Denali Commission: Options Exist to Address Management Challenges
Released: 2015-03-25T00:00:00

Letter

Background

This section discusses the unique nature of living in remote communities in Alaska, the history and administrative structure of the Commission, its funding, and its annual work plan and grants program.

Unique Nature of Living in Remote Communities in Alaska

Alaska is the largest U.S. state—one-fifth the size of the lower 48 contiguous states combined—but with a small population, the lowest population density in the country, and large travel distances between cities (see fig. 1). About 700,000 people live in Alaska, nearly half of whom reside in the three largest cities of Anchorage, Fairbanks, and the capital of Juneau. The remainder of the population lives in smaller, often isolated communities scattered throughout the state. Most of these remote communities are not connected to the power grid and must generate their own electricity and provide for their own heating locally. In communities that burn diesel fuel to generate electricity and use heating oil to heat their homes, these fuels must be stored in bulk fuel tanks, and fuel delivery to some of these communities can only occur during 3 or 4 months out of the year. In addition, Alaska’s mountain ranges, glaciers, and vast wilderness create natural barriers to transportation and communications, including coastal areas of the state that are completely iced-in most of the year.

Alaska’s transportation system is different from that of the contiguous 48 states, with many Alaskan cities and villages accessible only by air or water. Highway and rail infrastructure is primarily located in the south central region of the state, and many communities are not connected to the rest of the state by road or rail. Consequently, the dominant modes of transportation around the state are air and barge services along coastal and inland waterways. (See fig. 2 for a view of Alaska’s transportation network.)

Many parts of Alaska have an approximately 4-month summer construction season, due in part to the state’s extreme weather conditions. While some types of construction can be done at other times of year, such as excavating in permafrost—ground that is permanently frozen year-round in Arctic regions—and bogs, other types of construction either cannot be done or would be highly inefficient, such as erecting steel structures. In most cases, construction materials and equipment must be transported to the building site by sea during a brief time period in the summer. An exception to this is in the southeast part of the state, where shipping and construction can take place during most of the year.

After the passage of the Oil Pollution Act of 1990, which required the issuance of regulations to establish procedures, methods, equipment, and other requirements to prevent discharges of oil from vessels and onshore the U.S. Coast Guard declared it would no facilities, among other things,longer allow fuel delivery to Alaskan communities with fuel tanks that were leaking or otherwise contaminating the soil and water. Meeting the new requirements was well beyond the reach of many rural communities. Nearly 100 villages were in jeopardy, facing winter without electricity or home heating oil. In this context, the Denali Commission was established in 1998 as a federal agency to provide, among other things, infrastructure and economic development services to rural Alaskan communities.

The Denali Commission Act of 1998 established a 3-fold purpose for the Commission: (1) delivering federal services in the most cost-effective manner practicable by reducing administrative and overhead costs; (2) providing job training and economic development services in rural communities; and (3) promoting rural development and providing infrastructure. Since the Commission’s inception, the act has been amended several times, to among other things, authorize the Commission to undertake construction of health care facilities, surface transportation infrastructure, and waterfront development projects. Most recently, the act was amended to authorize the Commission to accept certain transfers of funds from other federal agencies, as well as conditional gifts or donations for the purpose of carrying out the act.

Denali Commission Structure and Evolution

The Denali Commission has a Federal Cochair and six other commissioners who are not agency employees. For these six commissioner positions, the following individuals designated by statute, or someone selected from nominations that they submit, may serve: the Governor of Alaska, who serves as the State Cochair; the president of the University of Alaska; the president of the Alaska Municipal League; the president of the Alaska Federation of Natives; the executive president of the Alaska State American Federation of Labor and Congress of Industrial Organizations; and the president of the Associated General Contractors of Alaska.

The Commission office is located in Anchorage, Alaska, and its staff work at the direction of the Federal Cochair to carry out day-to-day operations. Since the inception of the Commission, there have been three Federal Cochairs. On April 21, 2014, the third Federal Cochair began his second 4-year term. Under the Denali Commission Act, a Federal Cochair’s term is 4 years but the Federal Cochair can be reappointed. The act states that any vacancy in the Commission shall not affect its powers but must be filled in the same manner as the original appointment. To appoint a Federal Cochair, the act establishes a two-step process. First, the President pro tempore of the Senate and the Speaker of the House of Representatives each submits a list of nominations to the Secretary of Commerce. Second, the Secretary of Commerce appoints the Federal Cochair from among the list of nominations submitted.

The act specifies that the Federal Cochair is an employee of Commerce. Accordingly, Commerce officials review and approve his or her time card. The act also requires the Secretary of Commerce to review the Commission’s annual work plan, which includes programs and rural energy projects approved for funding. According to Commerce officials, officials in Commerce’s Economic Development Administration generally conduct this review. In addition, the act authorizes, but does not require, other federal agencies (including Commerce) to make personnel and services available to the Commission upon the Commission’s request.

In October 2006, the Commission’s Federal Cochair wrote a letter to the Department of Justice’s (Justice) Office of Legal Counsel to request guidance about federal ethics provisions that would be applicable to the commissioners. Specifically, the Federal Cochair wrote that he understood he was subject to the federal statutes and regulations governing employee ethics as a Commerce employee; however, the other six commissioners needed guidance as to which federal ethics provisions applied to them. In late 2006, Justice determined that the six commissioners were special government employees for purposes of ethics laws and regulations and therefore subject to the principal federal criminal conflict-of-interest law. Justice based its determination, in part, on the requirement in the Denali Commission Act that the commissioners receive pay for their work. The principal financial conflict-of-interest law prohibits regular and special government employees from participating personally and substantially in an official capacity in a “particular matter” that may have a direct and predictable effect on their financial interest. Under the law and implementing regulations, the commissioners’ financial interest includes the financial interest of their employers. Therefore, commissioners are prohibited from participating in any particular matter that has a direct and predictable effect on the organization that employs them, unless granted a waiver by the Federal Cochair. A waiver—which can only be granted under certain circumstances—permits an employee to participate in a particular matter that would otherwise be prohibited under federal law.

For purposes of this report, we refer to this third Inspector General as “the former Inspector General.” of the designated federal entity for purposes of the Inspector General Act.

Denali Commission Funding

The Commission receives direct appropriations, which are sometimes referred to as its base funding. In addition to this base funding, the Commission also receives statutorily directed transfers and grants from other agencies and entities. These other agencies and entities have varied over time and have included the following, among others:

Trans-Alaska Pipeline Liability Fund;

U.S. Department of Agriculture;

U.S. Department of Health and Human Services;

U.S. Department of Transportation;

U.S. Environmental Protection Agency;

U.S. Department of Housing and Urban Development;

U.S. Department of Labor;

U.S. Department of the Interior;

Alaska Mental Health Trust Authority; and

Alaska Department of Transportation and Public Facilities.

Funding for the Commission steadily increased until fiscal year 2005 and peaked in fiscal year 2007 at $141 million. However, from fiscal years 2008 to 2014, funding steadily decreased, reaching a low of $14 million in fiscal year 2014—a level below fiscal year 1999 funding and an overall decrease of 90 percent since its peak in fiscal year 2007—with funding decreases from nearly all of the Commission’s funding sources (see fig. 3). For example, the Commission’s direct appropriations decreased by more than 50 percent from fiscal years 2007 to 2008 and decreased by nearly 50 percent from fiscal years 2008 to 2009, falling to $10 million for fiscal year 2014. Similarly, since fiscal year 2007, funds from other agencies and entities, which were made available to or designated for use by the Commission, generally decreased or ceased entirely. In fiscal years 2013 and 2014, the Commission received funds from only one source other than its direct appropriation—the Trans-Atlantic Pipeline Liability fund.

Until fiscal year 2010, some of the Commission’s direct appropriations were identified for specific programs or projects. For example, in fiscal year 2004, the appropriations conference committee directed the Commission to spend $10 million for teacher housing in remote villages where there is limited housing available for teachers. In 2012, the Commission received broad authority to accept transfers of funds from any federal agency authorized to carry out an activity within the Commission’s authority and conditional gifts for purposes of carrying out the Denali Commission Act. Commission funding also includes matching funds from the state of Alaska for certain projects.

