U.S. DEPARTMENT OF ENERGY
                 OFFICE OF INSPECTOR GENERAL
                              
                              
                              
                              
                              
                              
                              
        AUDIT OF THE DEPARTMENT OF ENERGY'S GRANT FOR
           ECONOMIC DEVELOPMENT AT THE MOUND PLANT
                              
                              
                              
                              
  
      The Office of Inspector General wants to make the
  distribution of its reports as customer friendly and cost
   effective as possible.  Therefore, this report will be
    available electronically through the Internet at the
              following alternative addresses:
                              
          Department of Energy Headquarters Gopher
                      gopher.hr.doe.gov
                              
       Department of Energy Headquarters Anonymous FTP
                     vm1.hqadmin.doe.gov
                              
Department of Energy Human Resources and Administration Home
                            Page
                  http://www.hr.doe.gov/ig
                              
  Your comments would be appreciated and can be provided on
                             the
       Customer Response Form attached to the report.
                              
            This report can be obtained from the
                  U.S. Department of Energy
       Office of Scientific and Technical Information
                         P.O. Box 62
                 Oak Ridge, Tennessee  37831
 
  
  
  
  Report Number:  ER-B-97-02         Eastern Regional Audit Office
  Date of Issue:  February 14, 1997  Oak Ridge,Tennessee 37830
        
        
        
        AUDIT OF THE DEPARTMENT OF ENERGY'S GRANT FOR
           ECONOMIC DEVELOPMENT AT THE MOUND PLANT
                              
                              
  
  
  
                      TABLE OF CONTENTS
                              
                                                    Page
  
  SUMMARY . . . . . . . . . . . . . . . . . . . . .  1
 
  PART I  APPROACH AND OVERVIEW  . . . . . . . . . . 2
  
          Introduction . . . . . . . . . . . . . .   2
  
          Scope and Methodology . . . . . . . . . .  2
  
          Background    . . . . . . . . . . . . . .  3
 
          Prior Audit Reports . . . . . . . . . . .  3
 
  PART II   FINDING AND RECOMMENDATIONS   . . . .    5
 
          Cash Advance to the City of Miamisburg  . .5
 
  PART III  MANAGEMENT AND AUDITOR COMMENTS . . . .  8
 
                    
                    
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                    OFFICE OF AUDIT SERVICES
                                
                                
          AUDIT OF THE DEPARTMENT OF ENERGY'S GRANT FOR
             ECONOMIC DEVELOPMENT AT THE MOUND PLANT
                                
                                
Audit Report Number:  ER-B-97-02   February 14, 1997
 
                             SUMMARY
   
      The downsizing of the Department of Energy's (Department)
facilities as a result of the end of the Cold War had a negative
impact on communities that were heavily dependent on the
Department's operations for economic stability.  To lessen the
impact, the Department provided financial assistance to local
communities through Federal grants and cooperative agreements.
The objective of this audit was to determine whether funding
provided for economic development at the Mound Plant was used for
the Department's intended purposes.
   
   Overall, we found that the Department's funds were used for
their intended purposes. However, contrary to Federal
regulations, the Department advanced the City of Miamisburg, Ohio
(City) $2.6 million more than the minimum funds needed to meet
immediate cash requirements, and the City kept the majority of
the funds in non-interest bearing accounts.  The funds were
provided to fulfill commitments previously made to the City by
senior Department officials, and the Department did not require
the City to comply with Federal regulations or grant terms
regarding cash advances.  As a result, the City held a cash
advance of $2.6 million for more than a year and remitted only
$10,000 in interest earned on the advance.
   
   Management agreed with the finding and recommendations and
initiated the appropriate corrective actions.
 
