State audit finds issues with how City of Edmonds used pandemic relief funds

Assistant Audit Manager Kirk Gadbois presents audit results to Edmonds city councilmembers and staff during a virtual exit conference Tuesday.

In an audit released Thursday morning, the Washington State Auditor’s Office found that the City of Edmonds did not comply with requirements governing the distribution of federal COVID-19 relief funds in 2020.

During a Tuesday exit conference with Edmonds city councilmembers and staff regarding the findings, Assistant Audit Manager Kirk Gadbois noted the issue is one experienced by numerous other Washington state jurisdictions as they worked to administer coronavirus relief funds at the height of the pandemic.

“This was a brand-new program from the federal government,” Gadbois said. “It was issued very quickly, so many cities and governments around the state have had very similar issues,” depending on how they chose to spend those relief funds, he said, adding, “I can tell you the City of Edmonds is not unique.”

In their report, auditors issued an adverse opinion on the city’s compliance with requirements applicable to its major federal program involving 2020 CARES Act funds. Internal controls were inadequate for ensuring compliance with federal requirements for allowable activities, costs and subrecipient monitoring, the report said.

The exit conference covered three audits of city finances. In additional to the federal grant compliance audit, the State Auditor’s Office (SAO) conducted both accountability and financial audits.

“High level, the city did really well throughout the audit,” Gadbois said. “Two of the three audits — accountability audit and financial audit — had no reportable issues in our audit reports at all, so that’s really good.”

However, he added, “We did identify some issues and that caused us to issue an adverse opinion over this major federal program. Mainly that’s because when we looked at the internal controls and looked at the expenditures we did identify some deficiencies that we considered to be material weaknesses as well as some noncompliance with some of those federal expenditures.”

During fiscal year 2020, the City of Edmonds spent more than $2.1 million in relief program funds. More than $1.3 million of that money was used to establish a program that provided direct assistance payments to local businesses financially affected by COVID-19. The relief funds also included $456,344 that was passed through to four local nonprofits — defined as subrecipients — who were tasked with administering housing assistance programs and distribute food to Edmonds individuals and households. The remainder was used to cover additional pandemic-related costs incurred by the city such as teleworking equipment, personal protective equipment and payroll expenses.

The SAO audit report pointed to two areas of concern: 1) Documentation was lacking to ensure that Edmonds businesses receiving COVID grants were eligible for those funds and 2) the city failed to perform risk assessments and adequately monitor the nonprofits charged with distributing the emergency funds to Edmonds households.

“The city did not include all required elements in the subawards and did not perform risk assessments or monitor each subrecipient for compliance with program requirements, as federal regulations require,” the SAO report said.

Federal regulations require grant recipients to establish and maintain internal controls that ensure compliance with program requirements. These include understanding program requirements and monitoring the effectiveness of established controls.

For the local business grants, the State of Washington supplied the City of Edmonds with relief money it could then provide to local businesses. The expectation was that the city would develop eligibility criteria for applicants and then verify that they had met all of those conditions.

The City of Edmonds established four such measures; however, when businesses applied for the funds, the city only verified that three of those eligibility items were met. The criteria for suffering a 30% loss of revenue between 2019 and April or May 2020 was not verified.

“Instead the city relied on a self-certification from the business,” Gadbois noted, “and so that is an issue.” SAO staff communicated that concern to the city, which then hired an external contractor to get additional information from the 172 businesses that received funding in order to ensure they met revenue loss criteria and were eligible for the assistance payments.

That review identified 29 businesses that had received a total of $235,500 in grants and did not meet the city’s eligibility criteria based on the information they provided. And eight businesses that received a total of $62,000 either did not respond to requests for that information or provide the city with the additional financial information requested.

“Because of that we are going to be questioning those costs and we do note those as potentially unallowable expenditures,” Gadbois said.

In its response to the audit, the City of Edmonds said it is “exploring various remedies that may be available and appropriate, including but not limited to civil suits and criminal prosecution, to recover this $297,500 in grant funds or otherwise hold wrongdoers accountable for their actions.”