Denali Commission’s Annual Work Plan and Grants Program

The act requires (1) the commissioners to develop, annually, a proposed work plan for Alaska and submit that work plan for review and approval and (2) Commerce to review and approve the annual work plan after providing for public review and comment. Through the work plan—which authorizes the Federal Cochair to enter into grant agreements, award grants and contracts, and obligate federal funds—the Commission outlines its priorities and funding recommendations for each fiscal year. The process of developing and adopting the work plan generally occurs sequentially as follows: 1. Project proposals are solicited from local government and other 2. Commission officials draft the work plan and provide to the 3. Commissioners forward an approved draft version of the work plan to 4. Upon preliminary approval by the Federal Cochair, the draft work plan is published in the Federal Register for a 30-day public comment period and disseminated to the Commission’s program partners. If no revisions are made, the Federal Cochair provides notice of preliminary approval of the work plan to the commissioners, and forwards it to the Secretary of Commerce for approval; 5. The Secretary of Commerce, through the Economic Development Administration, reviews and then approves, partially approves, or disapproves the work plan (the work plan is revised as necessary to gain approval); and 6. The Federal Cochair awards grants and contracts based upon the approved work plan.

Since its inception, the Commission has issued over $1 billion in grants to help rural and remote communities in Alaska. Over 800 grants have funded more than 2,300 projects. The Commission has sometimes awarded large grants to “program partners” such as state agencies to fund multiple projects. For example, the Commission used a single grant to provide over $100 million to the Alaska Energy Authority to, among other things, plan and construct energy generation facilities. The Alaska Energy Authority, a public corporation created by state law, used the The Commission has also provided grant to fund over 200 projects.grants directly to small, village-level organizations. For example, the Commission provided about $9,000 to the community of Quinhagak to fund the study of an extension of the airport’s runway, among other things.

The Commission Faces Two Key Challenges in Fulfilling Part of Its Statutory Purpose, but Several Options Exist to Address Them

The Commission faces two key challenges in fulfilling the statutory purpose to promote rural development and provide for infrastructure needs, but there are options to assist the Commission in addressing them.making to achieve the rural development portion of its statutory purpose in light of significant funding decreases and (2) the application of the conflict-of-interest law which sometimes prevents commissioners—who hold key specialized knowledge—from being actively involved in developing the annual work plan.

The Commission’s Reliance on Grant Making May Not Be Sustainable Given Significant Funding Decreases, but Options Exist to Address This Challenge

Significant decreases in funding have raised questions about whether the Commission can sustain its current approach of grant making alone to fulfill its statutory purpose. Stakeholders have identified several key options the Commission could take to fulfill its statutory purpose. Amid questions about the future of the Commission, its management has begun efforts to reassess the Commission’s approach in light of its funding challenge.

The Commission Continues to Rely on Grant Making Even Though Its Funding Has Decreased by 90 Percent

In the face of a 90 percent decrease in funding from its peak in fiscal year 2007, the Commission may no longer be able to rely largely on grant making to pursue its statutory purpose, according to Commission management and stakeholders. One purpose of the Denali Commission Act is to provide economic development services in rural communities, promoting rural development, and providing infrastructure needs. However, Commission management and several stakeholders have raised concerns that the Commission’s current approach as primarily a grant-making agency cannot fulfill the statutory purpose in the current budget environment. Specifically, funding levels cannot support grant making on the scale and pace the Commission has done in the past. In addition, the number of program areas that the Commission has been able to fund through grant making has also decreased. By 2013, nearly all Commission spending went to only two program areas—transportation and energy—and the Commission no longer funded new economic development or health care facilities projects, among others.

As Commission funding has decreased, administrative expenses have consumed a larger percentage of its budget, creating a challenge since the Denali Commission Act, as amended, prohibits the Commission from using more than 5 percent of the funds appropriated under the act’s authority for administrative expenses. Under this cap, the amount available to the Commission for administrative expenses, such as grants management and oversight, has declined from approximately $7 million in fiscal year 2007 to less than $700,000 in fiscal year 2014. In practice, however, this cap has been waived each of the last 10 fiscal years in appropriations laws. According to Commission management, the waiver occurred because the Commission could not realistically safeguard the funds in its portfolio of grants under such budgetary constraints. The Commission’s December 2013 independent public audit highlighted the need for the Commission to adopt practical internal controls to ensure proper accounting and safeguarding of its funds—a key administrative activity. In this context, the Commission obligated $3.34 million for administrative expenses in fiscal year 2014—or 24 percent of its overall budget—according to Commission management. We previously found that spending caps can only work if they are realistic and that such caps “are not likely to bind if they are seen as totally unreasonable given current conditions.” Without a statutory change to the Denali Commission Act to permanently eliminate the 5-percent cap, it is unlikely that the Commission will have flexibility to plan and budget for essential administrative activities.

According to the Federal Cochair, as of February 4, 2015, the Commission had on staff 11 permanent federal employees; six intermittent federal employees; and the Federal Cochair, who is a Commerce employee. associated projects. Underscoring this concern, the Commission’s December 2013 independent public audit (1) cautioned that internal controls deficiencies would be created if the Commission was to lose any of the three members of its finance staff and (2) raised concerns that the Commission’s diminishing staff could impact all areas of the Commission, including origination and monitoring of grants.

Stakeholders Identified Several Options to Address This Challenge

Key stakeholders we interviewed—primarily commissioners and program partners—have identified a variety of options the Commission could take for how to approach fulfilling its statutory purpose in the future. These options are not mutually exclusive and could be combined in different variations, depending on strategic priority and funding. All options involve the Commission being more strategic in how it expends its diminishing funds—whether by prioritizing which program areas to continue or by increasing its nongrant activities. The options stakeholders identified include, but are not limited to:

Retain status quo of grant making. The Commission could continue to focus primarily on grant making, which includes funding traditional, “shovel-ready” construction projects as well as some atypical projects needing further Commission discussion before approval.

Limit number of grants. The Commission could limit the total number of grants it awards each year, particularly if it continues to primarily focus on grant making.

Limit scope of grants. The Commission could continue to narrow the scope of the program areas (such as energy, transportation, and training) in which it awards grants each year, particularly if it continues to primarily focus on grant making.

Focus on facilitation. The Commission could shift its approach to act more as a facilitator of grants. As a facilitator, the Commission could help bring together the relevant players—including rural Alaskan communities and potential project funders—in a coordinated effort to help communities in need and agencies with funding capacity effectively collaborate on infrastructure and economic development projects, including projects that identify or address needs on a community-wide scale. As part of this approach, the Commission could also award small grants to use as leverage to help rural communities obtain additional funds from other entities. The Commission has, to a limited extent, served as a facilitator in the past. For example, in funding the construction of health clinics, the Commission initially brought together key players—funders, government regulators, service providers, and community members— to determine how to address community needs.

Focus on technical assistance. The Commission could shift its approach to serve more as a provider of technical assistance to help better position rural Alaskan communities to compete for infrastructure and economic development funds from other entities. Such an approach may include a focus on predevelopment, such as helping communities design their projects in preparation for applying for construction and other infrastructure grants. The Commission provides such technical assistance to a limited extent as part of its existing predevelopment program—a collaborative effort that offers guidance and technical resources to communities for planning new facilities and renovating or expanding existing ones and for developing the documentation needed for competitive funding applications.

Maintain existing infrastructure. The Commission could shift its focus from grants that fund new projects to grants that fund work to help sustain and maintain the infrastructure in which the Commission and its program partners have already invested.

Options Exist to Better Leverage Commissioner Expertise in Developing the Work Plan

Since Justice’s 2006 determination that commissioners were subject to the principal federal conflict-of-interest law, Commission management and commissioners have attempted to implement the Denali Commission Act—which requires the Commission to develop a work plan—while also taking steps to ensure that commissioners did not violate the conflict-of- interest law—which prohibits commissioner participation in matters that would have a direct and predictable effect on their or their employers’ financial interests. Potential conflicts of interest are considered prior to each Commission meeting and commissioners recuse themselves accordingly. The Commission’s ethics official and officials from Office of Government Ethics (OGE)—the agency responsible for developing regulations to implement the conflict-of-interest laws and issuing guidance on granting waivers—noted, however, that the Commission’s structure lends itself to concerns about conflict of interests for commissioners because the Denali Commission Act requires that officials and directors from organizations receiving grants serve as commissioners. In addition, the restrictions on commissioner participation resulting from the conflict- of-interest law and the act’s silence on commissioner roles have led to a decade of frustration and concerns about the commissioners’ inability to contribute their expertise. Based on our legal analysis and information provided by Commission management and the attorney assisting the Commission, we identified four options that would better leverage commissioner expertise in developing the annual work plan.

Application of the Principal Federal Conflict-of-Interest Law Prevents Commissioners from Contributing Their Expertise, at Times, to the Development of the Annual Work Plan

The 2006 Justice determination that the six commissioners are subject to the principal federal conflict-of-interest law significantly changed how commissioners participated in Commission decision making. Prior to this determination, according to the ethics official and several commissioners and staff, commissioners considered each proposed project, discussed the merits of proposed projects without reservation, and voted on work plans. OGE concluded that, in light of the 2006 determination, commissioners needed to “significantly alter how they participated in the Commission’s decision-making processes to avoid violating the criminal conflict-of-interest law.” Specifically, according to the ethics official, if commissioners’ organizations had applied for funding, a commissioner’s acceptance or rejection of a project would have “a direct and predictable effect” on his or her organization’s financial interest in having its own project funded. The ethics official explained that this is a conflict of interest, because decisions to fund one program area, such as energy, would be at the expense of awarding grant funds to another program area, such as transportation.

