Tips for Managing FEMA Disaster Assistance Funds

The widespread devastation brought on by Hurricane Sandy has led President Obama to make federal disaster declarations for portions of several states. It seems likely that, as fuller assessment of the damage is made, even more state governments will receive those designations and will qualify to receive disaster assistance funds from the Department of Homeland Security’s Federal Emergency Management Agency (FEMA).

Under something FEMA calls its State Public Assistance Program, those states will be responsible for administering what are likely to be very significant amounts of federal assistance funds and for entering into subgrant arrangements with cities, towns, counties and school districts; water, sewer and transit authorities; and myriad other entities that have sustained damage from this gigantic storm, and that need to repair and replace public facilities and infrastructure. If the past is prologue, there will be enormous pressure at all levels to make quick programmatic and administrative decisions with lots of federal grant money in the balance and under very trying circumstances. And, unfortunately, that situation can inevitably lead to compliance and control problems that come to light long after the disaster occurred. The results, in turn, are disputes, sanctions and cost disallowances that add insult to the injury that the disaster caused.

The Robert T. Stafford Disaster Relief and Emergency Assistance Act, which authorizes the State Public Assistance Program, and the regulations promulgated by FEMA to implement it present a unique federal grant administrative regime that recognizes that, unlike other more normal grant programs, grant-funded response and recovery activities are usually being conducted under duress. While that means that some standard federal grant accountability practices can be relaxed, it doesn’t mean that they are all thrown out the window.

FEMA has gained considerable experience in identifying the kinds of vulnerabilities that routinely surface in federally declared disasters. Unfortunately, because many of the grantees and subgrantees that they fund are dealing with disaster assistance funds for the first time — or in an unprecedented volume — some of the same grants management mistakes surface each time a new set of disaster declarations is made. To alert those whose organizations have been affected by Hurricane Sandy and who will be administering FEMA awards as a result, here are some key things to be aware of going into this process.

Common Audit Findings

Expenditures of FEMA funds will count in determining whether an entity must have an audit performed under Office of Management and Budget (OMB) Circular A-133. Currently, the threshold that triggers that audit is $500,000 of federal awards expended during the entity’s fiscal year. Thus, the independent auditor who performs that audit is likely to perform testing of FEMA grant or subgrant expenditures. But that is not the only audit that recipients or subrecipients may encounter. The Office of Inspector General of the Department of Homeland Security may choose to conduct direct audits of recipients and subrecipients and is very likely to do so, given the volume of federal assistance expenditures that is going to result from this incident. Both types of audits are conducted mainly to determine whether the grantees and subgrantees expended and accounted for the funds in accordance with applicable OMB and FEMA policies. Common findings that have surfaced in these audits in the past include the following:

• Poor Project Accounting—Be sure to maintain a system that can account for FEMA funds on a project-by-project (award-by-award) basis and that can show funds received, disbursements and reference source documentation.
• Unsupported Costs—Costs claimed under FEMA awards must be fully and adequately documented in accordance with the applicable OMB cost principles. The unfortunate circumstance in disaster response and recovery is that grantees and subgrantees often fail to obtain and retain source documentation such as employee timesheets, invoices and receipts.
• Duplication of Benefits—The Stafford Act and its regulations (44 CFR 206.191) prohibit duplication of benefits such as receiving disaster funding for activities covered by insurance benefits, yet many grantees and subgrantees fail to deduct these amounts from their federal clams.
• Excessive Equipment Charges—FEMA regulations (44 CFR 206.228) require that grantees and subgrantees use FEMA’s schedule of equipment rates or their own local rates — whichever is lower. Numerous entities have charged the FEMA rate when their actual cost was considerably lower.
• Excessive Labor and Fringe Benefit Charges—FEMA regulations (22 CFR 206.228) preclude charging the regular-time salaries, wages and benefits of permanent employees to FEMA awards; frequent mischarging has occurred because certain fringe benefit costs were charged to overtime compensation or to payments made to independent contract laborers.
• Failure to Apply Credits—Revenue received from sale of material removed during recovery operations should be treated as an applicable credit and be offset against the expenditures to calculate the proper claims on FEMA awards; numerous grantees have neglected to do so.

With these kinds of vulnerabilities in mind, here are some solid practices to think about now:

• Obtain and review two key sets of FEMA regulations: 44 CFR 13 (Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments) and 44 CFR 206 (Federal Disaster Assistance for Disasters Declared on or After November 23, 1988); consult them routinely once you begin to receive and expend FEMA funds.
• Designate a single staff person to coordinate the accumulation of records and documentation and have that person follow-up contemporaneously to fill any documentary gaps.
• Research insurance coverages. Seek timely reimbursements for the maximum claim amounts, and credit the appropriate FEMA-funded projects with amounts received.
• Check the availability of funding under other federal aid programs (such as those of components of the U.S. Department of Transportation (Federal Highway Administration, Federal Transit Administration, etc.) and the U.S. Department of Housing and Urban Development). Make sure that final project costs charged to FEMA exclude those that were funded, or should have been funded, by another federal agency.
• Ensure that inventory withdrawal and usage records fully document materials taken from existing inventories for use under FEMA projects. Establish a consistent accounting practice for costing such withdrawals in accordance with the applicable federal cost principles.
• Do not claim as costs items or activities for which your organization does not have a cash outlay.
• Document pertinent actions for contracts awarded using FEMA funds including rationale for the method of procurement, basis for contractor selection and basis for the contract cost or price.
• Remember that a “cost plus percentage of cost” contract cannot be awarded using federal grant funds.

Organizations that will be operating in the FEMA funding environment over the coming months are likely to face daily programmatic and administrative challenges and will need to respond nimbly but carefully. Hopefully, some of the information provided here will start you on the right track in doing so.

Good luck and best wishes to everyone who has been in harm’s way this week.

If additional professional and technical assistance in administering these funds is needed, consider contacting Federal Fund Management Advisor and its Principal, Robert M. Lloyd. Mr. Lloyd has provided similar consulting assistance to state and local disaster assistance agencies and to private charitable groups that have responded to presidentially declared disasters since 1989. In addition, he has, on numerous occasions, served as an instructor on federal grants management at FEMA’s Emergency Management Institute campus in Emmitsburg, Maryland, where FEMA staff and employees of FEMA grantees receive extensive in-service training.