U.S. ENVIRONMENTAL PROTECTION AGENCY 

OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

Quick Reaction Report 

Costs Claimed under 

EPA Grant XP98011401 

Awarded to the City of Rupert, Idaho 

 Report No. 09-2-0078 

 January 12, 2009 
Report Contributors:	 Darren Schorer 

 Eileen Collins

 Michael Owen 

Abbreviations 

CADD Computer-Aided Design and Drafting 

CFR Code of Federal Regulations 

EPA U.S. Environmental Protection Agency 

FSR Financial Status Report 

Grantee City of Rupert 

OIG Office of Inspector General 

OMB Office of Management and Budget 

Region Environmental Protection Agency Region 10 

USDA-RD U.S. Department of Agriculture-Rural Development 

Cover photo: City of Rupert’s 1.1 million gallon water storage tank, known as “Big Blue.” 

(Picture taken by OIG staff in June 2008.) 
U.S. Environmental Protection Agency 09-2-0078 

January 12, 2009 Office of Inspector General 

At a Glance
 

Catalyst for Improving the Environment 

Why We Did This Review 

The U.S. Environmental 

Protection Agency (EPA) 

Office of Inspector General is 

reviewing Special 

Appropriation Act Project 

grants to identify issues 

warranting further analysis. 

We selected the City of Rupert 

(grantee) for one of these 

reviews. 

Background 

In 1998, the City of Rupert 

received an EPA Special 

Appropriation Act Project 

grant, XP98011401. The 

purpose of the grant was to 

provide Federal assistance of 

$2 million to construct a water 

supply system. The City of 

Rupert was required to 

provide local matching funds 

equal to 45 percent of the 

EPA-awarded funds. 

For further information, 

contact our Office of 

Congressional, Public Affairs 

and Management at 

(202) 566-2391. 

To view the full report, 

click on the following link: 

www.epa.gov/oig/reports/2009/ 

20090112-09-2-0078.pdf 

Costs Claimed under EPA Grant XP98011401 

Awarded to the City of Rupert, Idaho

 What We Found 

The grantee did not meet the Title 40 Code of Federal Regulations Part 31 

requirements for financial management. In particular, the grantee: 

•	 Claimed unsupported costs, 

•	 Claimed unallowable pre-award costs, 

•	 Claimed unallowable interest costs, 

•	 Claimed unallowable equipment costs, and 

•	 Reported cumulative total project costs that were not supported by 

accounting records. 

Because of the above issues, EPA needs to recover $63,256 of the $423,106 in 

costs questioned under the grant. 

What We Recommend 

We recommend that EPA Region 10’s Regional Administrator disallow $423,106 

and recover $63,256 in costs questioned under Grant XP98011401. 

With the exception of pre-award costs, the grantee concurred with the findings and 

recommendations in the discussion draft. 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL 

January 12, 2009 

MEMORANDUM 

SUBJECT:	 Costs Claimed under EPA Grant XP98011401 

Awarded to the City of Rupert, Idaho 

Report No. 09-2-0078 

FROM:	 Robert K. Adachi 

Director of Forensic Audits 

TO:	 Elin Miller 

Regional Administrator 

EPA Region 10 

This report contains a time-critical issue the Office of Inspector General (OIG) identified. This 

report represents the opinion of the OIG and does not necessarily represent the final position of 

the U.S. Environmental Protection Agency (EPA). EPA managers will make final 

determinations on matters in this report. 

The estimated cost of this report – calculated by multiplying the project’s staff days by the 

applicable daily full cost billing rates in effect at the time – is $101,397. 

Action Required 

In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us 

your proposed management decision for resolution of the findings contained in this report before 

any formal resolution can be completed with the recipient. Your proposed decision is due in 

120 days, or on May 12, 2009. To expedite the resolution process, please e-mail an electronic 

version of your proposed management decision to adachi.robert@epa.gov. 