In response to OGE’s conclusion, the ethics official and the Federal Cochair said they must determine if commissioners have a conflict of interest on a case-by-case basis. Specifically, they have had to consider (1) whether commissioners have a conflict of interest (or the appearance of a conflict of interest) before discussions or votes, and, (2) if they do, whether they must recuse themselves or qualify for a waiver from the conflict-of-interest law. The ethics official stated that he has tried to give the commissioners ethics advice so that they do not violate the criminal conflict-of-interest law. In 2007, the Federal Cochair granted waivers for all six commissioners to participate in discussions of that year’s work plan, funding allocations, and program priorities, after consulting with OGE. These waivers recognized, among other things, that the act “envisions the commissioners as having a meaningful role in the direction of the Commission” and that the act directs individuals designated for their expertise to use this expertise to drive the Commission’s work. Subsequently, OGE officials advised the Federal Cochair that granting such waivers was not a viable option. Thereafter, waivers have been granted only for the State Cochair but not for other commissioners.

As a result, commissioners have had to recuse themselves periodically from discussions and votes, so the Commission often barely has had a quorum to conduct business, according to the ethics official. Given such restricted participation, commissioners no longer discuss or vote on the relative merits of individual projects, voting instead on broadly worded work plans, according to current and former commissioners and Commission management. Some commissioners told us that they were unsure about the extent of allowable participation, given the conflict-of- interest law and have been advised not to participate in discussions and votes. Furthermore, several commissioners told us their fear of criminal prosecution—stemming in part from allegations by the former Inspector General, prior to his resignation, that they violated the conflict-of-interest law—has led them to substantially limit their participation and, in some instances, disengage from the Commission. One commissioner told us that meaningfully participating in the Commission under its current structure would mean doing so in possible violation of conflict-of-interest laws and is not worth the risk. Consequently, the development of the annual work plan is sometimes deprived of commissioner expertise on the sustainability or viability of proposed projects, according to the ethics official and several commissioners.

The ethics official and OGE officials noted that the Commission’s structure lends itself to concerns about conflict of interests for commissioners because the Denali Commission Act requires that officials and directors from named organizations receiving grants serve as commissioners and the principal conflict-of-interest law prohibits commissioners from participating in matters that would have a direct and predictable effect on their employer’s financial interests. In contrast, the Appalachian Regional Commission and the Delta Regional Authority are not subject to the same concerns because the laws establishing them exempt their commissioners and members, respectively, from the principal federal conflict-of-interest law and instead subject them to an alternative conflict-of-interest standard, which does not prohibit them from participating personally and substantially in matters that the state—their employer—has a financial interest.

The restrictions on commissioner participation resulting from the conflict- of-interest law and the Denali Commission Act’s silence on commissioner roles have led to nearly a decade of frustration and concerns about the commissioners’ inability to contribute their expertise, according to several current and former commissioners and staff. All commissioners acknowledged that their role since the 2006 Justice determination has decreased, with some characterizing their role as being a “rubberstamp” for the work plan developed by Commission staff, and others characterizing it as being “neutered” or “muzzled” by the application of the conflict-of-interest law. According to the Federal Cochair, the Commission’s success depends on the shared expertise of involved commissioners and precluding participation by experts in discussions about which projects to fund puts the Commission at risk for making faulty, but avoidable, funding decisions. For example, one commissioner told us of an instance where her knowledge could have prevented a poor Commission investment had she been able to see project-specific information prior to approval of the work plan since the grant involved an entity she knew to be delinquent in its taxes. Amendments to the Denali Commission Act could enhance the ability of the commissioners to provide their expertise with respect to the Commission's project funding decisions.

OGE officials told us that OGE has not been requested to issue a formal advisory opinion on the application of the conflict-of-interest law to the commissioners. According to OGE officials, the commissioners’ participation will be restricted unless Congress amends the Denali Commission Act to exempt commissioners from the principal conflict-of- interest law.

OGE officials also told us that they found people to be more receptive to the opinions of ethics officials when the advice is provided in writing. regulations. Moreover, in 2005 guidance, OGE encourages but does not require written advice under specific circumstances, such as when the advice applies the criminal principal conflict-of-interest law to specific facts—a circumstance common to advice given to Commissioners about their participation in specific Commission matters. As of February 4, 2015, the Commission had not developed a course of action.

Several Options Exist to Better Leverage the Commissioners’ Expertise

Based on our legal analysis and information provided by Commission management and the attorney assisting the Commission, we identified four options to restructure the Commission so that it could better leverage the commissioners’ expertise in light of the 2006 Justice determination (see table 1). Each of these options would require amending the Denali Commission Act.

Additional information about the four options for restructuring the Commission follows:

Make commissioners representatives on a FACA Advisory Committee. Under this option, the commissioners would be representatives on an advisory committee subject to FACA rather Representatives on FACA than special government employees.committees provide stakeholder advice—advice reflecting the views of the entity or interest group they are representing, such as Alaska Natives, municipalities, or the state—whereas special government employees on FACA committees, like all federal employees, are expected to provide their own best judgment in a manner free from conflicts of interest and without acting as a stakeholder representing any particular point of view. As representatives on a FACA committee, commissioners would be expected to represent a particular and known bias of the particular group that they are designated and appointed to represent. Under this option, the commissioners’ open and avowed interests, biases, and commitments are intended to check and balance each other, resulting in a balanced and objective recommendation. However, commissioners would not be subject to the principal federal conflict-of-interest law.

Make commissioners members on Non-FACA Advisory Committee. Under this option, the commissioners would be members of an advisory committee that is exempt from FACA and subject to an alternative conflict-of-interest standard rather than the principal federal conflict-of-interest law, as in the case of the fishery management councils established by the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) to advise the Secretary of Commerce in developing fishery management plans, among other things. To allow certain members of fishery management councils with financial interests in fisheries or fishery- related activities—including the financial interests of their employers— to participate in the councils, these members are exempt from the principal federal conflict-of-interest law when they comply with the financial disclosure and recusal requirements in the Magnuson- Stevens Act and its implementing regulations.

Subject commissioners to alternative conflict-of-interest standard but retain decision-making role. Under this option, the commissioners would retain the ability to make decisions on which projects to fund and would be subject to an alternative conflict-of- interest standard rather than the principal federal conflict-of-interest law, which is how the Appalachian Regional Commission and Delta Regional Authority operate. Specifically, the statutes authorizing these other regional entities prohibit their nonfederal members from participating personally and substantially in matters in which they or their immediate family members—but not the state, which is their employer—have a financial interest. Being subject to this alternative conflict-of-interest standard has allowed their nonfederal members to vote on specific project funding with only a few conflicts of interest arising, according to officials from the Appalachian Regional Commission and Delta Regional Authority. For example, Appalachian Regional Commission officials told us that commissioners do not have to recuse themselves from discussing or voting on grants their state agency applied for unless they are personally involved in the project, and Delta Regional Authority officials told us that there is generally not a conflict of interest that would prevent a member from discussing or voting on projects involving their state agency. However, under this option, the principal conflict-of-interest law and its implementing regulations would not apply because the nonfederal members are not subject to the principal federal conflict-of-interest law.

Make commissioners a Board of Directors with fiduciary duty and retain decision-making role. Under this option, the nonfederal commissioners would become members of a Board of Directors with a fiduciary duty—a duty imposed by law on a person in a position of trust to act for someone else’s benefit and not to further one’s personal interests—and not be subject to the principal federal conflict- of-interest law. For example, the Board of Directors of the Legal Services Corporation—a federally funded, private nonprofit corporation that makes grants to legal service providers who provide free legal assistance to those who otherwise cannot afford it—has a fiduciary duty to use a high level of care to manage the corporation to best promote the corporation’s interest. Boards of Directors are generally associated with corporations, but some governmental entities also have Boards of Directors. The Farm Credit Administration, an independent agency in the executive branch that, among other things, regulates entities involved in the Farm Credit System, and the National Credit Union Administration, also an independent agency in the executive branch that regulates, charters, and supervises credit unions, both have Boards of Directors. In addition, the Smithsonian’s National Museum of the American Indian is governed by a Board of Directors with a fiduciary duty. Under this option, OGE would not have a role since the commissioners would not be subject to the principal federal conflict-of-interest law. However, the scope and nature of the commissioners’ fiduciary duty, such as whether the commissioners owed a fiduciary duty to American taxpayers generally or to Alaskans in particular and, in either case, what actions would best promote each group’s interests—would need to be determined.