 
 
 
                                   _________/s/____________
                                   Office of Inspector General
                             
                             
                             PART I
                                
                      APPROACH AND OVERVIEW
                                
                                
INTRODUCTION
   
   Section 3161 of the National Defense Authorization Act of
Fiscal Year 1993 (Section 3161) required the Department of
Energy (Department) to develop programs to mitigate the
consequences of downsizing on workers and affected communities.
In response to Section 3161, the Department awarded a grant to
the City of Miamisburg, Ohio (City) for the transition of the
Mound Plant from a defense production facility to commercial
operations.  The objective of this audit was to determine
whether funding provided for economic development at the Mound
Plant was used for the Department's intended purposes.
 
   
SCOPE AND METHODOLOGY
   
   The audit was performed from April 24, 1995, through June
30, 1996, at the Department's Office of Worker and Community
Transition in Washington, D.C., and the Ohio Field Office and
Miamisburg Area Office in Miamisburg, Ohio.  To accomplish the
audit objective, we:
 
   o Evaluated Departmental guidance for economic development
     activities;
   
   o Reviewed Federal regulations governing grants awarded to
     state and local governments;
   
   o Examined grant files and supporting documentation;
   
   o Reviewed the Miamisburg Mound Community Improvement
     Corporation's financial statement at September 30, 1995; 
     and
   
   o Interviewed Departmental and City personnel responsible 
     for administering the grant.
 
   The audit was performed in accordance with generally accepted
Government auditing standards for performance audits, and
included tests of internal controls and compliance with laws and
regulations to the extent necessary to satisfy the audit
objective.  Accordingly, we assessed significant internal
controls related to the Department's administration of the
City's grant.  Because our review was limited, it would not
necessarily have identified all internal control deficiencies
that may have existed.  Also, we did not conduct a reliability
assessment of computer processed data because only a very
limited amount of computer-processed data was used during the
audit.
   
   On November 22, 1996, management formally concurred with the
finding and recommendations, stating that it had initiated the
appropriate corrective actions.  Therefore, no exit conference
was held.
 
 
BACKGROUND
   
   In September 1993, the Department awarded a grant to the City
for the transition of the Mound Plant to commercial operations.
The grant was originally awarded for $200,000, and by September
30, 1995, had increased to $14,150,000.  According to the terms
of the grant, payments were to be made to the City by cash
advances unless the Department determined that the City had not
demonstrated the willingness and ability to minimize the time
elapsed between the transfer of funds from the U.S. Treasury and
their disbursement.  Also, the grant stated that advances in
excess of $10,000 would be promptly returned to the Department
unless the funds were disbursed within 7 days.
   
 
PRIOR AUDIT REPORTS
   
   The Office of Inspector General (OIG) issued two prior
reports dealing with work force restructuring at the Mound
Plant.  In Report DOE/IG-0328, Audit of Mound Plant's Reduction
in Force, we concluded that the lack of Departmental guidelines
contributed to excessive costs for the Mound Plant's FY 1992
reduction in force and the approval of inconsistent employee
benefits among Departmental sites.  In Report DOE/IG-0360, Audit
of the Transfer of Government-Owned Property at the Mound and
Pinellas Plants, we determined that the Department planned to
transfer or otherwise make available to economic development
initiatives personal property that had Defense Program
requirements or had not been properly screened for other needs.
 
   In addition, the OIG has issued several reports dealing with
work force restructuring at other Departmental sites.  In Report
ER-B-95-06, Audit of Work Force Restructuring at the Oak Ridge
Operations Office, we concluded that the Oak Ridge Operations
Office had not achieved the Department's goals for worker
retraining and outplacement assistance, and it had awarded a
small grant to a local nonprofit organization whose primary
function appeared to be lobbying.   In Report ER-L-96-01, Audit
of Work Force Restructuring at the Pinellas Plant, we determined
that the early retirement incentives provided to workers under
the Pinellas Plant's reduction in force were consistent with the
plant-closing terms of the contract and in compliance with
Federal regulations.  In Report ER-B-96-01, Audit of Work Force
Restructuring at the Fernald Environmental Management Project,
we concluded that the Fernald Environmental Management Project's
restructuring was not effective in reducing staffing levels or
improving the mix of workers' skills.  Most recently, in Report
ER-B-97-01, Audit of Economic Development Grants and a
Cooperative Agreement with East Tennessee Not-for-Profit
Organizations, we determined that a portion of the funds
provided to a grantee was not used for intended purposes.  Also,
the Department advanced more funds than needed to meet the
grantee's immediate cash requirements and then allowed the
grantee to hold interest earned on the funds provided.
 