In addition, 74 businesses that received a total of $574,00 in direct grants had provided the city with various types of financial information that showed a loss in revenues for 2020. But based on that information, auditors could not confirm the year-over-year business revenue loss of at least 30% in April or May 2020 that the city’s eligibility criteria required.

“Those we also questioned as well because we’re unable to determine if it specifically met the city’s criteria,” Gadbois said.

City councilmembers and staff listen to the State Auditor’s Office report.

In its response, the city said that for those businesses that were “able to show proof of COVID-related income losses, we are not intending to pursue legal action in these cases at this time.”

Regarding the nonprofits tasked with distributing COVID relief funds to households, federal requirements for establishing such a program expect the city to conduct a risk assessment for each subrecipient, which also helps inform the type of monitoring subsequently needed to determine if they are spending those funds awarded correctly and accurately.

The audit notes that the city did not include all of the required relevant identifying information in the four contracts with subrecipients. As a result, the subrecipients may not have known the award came from a federal program, which also increases the risk those organizations would not realize they needed to comply with specific program requirements, which could potentially lead to spending funds for unallowable purposes.

“The city did not do the risk assessments over these four subrecipients and the city also did not do adequate monitoring of these subrecipients and their expenditures,” Gadbois noted.

The SAO provided the City of Edmonds with an opportunity to perform monitoring during the audit and verify if the four subrecipients complied with the terms and conditions of their subawards. It then hired a contractor earlier this year to perform risk assessments and review three of those subrecipients to verify that they only provided assistance to eligible participants and had complied with the program’s various requirements.

However, the city found the subrecipients did not have adequate support needed for demonstrating participant eligibility. As a result, $456,344 in costs the City of Edmonds passed through to subrecipients are considered to be unsupported payments.

“We did not question these costs,” Gadbois added, “mainly because it is acceptable that the city has these subrecipients so we’re calling these unsupported costs in the finding.”

The report notes that the city acted quickly by providing businesses with assistance payments and passing relief funds on to nonprofit organizations that it had previously worked with for other programs. However, the coronavirus relief fund program was a new type of federal funding mechanism for the City of Edmonds and it had not previously used federal funds to provide direct assistance payments to local businesses or passed funding through to subrecipients.

Therefore, city employees lacked adequate experience and training necessary to realize that they should have independently verified each business had met all of the eligibility criteria items before awarding assistance. In addition, staff were not aware of all the federal requirements involved when passing funding through to subrecipients, the report added.

In its response, the city said that it had “acted in good faith to quickly deliver aid and assistance to our residents, following the guidance and direction available at the time from the Department of Treasury and the Department of Commerce. Overall, city staff administered this highly complex and time sensitive program in a professional manner while dealing with emergency circumstances.”

However, the city also acknowledged that this does not relieve the city of its responsibility to ensure that the assistance payments are distributed only to those who meet its eligibility requirements.

Moving forward, auditors recommended that the City of Edmonds:

– Provide adequate training to staff responsible for administering federal programs

– Dedicate the necessary time and resources to staying updated on program guidance and ensuring compliance with all program requirements

– Verify that beneficiaries of public funds meet all of the City’s eligibility criteria before awarding funds

– Include all required elements in subaward agreements, assess subrecipients’ risk, and monitor them accordingly to verify they are complying with the terms and conditions of the award and only providing funds to eligible participants

In response, the city said it will “provide training to ensure that subrecipients are evaluated and monitored sufficiently to ensure eligibility and to reduce any risk of noncompliance. We are planning to add additional staff to provide better monitoring of the distribution of future grants funds, and we will provide staff with the time, resources, and training necessary to avoid these errors from occurring again.”

Regarding the city’s financial statements for 2020, auditors reported there were no deficiencies in the design or operation of internal controls over financial reporting that are considered to be significant deficiencies or material weaknesses. In addition, the SAO noted no instances of noncompliance that were material to the city’s financial statements. As a result, the SAO issued a clean, unmodified opinion that Gadbois characterized as “auditor-speak for good work.”

An accountability audit reviewing the city’s compliance with applicable laws, regulations, policies and procedures necessary for essentially safeguarding public funds “didn’t notice anything that we have to report,” Gadbois said. “In all the areas that we looked at the city complied with all the laws, all the policies and procedures it was supposed to and really had good controls to safeguard public resources.”