Several Challenges Have Hindered the Denali Commission’s Daily Operations

The Commission has faced several challenges that have adversely impacted its daily operations. These include periodic vacancies in the Federal Cochair position; issues related to the implementation of Dodd- Frank; and not having a Commission attorney. In addition, the Commission has received limited support from Commerce in trying to resolve its operational challenges.

Vacancy in Federal Cochair Position Has Stymied the Commission

The Federal Cochair position has been vacant on two separate occasions, which has stymied the Commission from fulfilling its statutory responsibilities even though the Denali Commission Act states that any vacancy in the Commission shall not affect its powers. The most recent vacancy of a Federal Cochair occurred during the second quarter of the fiscal year when the Commission typically awards new grants. Because only the Federal Cochair is authorized to take critical actions, such as approving new grants, no one was authorized to sign $7 million in new grant awards or obligate these funds in time for grantees to reserve space on barges bringing building materials to rural Alaska for the brief 2014 construction season, according to Commission management and staff. Commission management told us that this vacancy was a key factor in preventing the Federal Cochair from forwarding for approval a timely fiscal year 2014 work plan, leading to its delayed publication for public comment and subsequent approval.

In contrast to appointed officials of many other federal agencies and commissions, the Federal Cochair is not authorized to delegate his or her statutory responsibilities, such as publishing the draft work plan for public comment or to remain in office beyond the expiration of his or her term for several reasons. First, the Federal Cochair is not subject to the Federal Vacancies Reform Act of 1998 (Federal Vacancies Act)—an act that identifies who may temporarily perform the functions and duties in the absence of an officer who is appointed by the President of the United States and confirmed by the Senate—because the Federal Cochair is appointed by the Secretary of Commerce rather than the President. Second, the Denali Commission Act—unlike the statutes that established the Appalachian Regional Commission and the Delta Regional Authority—does not provide for an alternate or acting Federal Cochair. Third, the Denali Commission Act does not contain a “holdover” provision, which would allow the Federal Cochair to continue serving in office beyond the expiration of his or her term. Other federal agencies—such as the Federal Election Commission, Federal Energy Regulatory Commission, and the Federal Communications Commission—have holdover provisions that allow appointed members whose terms have expired to continue to serve in office for a specified period of time or until a successor is appointed or takes office. Furthermore, unlike enabling legislation for other federal agencies, the act does not contain a “delegation of authority” provision that would allow the Federal Cochair to authorize another person to perform the Federal Cochair’s statutory responsibilities during a vacancy that occurs at any point in the Federal In contrast to a holdover provision, a Federal Cochair Cochair’s term.could use a delegation of authority provision while he was in office or if he left before the end of his term. Without amending the act to include either a holdover or delegation of authority provision when the Federal Cochair position is vacant, Commission operations would be stymied the next time a vacancy occurs.

Implementation of Dodd- Frank Diverted Attention Away from Commission Operations and Resulted in Communications Breakdown with the Former Inspector General, Prior to his Resignation

Since the enactment of Dodd-Frank in 2010, the Federal Cochair and the attorney assisting the Commission said they spent substantial time discussing and seeking guidance from other agencies on whether and how to implement Dodd-Frank, which diverted attention from day-to-day Commission management and ethics issues. Once the Commission implemented Dodd-Frank in May 2013—thereby making the seven commissioners responsible for the general supervision of the Commission’s Inspector General—concerns arose about its application. For example, commissioners who previously advocated for the removal of the former Inspector General were now vested with the authority under Dodd-Frank to remove an Inspector General by a two-thirds majority vote even if the Federal Cochair is against removal. At the same time, the Federal Cochair could no longer take actions to appoint, supervise, or remove an Inspector General without explicit and prior approval of the other commissioners. The Federal Cochair and attorney assisting the Commission raised concerns about the potential for, or appearance of, commissioners abusing this new power to fire a Commission’s Inspector General, while the former Inspector General, prior to his resignation, raised concerns about his ability to carry out his duties with this supervisory change. As a result, Commission management and the attorney assisting the Commission said they repeatedly met with commissioners to discuss their new role and acknowledged that the commissioners need additional guidance and training on this topic.

This change in the commissioners’ role also exacerbated the already contentious relationship between the Commission and the Inspector General, according to Commission management. As a result, they told us, the Inspector General ceased to communicate with both the Federal Cochair and the commissioners for several months leading up to his resignation in December 2013. In addition, the former Inspector General, prior to his resignation, did not comply with requests from the Federal Cochair to attend meetings of the commissioners, including those discussing the implementation of the Dodd-Frank changes. According to Commission management, the decision by the former Inspector General, prior to his resignation, to cease communications stemmed from his concern that the Commission’s interpretation of Dodd-Frank and the subsequent supervisory change impaired the independence of his office.

In light of the former Inspector General’s resignation in December 2013, it is unclear what challenges, if any, will continue to exist for the Commission related to this issue.

The Commission Has Had Limited Legal Support, Even with Facing Complex Legal Questions

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). provide mechanisms to identify and deal with any special risks resulting from, for example, continual changes in governmental, operating, and regulatory conditions.

However, the Commission has never had a full-time attorney providing it with legal advice and support on a routine and consistent basis, leaving the Commission vulnerable. As primarily a grant-making agency, the Commission has awarded over 800 grants since its inception, many of which Commission officials acknowledged to be complex, that did not receive prior legal review by an attorney on behalf of the Commission. Current and former Commission officials told us that staff drafting grant agreements in the Commission’s early years—grants that generally served as templates for later grants, including recently awarded grants— relied on a combination of their own experience and grant language taken from other agencies.

The Commission has relied on other federal agencies for limited legal support. In its early years, the Commission had a memorandum of understanding with Commerce to provide the Commission with limited legal services. This agreement ended in 2006, after the Commission and Commerce were unable to reach an agreement on renewing it. Subsequently, the Federal Cochair entered into an agreement with the Federal Aviation Administration (FAA) for an attorney in the FAA’s Anchorage office to provide occasional and intermittent legal services after commissioners were determined to be special government employees in 2006. To supplement the limited legal assistance provided by FAA, according to Commission management, the Commission sometimes relied on others such as OMB. The FAA attorney did not review the legal agreements the Commission entered into but rather served as the Commission’s designated agency ethics officer and handled the legal questions raised by the Federal Cochair and other Commission officials.

As previously discussed, the Commission has recently faced complex legal issues such as the applicability of the principal federal conflict-of- interest law to the commissioners and the implementation of Dodd-Frank. In addition, over its 15-year existence, the Commission has encountered numerous other complex legal matters, such as the following:

Legislative proposals. The Federal Cochair, commissioners, and attorney assisting the Commission identified key operational and statutory challenges hindering the Commission—such as the role of the commissioners and the vacancy of the Federal Cochair—and considered proposals to amend the Denali Commission Act to address some of these challenges. As a result, the Federal Cochair and the attorney assisting the Commission had numerous discussions with OMB and others about amending the act and developed draft language for bills reauthorizing the Commission in 2012. The attorney assisting the Commission characterized its demand for legal services during this time as intensive.

Validity of, and the Commission’s liability under, certain complicated agreements. Prior to his resignation, the former Inspector General, in a 2012 report to Congress, raised concerns about the validity of the Commission’s “secondary operator agreements”—agreements that allow the Commission, under certain circumstances, to replace the original operator of a Commission- funded project—and whether the agreements impose liability on the Commission after a project’s completion. Similarly, the attorney assisting the Commission raised concerns about whether these agreements and other related agreements are valid contracts and make the Commission an owner or operator of the facility and thus liable if, for example, there is an oil spill. Commission officials and the attorney assisting the Commission told us that no attorney helped draft or review these agreements on behalf of the Commission prior to their approval.

Appropriateness of providing services to other federal agencies. In 2013, after the Commission entered into Economy Act agreements with three federal agencies to provide them with an electronic database and other grants administration support, commissioners raised questions about whether the Commission had authority to enter into such agreements and whether providing such services was within the Commission’s statutory purpose to serve rural Alaska. According to Commission management, however, these agreements help to further the Commission’s statutory purpose to deliver services of the federal government in the most cost-effective manner practicable by reducing administrative and overhead costs, since this purpose is not expressly limited to Alaska.helped draft or review these agreements on behalf of the Commission.

The Economy Act provides general authority for an agency to obtain goods and services from another agency.