   In addition to OIG reports, the U.S. General Accounting Office
(GAO) issued two reports dealing with community assistance and
work force restructuring.  The report entitled Energy Downsizing:
Community Assistance Criteria Needed (GAO/RCED-96-36) stated that
the Department had not established specific criteria for
identifying and evaluating the economic effects of closing its
facilities.  Also, the Department had not established specific
criteria for deciding what types and amounts of assistance were
appropriate to help offset these effects.  The report entitled
Value of Benefits Paid to Separated Contractor Workforce Varied
Widely (GAO/RCED-97-33) stated that the value of benefits offered
to separated workers varied considerably among locations,
reflecting the considerable discretion given to each facility in
determining how best to reduce its work force.
 
   In our opinion, the matters discussed in this report
identified a material internal control weakness that should be
considered when preparing the yearend assurance memorandum on
internal controls.
 
 
   
                             PART II
   
                   FINDING AND RECOMMENDATIONS
                                
 
Cash Advance to the City of Miamisburg
 
 
FINDING
 
   Federal regulations require that cash advances be limited to
the minimum amount needed to meet grant recipients' immediate
cash requirements, that each advance be kept in interest bearing
accounts, and that interest earned on cash advances be promptly
deposited in the U.S. Treasury.  However, the Department advanced
the City of Miamisburg (City) at least $2.6 million more than the
minimum funds needed to meet immediate cash requirements and the
City kept the majority of the funds in non-interest bearing
accounts.  The funds were provided to the City to fulfill
commitments previously made by senior Department officials, and
the Department did not require the City to comply with Federal
regulations and grant terms regarding cash advances.  As a
result, the City held a cash advance of $2.6 million for more
than a year and earned and remitted only $10,063 in interest.
 
 
RECOMMENDATIONS
 
   We recommend that the Manager, Ohio Field Office:
     
        Ensure that any cash advances made under economic
        development grants are needed for immediate disbursement 
        and maintained in interest bearing accounts;
     
        Require that any interest earned on cash advances be
        promptly returned to the Department for remittance to 
        the U.S. Treasury; and
     
        Require the City of Miamisburg to refund excess cash
        advances in accordance with Federal regulations and 
        grant terms.
 
 
MANAGEMENT REACTION
 
     Management concurred with the finding and recommendations
and stated that the appropriate corrective actions were
initiated.  Management's comments are summarized and addressed in
Part III of this report.
 
                       
                       
                       DETAILS OF FINDING
 
 
REQUIREMENTS FOR GRANTS TO STATE AND LOCAL GOVERNMENTS
 
   Title 10 of the Code of Federal Regulations (Title 10)
establishes rules to be followed by the Department in providing
cash advances to grantees and in recovering interest earned on
cash advances.  Title 10 requires that cash advances be limited
to the minimum amount needed by the receiving organization in
carrying out the purpose of the program or project.  The timing
and amount of cash advances are to be as close as is
administratively feasible to the actual disbursements by the
recipient organization for program or project purposes.  Further,
Title 10 requires that recipients maintain advances of Federal
funds in interest bearing accounts, and that interest earned on
the advances be promptly remitted to the U.S. Treasury.
 
 
FUNDS ADVANCED TO THE CITY OF MIAMISBURG
 
   The Department gave the City a $3.6 million cash advance
without requiring the City to justify that the entire amount was
needed immediately for program outlays.  Additionally, the
Department did not require the City to place the funds in
interest bearing accounts and remit the interest earned to the
U.S. Treasury.
 