We have no objections to the further release of this report to the public. This report will be 

available at http://www.epa.gov/oig. If you have any questions, please contact me at 

(415) 947-4537 or at the e-mail address above. 
09-2-0078 

Purpose 

The Office of Inspector General is reviewing Special Appropriation Act Project grants to identify 

issues warranting further analysis. This includes reviewing the total project costs incurred by 

selected grant recipients. During our review of the Special Appropriation Act Project grant 

awarded to the City of Rupert, Idaho (grantee), we found that the grantee did not meet the Title 

40 Code of Federal Regulations (CFR) Part 31 requirements for financial management. 

Background 

U.S. Environmental Protection Agency (EPA) Region 10 (Region) awarded grant number 

XP98011401 to the grantee on March 31, 1998. The purpose of the grant was to provide Federal 

assistance of $2 million to construct a water supply system. The construction project activities 

under this grant included a storage facility, new well, distribution lines, and a water treatment 

process. EPA was responsible for 55 percent of the eligible project costs up to $2 million and 

the grantee was responsible for the remaining 45 percent. Total project costs under the grant 

agreement were $3.67 million. The grant was amended five times, resulting in a budget and 

project period that started August 1, 1998, and ended June 30, 2005. 

Scope and Methodology 

We conducted this performance audit in accordance with generally accepted government 

auditing standards, except we did not obtain an understanding of the information systems 

controls. Our results were based on accounting information system output data provided by the 

grantee and our verification of these data to the corroborating documents, such as cancelled 

checks and vendor invoices. The generally accepted government auditing 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 on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and conclusions based on our 

audit objectives. 

We conducted our audit from June 2, 2008, to November 4, 2008. We made a site visit to the 

grantee and performed the following steps: 

•	 Conducted a tour of the facilities. 

•	 Obtained and reviewed grantee support for the cumulative amounts reported for the 

period ended June 30, 2005, including the grantee’s electronic accounting records, 

invoices, cancelled checks, and contracts. 

•	 Obtained and reviewed the grantee’s supporting documentation for payment requests. 

•	 Conducted interviews of grantee personnel. 

Findings 

The grantee did not meet the Title 40 CFR Part 31 requirements for financial management. In 

particular, the grantee: 

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09-2-0078 

• Claimed unsupported costs, 

• Claimed unallowable pre-award costs, 

• Claimed unallowable interest costs, 

• Claimed unallowable equipment costs, and 

• Reported cumulative total project costs that were not supported by accounting records. 

Because of the above issues, EPA needs to recover $63,256 of the $423,106 in costs questioned 

under the grant. Table 1 below is a summary of the questioned costs. 

 Table 1: Summary of Questioned Costs 

Cost Category Costs Questioned Note 

Costs Claimed $3,944,459 

Questioned Costs: 

 Unsupported Costs (86,750) 1 

 Pre-award (35,231) 2 

Interest (202,697) 3 

Equipment (98,428) 4 

Total Costs Questioned $423,106 

Total Allowable Claimed Costs $3,521,353 

EPA Share (55%) $1,936,744 

Payments Made $2,000,000 

Amount Owed to EPA $63,256 

Sources: Claimed costs are from the Financial Status Report. Costs questioned were 

based on OIG’s analyses of the supporting documentation provided by the grantee. 

Note 1: See discussion under Unsupported Project Costs. 

Note 2: See discussion under Unallowable Pre-award Costs. 

Note 2: See discussion under Unallowable Interest Costs. 

Note 3: See discussion under Unallowable Equipment Costs. 

Unsupported Project Costs 

The grantee did not have supporting documentation for $86,750 of project costs claimed in the 

final payment request under the grant submitted to the Region during June 2005. Title 40 CFR 

31.20 (b)(6) requires expenditures to be supported by source documentation such as invoices and 

cancelled checks. As a result, we questioned the $86,750 claimed under the grant. 

Unallowable Pre-award Costs 

The grantee claimed $35,231 in costs that under the grant that were unallowable because they 

were incurred prior to the grant’s funding and project periods. Title 40 CFR 31.23(a) states that 

where a funding period is specified, the grantee may charge to the award only costs resulting 

from obligations of the funding period. The grantee’s payment request submitted to the Region 

during 1999 included project costs incurred between May 20, 1998 and July 15, 1998. These 

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09-2-0078 

costs predated the grant budget and project period start date of August 1, 1998. Therefore, we 

questioned the $35,231 of pre-award costs. 