As a result of these complex matters, the Federal Cochair said that he increasingly had to focus on legal issues at the expense of other duties, such as strategic planning. Similarly, the attorney assisting the Commission characterized his work on such legal matters as increasingly time-consuming and going beyond what either agency had anticipated. For example, he initially spent about 5 hours per week on Commission work, which increased to at least 10 hours per week as issues arose related to the special government employee determination. Important legal matters demanding his attention increased substantially since 2010, according to this attorney. He spent more than half of his time addressing and advising the Commission on such issues as the Inspector General and Dodd-Frank, leaving no time for additional legal matters beyond the scope of the agreement, such as reviewing the Commission’s grants and other agreements. FAA ceased providing legal services to the Commission at the end of fiscal year 2014 because, according to the attorney assisting the Commission, his legal support for the Commission had become so time-consuming.

Without an attorney to help the Commission identify and navigate risks consistent with federal standards for internal control, the Commission is at increased risk for making legal mistakes. For example, the attorney assisting the Commission told us he would not have approved the Commission’s secondary operator agreements as written because such agreements put the federal interest at too much risk. In this context, he recommended that the Commission obtain a full-time, in-house attorney to help the Commission operate in what he termed a “legally murky” environment and to help it avoid legal mistakes in grants management. Similarly, prior to his resignation, the Commission’s former Inspector General recommended in 2010 that the Commission acquire in-house legal counsel. Both the Appalachian Regional Commission and the Delta Regional Authority have full-time legal counsel from either an in- house counsel or through contract with a law firm for the equivalent of a full-time attorney. Commission management has acknowledged that the Commission needs legal support on a more continuous and consistent basis, especially since the ethics officer and primary legal support is departing.

Commerce Has Provided Limited Support to the Commission

Apart from carrying out its own limited responsibilities under the Denali Commission Act, Commerce has consistently treated the Commission as an independent agency. According to the Commerce officials we interviewed, Commerce does not provide legal advice or guidance to the Commission because the Commission is an independent agency, even though its Federal Cochair is a Commerce employee. Similarly, until recently, the Commerce Inspector General did not provide Inspector General services to the Commission. When Commerce provided administrative and legal services for the Commission in the past, it was pursuant to a memorandum of understanding with the Commission. Commerce officials told us that they served as a sounding board for the Federal Cochair on a variety of legal matters after the memorandum of understanding’s expiration in 2006, but they did not provide legal guidance or advice. Commerce officials told us that they communicated this position with Commission management as recently as 2013.

However, the Commission and commissioners have not had a clear or consistent understanding of Commerce’s role with respect to the Commission. The Denali Commission Act—in addition to specifying certain responsibilities for Commerce and making the Federal Cochair a Commerce employee—authorizes, but does not require, federal agencies (such as Commerce) to make personnel and services available upon the Commission’s request. Commission management told us that they do not always know what support activities Commerce is responsible for providing, or allowed to provide, to the Commission. Consequently, Commission officials told us that the Commission has repeatedly, and unsuccessfully, sought legal advice and other assistance from Commerce.

In addition, at least one commissioner called for increased levels of support from Commerce, specifically calling for Commerce to immediately provide Inspector General staff to the Commission to help address challenges stemming from the recent resignation of the Commission’s former Inspector General. The Commerce Office of Inspector General began providing some oversight services to the Commission pursuant to a new interim agreement reached in May 2014 between the two agencies for the remainder of fiscal year 2014. This agreement was recently extended through the end of fiscal year 2015.

The Commission Has Some Administrative Grant Management Procedures, but Has Several Shortcomings in How It Has Managed Its Grants

The Commission has some key procedures in place for administering its grants, but we found several shortcomings in how the Commission has managed its grants. The rapid increase in funding during the Commission’s early years led staff to spend their time issuing grants rather than developing policies for how to do so. The Commission later developed some administrative procedures for administering its grants and has recognized the importance of developing policies to help manage its grants. In our review of a sample of projects funded by Commission grants, we found several shortcomings in how the Commission has managed its grants, including not having documented policies for awarding and managing grants; inconsistent monitoring of grant and project recipients; and lengthy delays in closing projects, among other things.

The Commission Has Some Administrative Grant Management Procedures

As it has evolved, the Commission has developed administrative practices to help manage grants in a consistent and transparent manner. For example, the Commission utilizes standard checklists to help ensure that its staff take the necessary administrative steps at key points in the grant-making process. These practices meet established criteria in the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability for good grant management and oversight,including having internal operating procedures in place before awarding grants. Before the Commission awards a grant, its program staff complete a pre-award checklist based on a conference with the grant recipient.

The checklist includes items such as discussing the project overview and expectations; the proposed budget and funding availability for cost overruns; and programmatic and business management requirements.

Similarly, when Commission staff close out a grant, they follow a closeout checklist, which includes verification that the award recipient submits a project closeout report; program staff and grants management staff review and accept the project closeout report; and a closeout folder is routed to appropriate personnel so that any remaining funds can be deobligated.

Figure 5, an interactive graphic, displays examples of checklists used by the Commission. (For full-sized, printable images of these processing checklists, see app. II.)

In addition, the Commission has maintained information about its grants and projects in an online database—the Project Database System—that is accessible to the public through the Commission’s website. Starting in October 2003, the Commission required grant and project recipients to submit certain types of reports through the Project Database System, including quarterly reports updating the status of the project and closeout reports at the projects’ conclusion. This database serves as a place for grantees and project recipients to report their progress, and as a source for the public to learn more about specific grants or projects. Such information includes documentation regarding the following:

The intended use of grant funds: the database includes links to financial assistance awards, which lay out the specific tasks to be accomplished under each grant and the associated reporting requirements; and

Status reports from grant recipients: the database includes sections on grant and project reporting; the project reporting section includes quarterly reports with such information as (1) how much money was allocated to the project, (2) how much money has been spent, (3) the projected timeline of the project, and (4) notes about the status of the project.

These practices meet established criteria for good grant management and oversight, including providing evidence of program success.managers and staff also use the Project Database System to help manage grants and reporting timelines. For example, the online database includes built-in reminders to project managers to follow up on missing or late progress reports.

Several Shortcomings Exist in How the Commission Has Managed Its Grants

Even with these administrative practices, we found several shortcomings in how the agency managed grants awarded in fiscal years 1999 through 2013. Most significantly, the agency does not have documented policies for awarding and managing its grants, leading to inconsistencies in the awarding and monitoring of grants. In addition, the agency does not have a process to address the findings of single audits; project closeouts have sometimes encountered lengthy delays, and the agency does not have a record retention policy in place, as required by federal regulations.

Not Having Documented Policies Has Led to Inconsistencies in Awarding and Monitoring Grants

The Commission does not have documented policies for how it awards and manages its grants, although it has developed guidelines for the administrative steps involved. In awarding federal grants, effective oversight and internal control—in the form of management directives, administrative policies, or operating manuals—is important in assuring the proper and effective use of federal funds to achieve program goals, according to the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability. The guide states that effective internal control systems provide reasonable assurance that grants are awarded properly, recipients are eligible, and federal funds are used as intended and in accordance with applicable laws and regulations. The Commission’s Grants Management Guidelines, most recently updated in January 2014, provide detailed information on the administrative steps involved in awarding and managing grants, such as creating an announcement for the award and issuing the award to officially obligate the funds for the grant. However, the guidelines do not describe the policies for how the Commission should award and manage its grants. For example, the guidelines do not address issues that could be addressed if the Commission documented its grant-making policies, such as the number of projects acceptable under each grant, when it is appropriate to use a competitive award process, and criteria for identifying the appropriate requirements to include in the Commission’s grant agreements.

Not having documented policies in place has hindered the Commission from having a consistent approach to awarding grants. For example, according to the Federal Cochair, the Commission used “monster awards”—a single grant that funded dozens or even hundreds of projects—during its early years, which led to an “accounting nightmare” because of the difficulty of tracking funds associated with such grants and projects. The Federal Cochair explained that such problematic practices arose because, in the absence of documented policies on the number of projects acceptable under each grant, program managers have had discretion in managing their program areas. In addition, the Commission has not consistently used a competitive selection process to award grants. For example, in awarding energy projects during the early years of the Commission, the Federal Cochair told us that Commission officials chose certain program partners based on previous professional contact rather than through an open and competitive selection process. In contrast, the Commission used a competitive process in selecting grantees for building health clinics in rural Alaska, according to Commission management. As the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability states, through competition, agencies can increase assurance that grantees have the systems and resources to efficiently and effectively use funds to meet grant goals. A competitive process also promotes fairness and openness in the selection of grantees. However, because the Commission does not have documented policies regarding when a competitive award process may or may not be appropriate, it cannot be assured that it is making such decisions consistently and based upon the appropriate considerations.

