Limited Scope Review of the State’s Oversight of Moneys Received Through the Coronavirus Relief Fund

From Hawaii State Auditor, October, 2020 (excerpts)

Introduction

At the Senate Special Committee on COVID-19’s request, we initiated this limited scope review of the oversight of $862.8 million the State of Hawai‘i received through the Coronavirus Relief Fund (CRF). The fund was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide direct assistance to state, local, and tribal governments to address costs associated with the current public health emergency. Our review includes those funds the State distributed to the counties of Hawai‘i, Maui, and Kaua‘i as well as to subrecipient organizations that are implementing state and county programs using CRF moneys.

We are providing this review to inform the Committee of possible areas of concern related to the State’s tracking of CRF moneys and compliance with certain federal requirements, the most significant of which is that the State is relying almost exclusively on each state department and county to ensure that their use complies with federal requirements. However, with the December 30, 2020 deadline to expend the CRF moneys quickly approaching, we did not ask each subrecipient – i.e., each state department and county – for the respective policies, procedures, and controls regarding their use and oversight of the CRF moneys. We determined that we would not be able to identify concerns, and possibly offer recommendations, about each entity’s policies, procedures, and controls in sufficient time for those entities to address those issues.…

Hawai‘i received $1.25 billion through the CRF, with $862.8 million distributed to the State and $387.2 million awarded directly to the City and County of Honolulu.1  …

1 Local governments with populations of 500,000 or more were permitted to apply directly to the Treasury for a specified share of their state’s funding. The City and County of Honolulu made such a request and was allocated moneys separate from the State’s; therefore, we did not review Honolulu’s oversight of its CRF award. The other counties do not have the populations to qualify for a separate allotment. …

State relies on subrecipients of federal funds to monitor themselves

The Department of Budget and Finance (B&F) is tasked with ensuring that effective cash management is employed for the CRF moneys as well as assisting the Office of Federal Awards Management in meeting CRF reporting requirements. In addition, the Governor designated B&F’s Deputy Director as the “Authorized State Official” for the federal award, charging him with coordinating department-level actions and providing support to the departments using CRF funds.

When we initiated this review, we assumed B&F had developed policies, procedures, and controls specific to the State’s use of the CRF moneys, and we expected to analyze those documents for purposes of our review. However, B&F’s Deputy Director informed us that B&F is not involved in overseeing the expenditure of CRF moneys.5 Instead, he relies on state and county departments and agencies, as well as other private subrecipient organizations, to ensure the federal funds are used appropriately and expended on time. He assumes each department and county has procedures and controls in place, as required, but B&F has not reviewed any of the subrecipients’ relevant documents.6 …

We have strong reservations about delegating such oversight to the departments and counties themselves. They have received substantial sums of money, much of which is paying for new programs that have to be up and running in a short amount of time, and putting controls in place to ensure that the funds are spent appropriately by December 30 may not be a priority. …

There simply is too much potential liability to the State – i.e., the State cannot afford to repay or return any of the moneys it was awarded under the CRF – to rely on blind faith. As the recipient of the award, the State is responsible for repaying or returning moneys to the U.S. Department of the Treasury (Treasury) if subrecipients do not comply with the law’s requirements, one of which is that the funds be incurred by December 30.

Inconsistent monitoring and tracking of the CRF moneys raise concerns about the State’s ability to distribute the funds in a proper and timely manner

At a September 30, 2020 news conference, the Governor announced that the State had “set aside” 98 percent of the $862.8 million of CRF moneys it had received from Treasury in April. He explained that CRF moneys must be spent by December 30, 2020; however, any funds unspent at year’s end will be placed in the State’s unemployment compensation trust fund and used to help repay a $1 billion loan that was secured to pay unemployment benefits to local residents.7 “The State will not leave any of the federal funding unused as these funds provide a crucial lifeline to our residents and businesses,” said the Governor. “We are going to use every penny.”

In our review of CRF funds reports, we found significant discrepancies in the State’s accounting of moneys allocated, encumbered, and, most importantly, expended. This inconsistent monitoring and tracking of CRF moneys raise concerns about the State’s ability to distribute the funds in a proper and timely manner. The moneys the State received through the CRF must be expended by the end of the year, not just set aside, with leftovers being used for other purposes. Any money not used to cover expenditures incurred by December 30 must be returned to the federal government.