Unallowable Interest Costs 

The grantee claimed $202,697 in unallowable interest costs under the grant. The grantee 

incurred these costs in order to meet its 45 percent match funding requirement under the grant. 

The grantee's share of the funding was provided from a U.S. Department of Agriculture-Rural 

Development (USDA-RD) loan of $1,750,000. However, USDA-RD, as a condition of 

providing the loan, required the grantee to obtain interim financing from commercial credit 

sources to fund its share of costs during construction of the project. The grantee obtained the 

required financing from a commercial lender and claimed $233,091 in interest costs under the 

grant. However, the grantee did not offset these costs with the corresponding interest earnings 

from the proceeds of the interim financing. The grantee deposited the proceeds from the 

financing in a local government investment pool account. During the period that the interest 

costs claimed under grant were incurred, the grantee earned $202,697 in interest from the funds 

deposited in the local government investment pool. 

According to Office of Management and Budget (OMB) Circular A-87, Attachment B.23.b, 

financing costs (including interest) associated with the otherwise allowable costs of building 

acquisition, construction, or fabrication, reconstruction, or remodeling are allowable when four 

conditions are met. One of these four conditions is that the financing is by a bona fide third party 

external to the governmental unit. However, another of these conditions specifies that interest 

expense should be offset by interest earned on borrowed funds. As a result, we questioned 

$202,697 of the interest costs claimed under the grant. These questioned costs represent the 

interest earned during the period that the interest costs were incurred. 

Unallowable Equipment Costs 

The grantee claimed unallowable equipment costs totaling $98,428. OMB Circular A-87, 

Attachment A, Section C.1., specifies several factors that must be met in order for costs to be 

allowable under Federal grant awards. These factors include that costs must be (1) necessary and 

reasonable for proper and efficient performance and administration of Federal awards, and (2) 

allocable to Federal awards. The costs itemized in Table 2 were not allowable because they were 

not necessary for the performance and administration of the grant’s scope of work or included in 

the budget for the grant award.

 Table 2: Equipment Costs 

Description Cost 

Backhoe $66,861 

CADD Station 8,498 

Billing Machine 10,869 

Computers 12,200 

Total $98,428 

 Source: EPA analysis of City of Rupert data 

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09-2-0078 

The grantee purchased a backhoe during the project period and claimed the cost under the grant. 

The grant award provided funding for construction of the water supply system, but did not 

provide funding for maintenance of the system. A July 2003 email from the Idaho Department 

of Environmental Quality to the grantee stated that the EPA project officer agreed that the 

backhoe could be purchased with grant funds. The email further said that the backhoe would be 

dedicated to the project during the construction phase and used for maintenance of the system 

once construction was completed. However, the grantee was unable to provide us with 

equipment records showing the extent of use for the backhoe during the construction phase. 

Since the claimed costs for the backhoe were not a necessary cost under the grant, we questioned 

the $66,861 claimed under the grant for the cost of the backhoe. 

The grantee claimed the cost of a computer-aided design and drafting (CADD) station under the 

grant. According to the grantee, the equipment was purchased during the project period to run 

water distribution modeling. However, the grantee could not explain how the CADD station was 

used for the modeling. The grantee also acknowledged that its engineering contractor generally 

performed the water distribution modeling during construction phase of the project. Because the 

grantee could not demonstrate that the CADD station was necessary and benefited the project, 

we questioned the $8,498 cost of this equipment claimed under the grant. 

The grantee claimed the cost of a billing machine and the maintenance contract for the machine 

under the grant. The grantee purchased this office equipment during the project period to fold 

water monthly billings and place them in envelopes for mailing to customers. However, this 

equipment and maintenance contract was not necessary for the proper and efficient performance 

and administration of the grant’s scope of work. Therefore, we questioned the $10,869 cost of 

the billing machine and maintenance contract claimed under the grant. 

The grantee also purchased four desktop personal computers during the project period. 

According to the grantee, these computers were purchased for office administrative purposes, 

such as preparing monthly billings to water system customers. The grantee was unable to 

demonstrate that the computers were necessary costs for proper and efficient performance and 

administration of the construction of the water system. As a result, we questioned the $12,200 

claimed under the grant for the cost of the office computers. 