The Commission does not have documented policies to specify what reporting requirements should be included in its grants and the frequency of reporting required. Rather than issuing its own policies, the Commission has often incorporated OMB guidance by reference in its grant agreements even though the OMB guidance is intended for agencies and not grant recipients. For example, the OMB guidance indicates that agencies should require recipients to submit financial status reports no more often than quarterly but no less often than annually. Based on our sample, an estimated 33 percentprojects’ grant agreements incorporated this OMB guidance by reference, of Commission-funded and 22 of the 33 such projects in our sample did not specify how often grant recipients’ financial status reports were due. As a result, it was unclear how often the grantee in these 22 cases was required to report to the Commission and difficult to determine whether these grantees met their reporting requirement. While Commission officials told us that program managers would have informally communicated to grant recipients how frequently such reports were expected, not specifying reporting requirements in written grant agreements could lead to confusion regarding what is required of the grantee. According to the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability, the terms, conditions, and provisions in the award agreement, if well designed, can render all parties more accountable for the award. Without documented policies to specify such requirements, the Commission may not be setting clear expectations for grantees, making it difficult to hold them accountable for fulfilling the terms of the grant agreement.

In addition, as a result of not having clear, documented policies related to monitoring, the Commission has not been consistent in how it monitors the requirements it has included in its grants. We have previously found that once an agency has awarded grants, its monitoring of grantee performance is important to help ensure that grantees are meeting program and accountability requirements. Moreover, monitoring grantee performance helps ensure that grant goals are reached, required deliverables are completed, and potential problems can be addressed early in the grant period.inconsistent in the following ways: The Commission’s monitoring has been

The Commission allowed grant recipients to draw down funds without submitting quarterly progress reports as required in the grants. According to Commission officials, the Commission’s policy is to not provide funds to grantees unless they submit required reports. However, in 19 of the 38 projects where this situation could be identified, the Commission allowed grantees to draw down about $5.6 million during periods of inadequate progress reporting.According to Commission program officials, they rarely have withheld payment in cases where required reporting is missing. One program official described withholding payments from grantees as the least viable option, since many project recipients would not have the funds to continue the project without the Commission’s funding. The Commission’s Grants Management Guidelines include a description of a process that eventually cuts off funding for awards when grantees are delinquent on their progress reports, but it does not describe criteria for a program official to apply in deciding whether to allow a grantee who is delinquent to continue to draw down funds. Without clear, documented policies that describe under what circumstances Commission officials should withhold funds, this method of enforcing grantee compliance is less likely to function.

Not all required photographs were submitted in 51 of the 66 projects in our sample where the Commission’s grant required photographs. For example, for one project to construct behavioral health space within a primary care clinic, the grant required a minimum of three dated photographs with each quarterly report to fully establish the before, during, and after of the project; Commission records showed that no photographs were submitted with the quarterly progress reports. Photographs of ongoing projects are important because of the inaccessibility of many rural Alaskan communities and the difficulty of having Commission officials conduct visits to observe progress of the project, particularly given decreased funding.

While we found that the Commission specified requirements for submission of other documentation and reports, we also found that they did not ensure grant recipients submitted them. For example, the Commission required Labor, Wage, and Residency reports for an estimated 36 percent of its projects, but among the projects reviewed in our sample, these reports were submitted for only 13 of the 36 sample projects for which they were required. Among the documentation for these 13 projects, 4 contained only a letter that referred to past Labor, Wage, and Residency reports being submitted, while the content of such reports for an additional 3 projects did not meet the Commission’s requirements. For example, a grant recipient provided information on the number of employees, place of primary residence, and total payroll earnings for those employed on the project but not on their position, first check date, last check date, and rate of pay per hour—as required by the grant agreement. Similarly, the Commission required periodic meetings, generally semiannually, to discuss lessons learned for an estimated 22 percent of its projects, but we did not find evidence of such meetings occurring in Commission records for any of the 22 such projects in our sample.requirements are appropriate to include in what types of grants would help ensure the Commission was only requiring those reports it actually needs to effectively monitor grantees.

Having documented policies regarding what reporting In addition, prior to his resignation, the Commission’s former Inspector General raised several concerns in December 2012 about the Commission’s monitoring of certain accounts meant to fund the operation, as well as maintenance and renewal and replacement of projects, including whether the accounts had been created, funded, and used for their intended purpose; and whether any federal dollars were missing.For more information about these accounts, see appendix III.

The Commission Does Not Have a Process for Addressing the Findings of Federal Single Audits

The Commission does not have a process for obtaining, reviewing, or acting on the results of federal single audits of its grantees. The Single Audit Act, as amended, was enacted to promote sound financial management, including effective internal control, with respect to federal grant awards administered by nonfederal entities. The act requires nonfederal entities that expend more than a certain amount in a year in federal awards to have a single or program-specific audit conducted by an independent auditor. As the awarding agency, the Commission is responsible for ensuring that audits for the federal awards it makes are completed and reports are received in a timely manner and in accordance with OMB guidance. It is also responsible for issuing a management decision on audit findings within 6 months after receipt of the audit report and ensuring that the recipient takes appropriate and timely corrective action. Among the 113 single audit reports for fiscal years 2001 through 2012 for which the Commission was the oversight agency—generally, the agency providing the predominant amount of funding directly to the recipient—we found that 29 had evidence of a potential problem—in 22 cases with the Commission’s funding specifically, and in 7 cases with Commission officials stated that, in some funding from other agencies.cases, when program staff was aware of one of these instances, they followed up with the grantee, but follow-up did not occur in a systematic manner. Unless the Commission takes steps to resolve the findings of these audits, or at least the ones that are relatively recent, the Commission risks continuing to award funds to grantees who may have inadequate controls over their grant funds.

Under the federal internal control standard for monitoring, managers are to (1) promptly evaluate findings from audits and other reviews, including those showing deficiencies and recommendations reported by auditors and others who evaluate agencies’ operations; (2) determine proper actions in response to findings and recommendations from audits and reviews; and (3) complete, within established time frames, all actions that correct or otherwise resolve the matters brought to management’s attention. Under this standard, monitoring of internal control should include policies and procedures for ensuring that the findings of audits and other reviews are promptly resolved, including the time frames in which the findings of audits and other reviews are to be resolved. However, officials acknowledged that the Commission does not have a policy or process in place for obtaining, reviewing, or acting upon the results of single audits. Without a documented process for ensuring that the findings of audits and other reviews are promptly resolved, the Commission is not likely to take action on the findings of such audits.

Project and Grant Closeouts Have Encountered Sometimes Lengthy Delays

Commission officials often did not perform required project and grant closeout steps in a timely manner. As we have previously found, closeout processes can be used for detecting problems that have occurred in areas such as recipient financial management and program operations, accounting for any real and personal property acquired with federal funds, making upward or downward adjustments to the federal share of costs, and receiving refunds that the recipient is not authorized to retain. Further, closeout procedures are intended to ensure that recipients have met all financial requirements, provided final reports, and returned any unused funds. When agencies do not conduct closeout procedures in a timely manner, this increases risk that records will be lost or the grantee’s officials may leave or not remember sufficient details, making it more difficult for the agency to recoup unused funds.

GAO-11-773T. with late closeout reports had unused funds of approximately $750,000 that sat idle for periods ranging from about 3 weeks to over 5 years.

In addition, until the projects were closed out, the grants that funded them could not be closed out. As we previously found for federal agencies, OMB guidance and agency regulations generally require grantees to submit all financial and performance reports and liquidate all obligations incurred under the grant within 90 days after the completion of the grant. Awarding agencies must then make prompt payments to grantees for allowable reimbursable costs for the grant being closed out. In 2013, Commission officials were actively engaged in closing out grants. From September 2012 to May 2013, Commission records indicate that grants totaling about $8.7 million in unused funds were closed out, and the funds de-obligated. However, the Commission official leading this effort left the agency in August 2013, and Commission officials indicated that no one took over this effort, although program managers, to the extent they are available, have continued this work. Incomplete and late grant closeouts have led to a substantial amount of unused Commission funds—$6.5 million as of June 2014—not being put to other uses. About half of these funds were from grants with award periods that ended in 2012 or earlier. Unless the Commission enhances its efforts to close out projects and grants and de-obligates unused but available funds in a timelier manner, taxpayer dollars provided to the Commission may continue to sit idle for excessively long periods of time.

The Commission Has Not Had a Record Retention Policy in Place

Finally, the Commission has not established a record retention policy as required by federal regulations. This regulation requires agencies to develop record retention policies and obtain approval from the National Archives and Records Administration before implementing the policies, but the Commission did not submit such a draft policy for review until April 2013. As of June 2014, the Commission had not received a decision on the policy; Commission management expected a decision by December 2014.