Inconsistent data leads to questions about spending

The Governor also spoke about the need to get the CRF moneys into the community quickly and to ensure transparency. He explained that the Hawaii Data Collaborative, a local nonprofit, is monitoring and tracking federal funds awarded to the State with assistance from B&F. His presentation that day featured information provided by the collaborative, and the Governor’s office directed interested parties to both organizations’ websites. We visited both and found significant differences between the information provided by the Governor and the data reported by B&F.

First, to support the claim of funds set aside, or allocated, the Governor’s Office included “Coronavirus Relief Fund – Allocated Funds,” a chart listing 22 state departments and programs that were allocated a total of $845.3 million (or 98 percent) of the State’s $862.8 million of CRF moneys. (See below.) However, according to B&F’s September 2020 report on the State’s allocations and expenditures of CRF moneys, $726.7 million (84 percent) has been allocated.

B&F also reported that the State and the counties of Hawai‘i, Maui, and Kaua‘i, combined, have spent $195.8 million and encumbered another $283 million, which adds up to $478.8 million. Of the $862.8 million received by the State, $384 million (or 45 percent) has not been spent or encumbered, as of September 30.

Meanwhile, according to the Hawaii Data Collaborative “Tracking Federal Funds” webpage, as of October 23, 2020, of the $862.8 million CRF moneys received by the State, $160.2 million has been expended and $258.2 million encumbered, which adds up to $418.4 million, representing just 48 percent of the State’s CRF moneys. In accordance with the amounts reported by the Hawaii Data Collaborative, in total, the State has not expended or encumbered $444.4 million (or 52 percent) of the CRF moneys that must be spent by December 30.

So has the State expended or encumbered $478.8 million as B&F reports or is it $418.4 million as the Hawaii Data Collaborative claims? And is the remaining balance of CRF funds, which have not been encumbered or expended, $384 million? Or is it $444.4 million?…

“Real-time” expenditure reporting: a missed opportunity for oversight

Since the requirements for allowable expenditures under the CARES Act are quite generous, the Administrator of the Office of Federal Awards Management believes the risk that CRF moneys will be used inappropriately is low. However, he does believe that there is greater risk the funds will not be expended on time or, as the December 30 deadline approaches, organizations will spend those moneys without the requisite scrutiny to ensure compliance or without a clear purpose, in other words, spend-for-the-sake-of-spending. To minimize that risk, the Administrator believes nonprofit organizations that have been engaged to implement programs using CRF moneys should be required to report “real-time” expenditure data. The Administrator believes that daily, real-time expenditure reporting will allow departments to hold subrecipients accountable for their program implementation or redirect moneys to other programs to prevent funds being expended for less impactful purposes as the spending deadline nears.

The Chief Integrity Advisor at the Department of the Attorney General offered a different approach, which she described as a “continuous audit.” She proposed a process using an algorithm that would “flag” questionable expenditures of CRF moneys. According to the Advisor, such a system would be similar to the processes credit card companies use to identify questionable charges. She said that Rutgers University could build the algorithm in about two weeks. …

(IQ Test: Are you laughing?)

Will the Housing Relief and Resiliency Program make payments on time?

We note that various reports on the Housing Relief and Resiliency Program’s spending leave conflicting impressions of the progress of the program’s efforts. For instance, according to B&F, as of September 30, the Housing Relief and Resiliency Program was allocated $100 million, with $40.2 million expended and $59.6 million encumbered, leaving a balance of only $266,486 or less than 0.3 percent of the total allocation. However, the Hawaii Data Collaborative lists the two nonprofits that administer the program as having spent $1.6 million and $2.9 million, respectively, for a total of $4.5 million as of October 23. Meanwhile, on October 23, the Rent Relief and Housing Assistance program’s website listed nearly $7 million in payments made.

However, on October 26, 2020, Hawai‘i News Now reported that the Housing Relief and Resiliency Program had only distributed $8.5 million, with another $6.19 million in payments pending. According to the news report, almost 20,000 residents had applied for assistance, with few receiving checks.

The Hawai‘i Housing Finance and Development Corporation, the state agency that oversees the program, represented to the Senate Special Committee on COVID-19 that only 2 percent of program funds have been disbursed, which, based on the allocation of $100 million, is $2 million.…

…we are also concerned that the pressures of a backlog of applications and a looming deadline will result in a rush to get money out the door without proper scrutiny and review. This last-minute, “spend-for-the-sake-of-spending” mentality that the Administrator of the States’ Office of Federal Awards Management warned about, as discussed earlier, possibly poses the biggest single risk to the Housing Relief and Resiliency Program and CRF spending in general.…

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