The SAO’s next audit of the City of Edmonds is scheduled for May. It will cover three general areas including accountability for public resources, financial statement including annual comprehensive financial report opinion letter and federal programs.

— By Nathan Blackwell

  1. Allowing the businesses to self-certify was a “quick and dirty” way to get the money out the door. Unfortunately businesses that received grants and did not meet the city’s eligibility criteria based on the information they provided clearly was hundreds of thousands of dollars misused funds. It makes me wonder if any of the restaurants who had street shacks improperly received funds because of an ineligibility.

  2. PBS news just reported that billions of dollars in CARES ACT funds have gone unaccounted for and it appears many millions of dollars somehow ended up in off shore enterprises of one sort or another. I don’t think Edmonds government needs to get too shook up over some apparently well meaning honest mistakes regarding this relatively small amount of funds. Just shine on the Fed.s a little and forget it would be my advice. This is stealing paper clips compared to the legal private sector government robbery of public funds that has gone pretty much unchallenged in our economy for decades. Fat cats who apparently stole millions will never be called to account which is SOP in our sad world today. Oligarchs and multi-billionaires have different standards of accounting to meet than simple folks everywhere.

    1. I’m not clear that the State Auditor’s office mentioned Oligarchs or multi-billionaires reviewing pandemic relief funds. The city has an fiduciary obligation to spend and manage money wisely. Someone can correct me if I’m wrong.

  3. I’m just saying we have bigger fish to fry in town than worrying about this drop in the bucket of possibly and probably accidentally misappropriated CARES ACT funds. I’m just glad someone small business and local might have benefited from what were probably honest mistakes. Life is too short to give this one much thought.

  4. Sounds like some small tweaks will be made, but overall that Edmonds did a good job. Certainly there is a large noticeable difference between cities that worked to support businesses hurt by the shut downs vs. the smaller nearby cities that likely did not have the staff or expertise to monitor accountability with this program, and just let their businesses suffer.

    “Sifting through the reporting requirements to receive federal pandemic recovery dollars, Brier Mayor Dale Kaemingk just didn’t think his staff had the time to deal with the extra paperwork that came along with the money…” a recent Crosscut article – Why six small WA cities left thousands [$2.4 million] in federal relief unclaimed –

    It is easy to focus on what we could have done better, but not always easy to acknowledge what we did well. There are a lot of businesses that may not have been able to survive if not for our city deciding to brave the paperwork of CARES for the benefit of Edmonds. The tweaks that SAO recommended are small, and overall this is a big success story for our city. We are lucky to overall have good city government in Edmonds.

    1. “In its response to the audit, the City of Edmonds said it is “exploring various remedies that may be available and appropriate, including but not limited to civil suits and criminal prosecution, to recover this $297,500 in grant funds or otherwise hold wrongdoers accountable for their actions.”

      Way to spin a story, good city government. Only 300k stolen, for some chump change

  5. Millions of dollars were handed out by our federal government to people whether they needed it or not. Picking on Mayor Nelson and a few city staff for what were probably honest mistakes just strikes me as petty nit-picking at best. I was handed government checks I didn’t need and so were millions of others. I say go after the real crooks and fraudsters and leave regular folks who might have just gotten a little lucky alone.

    1. How about the unlucky ones who didn’t get a check, and deserved one, because the local crooks stole undeserved money. For some that’s nitpicking or business as usual. A certain amount of City money is presumed always stolen or wasted I guess? City staff was sloppy and got called out because the money should have gone to those who deserve it. I’m sure they’ll make an effort to do better.

  6. Federal money always comes with strings often NEW strings. I think it is the responsible for management to thoroughly vet and understand the Federal “rules” before releasing any money. I agree it was a hurry up time and there was valid need but that does not mitigate total understanding of how candidates are identified and veted, AND what records are required. In my view programs like this should always get extra scrutiny by at least second level management. Particularly with Federal Funds! …. and extra particularly when it involves a NEW fiscal dispersal program. Have we learned and DOCUMENTED lessons learned from this, such that when the next “free money” comes in the door we don’t make these mistakes again?

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