Operating without a record retention policy has led to inconsistencies in how the Commission’s records have been treated. Specifically, some records for grants that have been completed and closed out for many years have been retained. For example, among the projects we reviewed, the Commission maintained records for an award with a performance period that began in December 2000 and ended in September 2004, and At the same time, according which was closed out in December 2004.to Commission staff, the Commission does not generally retain documentation related to unsuccessful applications for grants and projects. Moreover, some Commission officials told us that they were directed to dispose of certain records in the past. For example, Commission officials told us that, at the direction of Commission management, they disposed of bank records from project operators— information that was subsequently needed for an Inspector General inspection. According to Commission management, having a record retention policy in place would not have led to retaining these records because, at the time, neither Commission management nor staff understood what the documents were or that they were associated with Commission-funded grants and projects. Once the Commission’s former Inspector General, prior to his resignation, identified the bank records as relevant documentation, the Commission began retaining such records. Unless the Commission implements its record retention policy, once it is approved, inconsistent record management is likely to continue in the future.

Conclusions

Since its inception in 1998, the Denali Commission has funded numerous energy, health, and infrastructure projects that have improved the lives of many rural Alaskans. The principal conflict-of-interest law prevents commissioners from providing their expert advice and opinions on particular matters that would directly affect the financial interest of their employers. Different structures for the Commission, such as the four options identified, could better leverage commissioners’ expertise in the development of the annual work plan.

Because the Denali Commission Act does not include holdover or delegation of authority provisions, the Commission has been stymied for significant periods of time after the expiration of a Federal Cochair’s term, affecting the Commission’s day-to-day operations and the Federal Cochair’s statutory responsibilities. Most recently, the Commission was unable to award new grants or submit its annual work plan during a nearly 4-month vacancy in 2014. Without such provisions being enacted into law, the risk remains that the next vacancy in the Federal Cochair position may again bring the Commission to a standstill. Moreover, as the Commission’s funding has decreased, administrative expenses have consumed a more significant part of its overall budget—up to 24 percent in fiscal year 2014. Under the existing 5 percent cap on administrative expenditures, it is unlikely that the Commission will be able to conduct essential administrative activities, such as oversight of its existing and new grants portfolio. While this cap was waived in each of the last 10 fiscal years in appropriation laws, unless Congress amends the act to modify or end it, the Commission will lack flexibility to plan and budget for essential administrative activities.

Given the Commission’s 90-percent decrease in funding since 2007, it may not be feasible to continue relying on grant making as its primary approach to achieve its statutory purpose. Unless the Commission reexamines how it operates and realigns its approach to better match its limited budget—and clearly articulates this new approach in a strategic plan, as it is required to do every 4 years—the Commission risks falling into obsolescence. Without issuing a new strategic plan that clearly articulates its approach for fulfilling its statutory purpose amidst decreased funding, the Commission may not be prioritizing its operations in a manner that aligns with its current budget situation. In addition, while the Commission has faced numerous and complex legal questions, it has never had a full-time attorney providing it legal advice and support on a routine and consistent basis, which has led to avoidable legal mistakes. Unless the Commission obtains a full-time attorney to provide legal advice and serve as the Commission’s designated ethics officer, it may find it difficult to address current and future legal matters and will remain at risk of making costly legal mistakes.

While the Commission has awarded over $1 billion in grants to help develop the infrastructure and economy of rural communities in Alaska, it has done so without documented policies for how it awards and manages its grants, resulting in inconsistencies in how the Commission awards and monitors grants. Unless the Commission issues such policies, it risks compromising its ability to ensure that grants are awarded properly, clear expectations are set and all parties are accountable, and that federal funds are used as intended and in accordance with applicable laws and regulations. In addition, while the federal internal control standard for monitoring requires, among other things, that the findings of audits and other reviews are promptly resolved, the Commission does not have a process for obtaining, reviewing, or acting on the results of federal single audits of its grantees. Without a documented process for ensuring that the findings of federal single audits and other reviews are promptly resolved, the Commission is not likely to take action on the findings of such audits. Moreover, single audits that raised potential problems could inform the Commission’s future decisions about awarding grants. Unless the Commission takes action to resolve the findings of these audits, at least the recent ones, it risks continuing to award grants to grantees who may have inadequate controls over grant funds.

Moreover, the Commission made significant progress in 2013 in closing out expired grants with unused funds, but more work remains to be done in this area, with over $4 million as of September 2014 not being put to other uses. The Commission’s closeout procedures are intended to ensure that recipients have met all financial requirements, provided final reports, and returned any unused funds. Failing to close out grants and de-obligate unspent funds in a timely manner means that taxpayer dollars may sit idle, and the Commission has fewer resources to meet its statutory purpose. Finally, although the Commission has submitted a draft record retention policy to the National Archives and Records Administration as required by federal regulation, it must follow through to implement the policy once it is approved. Unless it does so, the Commission may continue to experience problems with inconsistent record management and retention.

Matters for Congressional Consideration

To better leverage the commissioners’ expertise in the development of the annual work plan, Congress should consider amending the Denali Commission Act, potentially with one of the identified options.

To address barriers to the operation of the Commission, Congress should consider amending the Denali Commission Act to include either a holdover or delegation of authority provision when the Federal Cochair position is vacant.

To allow for greater flexibility in the Commission’s operations, Congress should consider amending the Denali Commission Act to modify or end the 5 percent cap on administrative expenditures.

Recommendations for Executive Action

To enhance the Commission’s operations, we recommend that the Commission’s Federal Cochair direct the Commission to consider options for fulfilling the Commission’s statutory purpose and finalize that new approach in a new strategic plan.

To address the Commission’s legal challenges, we recommend that the Commission’s Federal Cochair direct the Commission to obtain a full-time attorney who would provide legal advice, including reviewing contracts and agreements, and serve as the Commission’s designated ethics officer.

To improve the Commission’s grants management, we recommend that the Commission’s Federal Cochair direct the Commission to take the following four actions: issue Commission-specific policies for awarding and managing grants; establish a documented process for ensuring that the findings of single audits of grantees are promptly resolved and take action to resolve any recent single audits that showed evidence of a potential problem; continue efforts to close out grants and projects, including de- obligating unspent grant funds in a timely manner; and take steps to consistently manage and retain Commission records, including implementing its record retention policy once it is approved.

Agency Comments and Our Evaluation

We provided a draft of this report to the Denali Commission and the Department of Commerce for review and comment. Written comments from the Federal Cochair; the State Cochair, representing the views of the other six commissioners; and the Department of Commerce; are reproduced in appendixes IV, V, and VI, respectively. The Federal Cochair concurred with our conclusions and recommendations, and he summarized the Commission’s ongoing efforts to address our recommendations. The Federal Cochair also provided technical comments that we incorporated, as appropriate. The other six commissioners of the Denali Commission also concurred with our conclusions and recommendations. The Department of Commerce did not comment on our conclusions and recommendations. The letter from the Deputy Secretary of Commerce reiterated that the Denali Commission is an independent agency.

After the draft report was provided for review and comment, we received new and updated information on the ethics issues discussed in the draft report from Commerce, the Denali Commission, and OGE. We updated the ethics section of the report accordingly to reflect this new information. We also updated the draft Matter for Congressional Consideration on the ethics issue to focus it on the question of what is the best statutory framework to better leverage the commissioners’ expertise and we deleted the draft Matter for Congressional Consideration on the commissioners’ roles and responsibilities.

We discussed these subsequent changes with the Federal Cochair on February 4, 2015. The Federal Cochair concurred with our conclusions and revised recommendations, and he summarized the Commission’s ongoing efforts to address our recommendations. The Federal Cochair reiterated the need to obtain clarity on Commerce’s responsibilities vis-à- vis the Commission. In addition, we have learned that, consistent with the recommendations in our draft report, the Commission started a new strategic planning effort in January 2015 and has hired a full-time attorney, who began work on January 12, 2015.

We are sending copies of this report to the appropriate congressional committees, the Denali Commission’s Federal Cochair and other commissioners, the Secretary of Commerce, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or fennella@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) the challenges, if any, the Denali Commission (Commission) and commissioners face in fulfilling the Commission’s statutory purpose and options to address them; (2) the challenges, if any, that have hindered the daily operations of the Commission; and (3) the Commission’s policies and procedures for awarding and managing grants and the extent to which grantees and commission officials complied with these policies and procedures. We reported separately on the Denali Commission’s Office of Inspector General in September 2014.