   The City requested the funds for loan guarantees and new
business start-up costs, but provided no specifics as to who
would receive the funds or when they would be disbursed.  Upon
review, the contracting officer requested that the City provide
justification for the advance and requested that no funds be
advanced without additional justification.  Nevertheless, the
Department advanced $3.6 million to the City without additional
justification.
 
   In addition, the Department allowed the City to hold $2.6
million for over a year.  In total, the Department disbursed
about $4.3 million to the City between October 1993 and August
1994.  Although the City proposed to spend $2 million for loan
guarantees and start-up money for commercial ventures through
September 30, 1995, it actually spent only about $116,000 for
those activities.  It spent about $600,000 for personnel and
administration and about $660,000 for consultant and contractual
services, primarily for facilities assessments, marketing
support, and architectural and engineering services.  As of
September 30, 1995, the City had an unexpended balance of $2.6
million.  Almost all the funds were maintained in non-interest
bearing accounts.
 
 
COMMITMENTS BY SENIOR DEPARTMENT OFFICIALS
 
   On two occasions, senior Department officials publicly
announced that funding would be made available to the City prior
to the City showing an actual need for the funds.  Initially, the
Department announced it would give the City $4 million in January
1994.  However, the City did not submit its application until
June 1994.  In October 1994, the Department presented the City
with a $10 million sample check at a public ceremony at which
additional funds were promised.  Again, however, the City did not
submit its revised plan for spending the additional $10 million
until March 1995.
 
 
GRANT REQUIREMENT NOT ENFORCED
 
   In addition to disbursing funds to meet public commitments
rather than a showing of the City's needs, the Department did not
enforce the grant's requirement for the prompt return of cash
advances and interest earned on cash advances.  These violations
of the grant terms were reported to the City by its independent
accounting firm for the year ended December 31, 1993, and
reported to the Ohio Field Office by its Financial Review Team in
April 1995.  However, the Department had not initiated action to
recover the excess cash advance as of September 30, 1995, and had
received interest payments of only $10,063 from the City.
 
                            PART III
                                
                 MANAGEMENT AND AUDITOR COMMENTS
 
   Management concurred with the audit finding and
recommendations, stating that all necessary actions to comply
with the three recommendations have been taken.   Management
initiated a program whereby grant funds are advanced on a
quarterly basis.  The amount of the advance is tied directly to a
budget detailing how the funds will be disbursed during that
quarter.  In addition, management directed the City to deposit
all advances in interest bearing accounts.
 
   We consider management's actions to be responsive to the
recommendations.
                                     
                                     IG Report No.   ER-B-97-02
 
 
                      CUSTOMER RESPONSE FORM
                                
     The Office of Inspector General has a continuing interest 
in improving the usefulness of its products.  We wish to make our 
reports as responsive as possible to our customers' requirements,
and therefore ask that you consider sharing your thoughts with us.  
On the back of this form, you may suggest improvements to enhance 
the effectiveness of future reports.
     
     Please include answers to the following questions if they
are applicable to you:
 
     1.   What additional background information about the
          selection, scheduling, scope, or procedures of the 
          audit or inspection would have been helpful to the 
          reader in understanding this report?
 
     2.   What additional information related to findings and
          recommendations could have been included in this 
          report to assist management in implementing corrective 
          actions?
 
     3.   What format, stylistic, or organizational changes might
          have made this report's overall message more clear to the 
          reader?
 
     4.   What additional actions could the Office of Inspector
          General have taken on the issues discussed in this report 
          which would have been helpful?
 
     Please include your name and telephone number so that we may
contact you should we have any questions about your comments.
 
 
     Name:___________________   Date: ________________________
 
     Telephone: _______________  Organization: ________________
 
 
     When you have completed this form, you may telefax it to the
Office of Inspector General at (202) 586-0948, or you may mail it to:
 
                    Office of Inspector General (IG-1)
                    Department of Energy
                    Washington, D.C. 20585
                    ATTN: Customer Relations
 
     If you wish to discuss this report or your comments with a
staff member of the Office of Inspector General, please contact Wilma
Slaughter at (202) 586-1924.