractor; and 

x tracking deficient source records. 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Conclusion 

CalRecycle has implemented corrective actions to provide some assurance that 

costs it claimed are supported and eligible. However, by September 2016, 

CalRecycle had — 

x paid its contractors $186.4 million, or more than 93 percent of the 

$200 million in invoiced costs; 

x claimed $68.1 million in Public Assistance funding; 

x not fully reviewed records to support invoices — the consultants had 

reviewed $108 million, but had yet to review about $92 million; and 

x had not substantiated all deficient documentation to support invoices. 

Therefore, to prevent CalRecycle from potentially submitting reimbursement 

claims without adequate documentation, FEMA should direct California to — 

x provide CalRecycle with further technical assistance to ensure cost 

reimbursement claims for debris removal work are supported fully with 

adequate documentation; and 

x ensure CalRecycle collects all missing documentation from the 

contractors before submitting final claims for the grant. 

Taking these steps should help FEMA avoid improperly funding any of the 

$230 million in contract costs CalRecycle estimates it will claim for damages 

caused by this disaster. It will also allow CalRecyle the opportunity to 

supplement deficient documentation or locate missing records before too much 

time elapses. 

Recommendations 

We recommend that the Acting Regional Administrator, FEMA Region IX: 

Recommendation 1: Direct California, as recipient, to provide CalRecycle with 

technical assistance to ensure compliance with all applicable Federal 

regulations, specifically for document support and contract management, and 

to avoid improperly funding any of the $230 million ($173 million Federal 

share) in contract costs CalRecycle estimates it will claim for damages caused 

by this disaster. 

Recommendation 2: Direct California, as recipient, to ensure that all 

CalRecycle’s cost reimbursement claims for debris removal work are supported 

with adequate documentation and that costs are eligible in accordance with 

FEMA’s debris removal guidelines. 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Discussion with Management and Follow-Up
 

We discussed our observations with FEMA, California, and CalRecycle officials 

and included their comments in this management advisory report, as 

appropriate. We also provided a draft advisory report in advance to officials 

from FEMA on September 22, 2016; California on September 30, 2016; and 

CalRecycle on October 4, 2016. We also discussed the draft at an exit 

conference with FEMA on September 26, 2016, and with California and 

CalRecycle officials on November 2, 2016. FEMA officials agreed with our 

observations and recommendations, while California and CalRecycle disagreed. 

FEMA officials provided a written response on October 24, 2016, agreeing with 

our observations and recommendations (see appendix B). FEMA expects to 

complete its proposed corrective actions to address our recommendations by 

July 31, 2017. Therefore, we consider the two report recommendations to be 

resolved but open.3 We will close these recommendations when we receive and 

review documentation that FEMA has completed its proposed corrective 

actions. Please email closeout documentation and request to 

Humberto.Melara@oig.dhs.gov. 

The Office of Emergency Management Oversight major contributors to this 

report are Humberto Melara, Director; Louis Ochoa, Audit Manager; 

Renee Gradin, Auditor-in-charge; Paul Sibal, Auditor; Victor Du, Auditor, and 

Daniel Flores, Auditor. 

Please call me with any questions at (202) 254-4387, or your staff may contact 

Humberto Melara, Director, Western Regional Office, at (510) 637-1463. 

3 FEMA’s initial estimated completion date for Recommendation 2 was December 31, 2016. 

Due to resent disasters in California, we approved an extension to July 31, 2017 to allow FEMA 

adequate time to respond to the recommendation. 

www.oig.dhs.gov 5 OIG-17-44-D 
 

 

 

 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix A 

Objective, Scope, and Methodology 

We are currently auditing FEMA Public Assistance grant funds awarded to 

CalRecycle, Public Assistance Identification Number 000-UUJ4B-00. Our full 

audit will include a review of four contracts awarded by CalRecycle valued at 

about $223 million to perform disaster-related work. Our audit objective will be 

to determine whether CalRecycle’s policies, procedures, and business practices 

are adequate to account for and expend FEMA Public Assistance Program grant 

funds according to Federal regulations and FEMA guidelines. We are 

conducting this audit early in the Public Assistance process to identify areas 

where CalRecycle may need additional technical assistance or monitoring to 

ensure compliance, before improperly expending any of the Federal grant funds 

to be awarded for FEMA Disaster Number 4240-DR-CA. 

Our review covers the period September 9, 2015, the first day of the incident 

period, through September 8, 2016, our cutoff date for this advisory report. As 

of August 12, 2016, FEMA and California had only drafted the project 

worksheets to estimate the debris removal costs for the September 2015 

wildfires. FEMA plans to provide additional funding for the two large projects 

as CalRecycle expects debris removal costs to reach about $230 million. The 

award provides 75 percent funding for debris removal work for two large 

projects.4 

To complete our management advisory report, we interviewed FEMA, 

California, and CalRecycle officials; assessed the adequacy of the policies, 

procedures, and business practices CalRecycle uses or plans to use to account 

for and expend Federal grant funds and to procure and monitor contracts for 

disaster work; reviewed applicable Federal regulations and FEMA guidelines; 

and performed other procedures considered necessary to accomplish our 

objective. We did not perform a detailed assessment of CalRecycle’s internal 

controls over its grant activities because it was not necessary to accomplish 

our audit objective. We, however, as part of this management advisory, did a 

limited review of the associated costs. We conducted fieldwork activities at 

FEMA, California, and CalRecycle offices. 

4 Federal regulations in effect at the time of the disaster set the large project threshold at 

$121,600 [Notice of Adjustment of Disaster Grant Amounts, 79 Fed. Reg. 62,648 (Oct. 20, 

2014)]. 

www.oig.dhs.gov 6 OIG-17-44-D 
 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix A (Continued) 

We are conducting this performance audit 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 objective. We believe 

that the evidence obtained provides a reasonable basis for our findings and 

conclusions based upon our audit objective. We are conducting this audit by 

applying the statutes, regulations, and FEMA policies and guidelines in effect 

at the time of the disaster. 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix B 

FEMA Region IX Response 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix B (Continued) 

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OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix C 

Report Distribution 

Department of Homeland Security 

Secretary 

Chief of Staff 

Chief Financial Officer 

Under Secretary of Management 

Executive Secretary 

Chief Privacy Officer 

Audit Liaison, DHS 

Federal Emergency Management Agency 

Administrator 

Chief of Staff 

Chief Financial Officer 

Chief Counsel 

Chief Procurement Officer 

Infrastructure Branch Chief 

Director, Risk Management and Compliance 

Audit Liaison, FEMA Region IX 

Audit Liaison, FEMA (Job Code G-16-010) 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees 

External 

Director, California Governor's Office of Emergency Services 

Audit Liaison, California Governor's Office of Emergency Services 

California State Auditor 

Deputy Director, California Dept. of Resources Recycling and Recovery 

www.oig.dhs.gov 10 OIG-17-44-D 
 

 

 

 

 

 

 

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