To inform our review of all three objectives, we analyzed the Denali Commission Act of 1998, as amended; relevant federal laws; regulations; legislative history; agency guidance; and other documents and information related to the commission’s structure and operations. To obtain their views on our objectives, we interviewed Commission officials and staff, including the current federal cochairperson (Federal Cochair) and other Commission officials, as well as a former Federal Cochair and selected former Commission staff; all current commissioners and selected former commissioners; and the attorney assisting the Commission on ethics and certain other legal matters. We also interviewed several stakeholders—parties affected by the Commission and its decisions— including commissioners and the organizations they work for; program partners (generally, state agencies or other entities that receive grants from the Commission and oversee projects funded by those grants); other grant recipients; and residents of rural Alaskan communities. We also analyzed the structure and function of other similar agencies and bodies that provide advice or direction to federal agencies, including the Appalachian Regional Commission, Delta Regional Authority, and fishery management councils, focusing on their organic legislation and conflict- of-interest provisions. To inform our analysis, we also conducted site visits to Anchorage and five selected remote communities in Alaska: Nome, Savoonga, Unalakleet, Ketchikan, and Metlakatla. We selected these communities based on selection criteria that included the number and variety of Commission-funded projects, geographic location, accessibility, and their relative proximity to each other. We visited Nome, Savoonga, and Unalakleet in one trip and Ketchikan and Metlakatla in a second trip. In these communities, we spoke with local officials representing municipal government, tribal entities, and grant recipients, among others, to discuss their experiences working with the Commission.

To identify and assess specific challenges faced by the Commission and its commissioners in fulfilling the Commission’s statutory purpose, we also analyzed appropriation and spending data to determine how the commission’s funding and activities have changed over time. We collected and reviewed documents, guidance, and our prior reports related to strategic planning and organizational change. We also analyzed legal opinions; correspondence; and other documents and information related to the role of the commissioners, including the applicability of the principal conflict-of-interest law. To identify possible options for how the Commission can operate in the future, we synthesized information collected from semistructured interviews and e-mails; assessed options presented by similar agencies or commissions; and analyzed relevant evaluations of the Commission. To identify possible options to better leverage the commissioners’ expertise, we analyzed laws, regulations, legislative history, legal opinions, correspondence, and other documents and information related to the role of the commissioners, including their status as special government employees and other more recent changes. We also analyzed the structure and function of other similar agencies, such as the Appalachian Regional Commission and the Delta Regional Authority, and bodies that provide advice to federal agencies, such as regional fishery management councils,identify possible options for the commissioners. We also interviewed officials from the Office of Government Ethics. focusing on their applicable conflict-of-interest provisions to To identify and assess specific challenges that hindered the Commission’s daily operations, we also analyzed legal opinions; correspondence; and other documents and information related to, among other things, the position of the Federal Cochair, the role played by agency attorneys, and the supervision of the Inspector General. We also analyzed the authorizing laws for other similar commissions and bodies for when there is a vacancy of the top official, including the Appalachian Regional Commission and the Delta Regional Authority. We collected and analyzed documents related to internal controls, such as risk management, and agency operations. We also interviewed officials from the Department of Commerce (Commerce) and collected and analyzed documents and e-mails related to the relationship between the Commission and Commerce.

To evaluate the Commission’s policies and procedures for awarding and managing grants and the extent to which grantees and commission officials complied with these policies and procedures, we selected a random sample of 100 of the approximately 2,349 Commission-funded projects from fiscal years 1999 through 2013. This sample allowed us to make estimates about all Commission-funded projects during this time period. With this probability sample, each member of the study population had a nonzero probability of being included, and that probability could be computed for any member. Each sample element was subsequently weighted in the analysis to account statistically for all members of the population, including those who were not selected. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. All percentage estimates from the file review have margins of error at the 95 percent confidence level of plus or minus 10 percentage points or less. We developed a data collection instrument to collect several pieces of data for each project selected. To ensure the reliability of the data we collected, multiple analysts were involved in gathering, entering, and verifying the data in the data collection instrument. First, we obtained documentation related to these projects from the Commission’s Project Database System and from a review of the Commission’s paper files conducted at the Commission’s office in Anchorage in September 2013. We then analyzed these documents to determine the extent to which grantees complied with requirements in the relevant grant agreements and other similar documents. We evaluated this documentation to determine, among other things: what reporting was required for each project, including progress reports; Labor, Wage, and Residency reports; financial status reports; and closeout reports, among others; the extent to which grantees complied with these reporting requirements, including whether reports were submitted in a timely manner and whether their content adequately satisfied the requirement; and whether any delays or other shortcomings in reporting contributed to other problems, such as late closeout reports leading to unused funds sitting idle for a period of time or payments to grantees during periods of inadequate progress reporting.

We followed up with Commission officials to discuss particular aspects of grant requirements and reporting to ensure our understanding was accurate. To assess the reliability of the data in the Project Database System, we interviewed Commission officials and grant managers about the data system and elements, how the system is used, and the method of data input, among other areas. In some cases, a certain amount of judgment was required to ascertain certain aspects of projects, such as the exact start and end date of a project; to mitigate against any uncertainty created by these judgments, all data points that support the analysis presented in this report underwent a confirmation process by a second reviewer. We determined that the data we used were sufficiently reliable for our purposes.

We conducted this performance audit from May 2013 to March 2015 in accordance with 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 on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Examples of Commission Grant Management Checklists (Corresponds to Fig. 5)

Appendix II: Examples of Commission Grant Management Checklists (Corresponds to Fig. 5)

Following are the full-sized, printable versions of the Denali Commission (Commission) grant management checklists included in figure 5 of this report.

Appendix III: Denali Commission Oversight of Renewal and Replacement Accounts After Completion of Certain Projects

In September 2001, the Denali Commission (Commission) passed a resolution outlining new sustainability guidelines for its infrastructure projects and requiring the completion of business plans before construction funding was awarded on most infrastructure projects. To this end, the Commission used a number of different methods to promote sustainability, including the following: requiring that grantees develop a business operating plan for the facility’s operator, which outlines how they will successfully operate and manage the facility, prior to receiving construction funding; requiring the primary operator of each facility, and the owner if they were not the same entity, to sign a secondary operator agreement, which provides that if the facility is not operated sustainably and in accordance with the business operating plan, and such behavior significantly threatens the long-term economic sustainability of the facility, the Commission has the right to select a new, or secondary operator; and requiring that the operator commit to funding the facility through the creation of two enterprise bank accounts, an “operations and maintenance” account and a “renewal and replacement” account, which were to be funded from the revenue generated by selling fuel or electricity and not from the Commission’s grant or other federal agency money.

However, the Commission’s Inspector General, in his Fiscal Year 2012 Second Half report, raised several concerns related to both operation and maintenance and renewal and replacement accounts, including whether the accounts had been created, funded, and used for their intended purpose. In this report, the Inspector General also raised concerns about funds missing from these accounts, which some interpreted as including federal dollars. However, these accounts were not intended to be funded with federal funds, but rather by the revenue generated by selling the electricity produced by the facility or fuel stored in the facility.

According to the federal cochairperson (Federal Cochair), the Commission has not enforced the requirement for some operators to set aside funds to pay for project renewal and replacement costs and report to the Commission annually on the status of these funds. Likewise, the Commission has not followed up with operators who did not submit this information, and, until the Inspector General’s December 2012 report, had After the Inspector General’s report, the not checked on these accounts.Commission hired an intermittent employee to review the status of project recipients’ renewal and replacement accounts. The employee contacted dozens of operators of bulk fuel facilities and rural power systems funded by the Commission and asked about their accounts. Overall, about half of the operators reported creating such renewal and replacement accounts, although these operators were not required to provide documentation of these accounts. The employee also reviewed Commission records but found little documentation. According to at least one former Commission official, the records that staff had been instructed to dispose of (as discussed earlier) showed that such renewal and replacement accounts existed.

In addition, the Inspector General questioned whether the Commission inadvertently put itself in a position to potentially be held liable for the facilities in perpetuity through its secondary operator agreements. As discussed earlier, questions exist about the secondary operator agreements and other related agreements being valid contracts and, if valid, whether they impose liability on the Commission. At the Federal Cochair’s request, the attorney assisting the Commission has researched whether the agreements impose liability on the Commission. the results of his research, commissioners may make a decision on whether to terminate, rewrite, or continue the agreements. According to the Federal Cochair, the Commission has not tried to invoke these secondary operator agreements.

The attorney was not asked to and did not research whether the secondary operator agreements and the other related agreements are valid contracts.

Appendix IV: Comments from the Federal Cochair of the Denali Commission

Appendix V: Comments from the Other Denali Commission Commissioners, Consolidated by the State Cochair

Appendix VI: Comments from the Department of Commerce

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Anne-Marie Fennell, (202) 512-3841 or fennella@gao.gov.

Staff Acknowledgments

In addition to the individual named above, Jeffery D. Malcolm (Assistant Director), Carolyn Blocker, Mark Braza, John Delicath, Justin Fisher, Stuart Kaufman, Armetha Liles, Josh Ormond, Christine San, Nico Sloss, Jeanette Soares, Kiki Theodoropoulos, and Tama Weinberg made key contributions to this report.