Financial Status Report Was Not Supported by Accounting Records 

The cumulative total costs claimed in the grantee’s final Financial Status Report (FSR) for the 

grant were not supported by accounting records as required by 40 CFR 31.20. The grantee 

submitted the final FSR for the grant to Region 10 in January 2006. This FSR claimed total 

cumulative project costs of $3,944,459 under the grant. However, expenditures recorded in the 

grantee’s general ledger accounts as costs incurred under the grant totaled $3,856,167. 

Therefore, the total cumulative costs in the FSR exceeded the grant expenditures recorded in the 

general ledger accounts by $88,292. Under 40 CFR 31.20(b)(1), the grantee must make 

accurate, current, and complete disclosure of the financial results of financially assisted activities 

in accordance with the financial reporting requirements of the grant. Title 40 CFR 31.20(b)(2) 

requires that grantees also maintain records which adequately identify the source and application 

of funds provided for financially assisted activities. Therefore, the grantee needs to improve its 

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09-2-0078 

accounting system to ensure these Federal reporting and financial management requirements are 

met. 

Potentially Eligible Project Costs 

The grantee reportedly incurred additional potentially eligible project costs that EPA has not 

reviewed or considered for grant reimbursement. Since the grant is officially closed and these 

costs were never submitted to EPA, we cannot offset other costs questioned with unclaimed 

costs. We did not evaluate these additional costs to determine whether they were allowable 

under the grant because they were not included in the grantee’s final FSR. 

Recommendation 

1. We recommend that EPA Region 10’s Regional Administrator disallow $423,106 and 

recover $63,256 in costs questioned under Grant XP98011401. 

Region 10’s and Auditee’s Comments 

On November 13, 2008, an exit conference was held with representatives from Region 10 and 

the grantee to obtain their comments regarding the factual accuracy of our discussion draft. With 

the exception of pre-award costs, the grantee concurred with the findings and recommendations 

in the discussion draft. We questioned the pre-award costs because the grantee was unable to 

show during field work that EPA had provided written approval for these costs. However, on 

November 10, 2008, the grantee provided us with a July 1998 letter from the Region 10 project 

officer for the grant approving eligible construction costs incurred in advance of the project start 

date. 

The Region did not provide a response to the discussion draft because it did not have sufficient 

time to work with the city on the findings and recommendations. 

OIG Response 

Our position remains unchanged on the $423,106 of questioned costs discussed in the report. 

With regard to the questioned pre-award costs, the Region’s July 1998 letter does not provide an 

acceptable deviation from the requirement of Title 40 CFR 31.23(a). Under Title 40 CFR 

31.6(c), a deviation from the requirement must be obtained from the Director for the EPA Grants 

Administration Division. We made minor revisions to the report to more clearly explain the 

basis for questioning the pre-award costs claimed under the grant. 

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Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Rec. 

No. 

1 

Page 

No.

5 

 Subject 

Disallow $423,106 and recover $63,256 in costs 

questioned under Grant XP98011401. 

Status1 

U 

Action Official 

Region 10 

Regional Administrator 

Planned 

Completion 

Date 

TBD 

Claimed 

Amount 

$63 

Agreed To 

Amount 

$44 

1 O = recommendation is open with agreed-to corrective actions pending; 

C = recommendation is closed with all agreed-to actions completed; 

U = recommendation is undecided with resolution efforts in progress 

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09-2-0078 

Appendix A 

Distribution 

Regional Administrator, Region 10 

Director, Office of Wastewater Management, Office of Water 

Director, Office of Wastewater Management - Municipal Support Division, Office of Water 

Director, Office of Grants and Debarment 

Director, Grants and Interagency Agreements Management Division 

Agency Follow-up Official (the CFO) 

Agency Follow-up Coordinator 

Associate Administrator for Congressional and Intergovernmental Relations 

Associate Administrator for Public Affairs 

Region 10 Audit Follow-up Coordinator 

Region 10 Public Affairs Office 

Region 10 Special Appropriation Act Project Coordinator 

Mayor, City of Rupert, Idaho 

Deputy Inspector General 

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