County of Sacramento Indirect Cost Rate Proposal Audit

The audit was performed to determine whether the CMID and DOT ICRPs were presented in accordance with Title 2 Code of Federal Regulations (CFR) Part 225 (superseded by 2 CFR 200), 2 CFR 200, and Caltrans Local Assistance Procedure Manual (LAPM) Chapter 5. It was also performed to determine whether the County had a financial management system capable of accumulating and segregating costs that are reasonable, allowable, and can be allocated to projects.

The scope of the audit was limited to select financial and compliance activities. The audit consisted of a recalculation of the ICRP, a review of the County's Single Audit Report for FYs ended June 30, 2016, and inquiries of County personnel. The audit also included tests of individual accounts to the general ledger and supporting documentation to assess allowability, allocability, and reasonableness of costs based on a risk assessment, as well as an assessment of the internal control system as related to the ICRP as of November 16, 2017. Financial management changes subsequent to this date were not tested and, accordingly, our conclusion does not pertain to changes arising after this date. We believe that our audit provides a reasonable basis for our conclusion.

The County is responsible for preparing their ICRP in accordance with state and federal requirements which includes implementing internal controls and maintaining an adequate financial management system to accumulate and segregate reasonable, allowable, and allocable costs. Because of inherent limitations in any financial management system, misstatements due to error or fraud may occur and not be detected. Also, any projection or evaluation of the financial management system in future periods using the results of this audit are subject to the risk that the financial management system may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

We conducted this performance audit 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. The audit was less in scope than an audit performed for the purpose of expressing an opinion on the financial statements of the County. Therefore, we did not audit and are not expressing an opinion on the County's financial statements.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the data and records selected. An audit also includes assessing the accounting principles used and significant estimates made by the County, as well as evaluating the overall presentation of the ICRP costs.

At the discretion of local agencies, indirect costs may be recovered when seeking reimbursement for their federal-aid transportation projects, as well as State Transportation Improvement Plan (STIP) and state funded projects. Specifically, this applies to federally authorized work, as well as STIP projects and state funded projects, with costs incurred after June 9, 1998. Completed projects with a Final Report of Expenditures prior to June 9, 1998 will not be eligible for retroactive indirect cost reimbursement.

Computation of Indirect Cost Rates are based on:

• 2 CFR 225 (superseded by 2 CFR 200), 2 CFR 200, Cost Principles for State, Local and Indian Tribal Government; and
• Cost Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government (ASMB C-10), issued by the United States Department of Health and Human Services.

We determined CMID FY's ending June 30, 2015 and June 30, 2016, and DOT's ICRPs for FY June 30, 2016 were presented in accordance with 2 CFR 225, 2 CFR 200, and LAPM except for the findings identified as follows:

• Both CMID and DOT did not reconcile estimated labor to actual labor costs.
• CMID included unallowable costs in the indirect cost pool for FY 2015/16.

The audited rates are listed below:

*See Attachment I for adjustments to the audited rate.

DOT's findings did not impact the proposed indirect cost rates, therefore, no changes were made to DOT's rates.

Our findings and recommendations took into consideration the County's response submitted on February 7, 2018, to our January 23, 2018 draft report. Our findings and recommendations, the County's response, and our analysis of the response are set forth in the Findings and Recommendations section of this report. A copy of the County's full written response is included as Attachment II.

This report is intended as information for Caltrans management, the Federal Highway Administration, and the County. This report is a matter of public record and will be placed on Caltrans website which can be viewed at: <www.dot.ca.gov/hq/audits/reports_issued.html>.

The County of Sacramento (County) Department of General Services, Construction Management Division (CMID) and Department of Transportation (DOT) did not bill actual labor costs. CMID and DOT billed Caltrans using an average labor rate (rate) for each job classification within a division. The rate is applied to each employee by classification to their actual productive hours, which is the total estimated labor costs. CMID and DOT did not reconcile estimated labor costs to actual costs which is necessary to ensure labor costs are actual and allowable. Two prior California Department of Transportation (Caltrans) audits also identified this same finding for DOT and it has not been resolved.

The County's practices have been to use estimated labor costs for billing and did not perform reconciliations. Since, there are no written policy and procedures for actual labor billings, the County did not understand a reconciliation is required when estimated costs are used for billing.

Without reconciling the estimated labor costs to actual labor costs Caltrans may reimburse the County more direct labor costs than allowed. Additionally, when applying the indirect cost rate to estimated labor costs, the County may be recovering more indirect costs than allowed.

Article IV Section 7 in the Federal Master agreement 03-5924R states in part, "Payments to Administering Agency can only be released by the State as reimbursements to actual allowable project costs already incurred and paid by administering agency."

Local Assistance Procedure Manual (LAPM), Chapter 5, Section 5.2, Requirements for reimbursement states in part, "The local agency may submit monthly invoices for reimbursement of participating costs (costs eligible for state and/or federal reimbursement). Amounts claimed must reflect the cost of completed work, which has been paid for."

Recommendation

We recommend the County bill actual labor costs and adhere to LAPM Section 5.2. Alternatively, if the County continues to bill Caltrans using an average labor rate, the County is required to develop and implement written procedures and reconcile the billings by comparing what was billed to the actual labor costs annually and at project completion. In addition, the County will not be eligible for any project reimbursement until the reconciliation process and procedures have been developed and implemented.

Summary of Auditee's Response

The County indicated they have implemented a process to reconcile average labor rates to actual labor costs. In addition, the County indicated they will adjust for variances in project billings. See Attachment II for the County's complete response.

Analysis of Auditee's Response

We appreciate the County's implementation of corrective action. The County's corrections were implemented after our fieldwork and have not been audited or reviewed.

CMID included unallowable costs in the indirect cost pool for fiscal year (FY) 2015/16. The Construction Contract costs of $373,788 (See Attachment I) are directly related to a final cost objective and should be identified as a direct cost and not be included in the indirect cost pool.

The County staff included Construction Contract costs in the indirect cost pool for recovery purposes because the costs were not a direct reimbursable cost from Caltrans. The CMID's indirect costs were impacted, resulting in the overstating of the Division Overhead Rate. If unallowable costs are included in the Indirect Cost Rate Proposal (ICRP), Caltrans may reimburse the County more than allowed.

2 Code of Federal Regulation (CFR) 200.413 Direct Costs (a) General states in part, "Direct costs are those costs that can be identified specifically with a particular final cost objective, such as a Federal award, or other internally or externally funded activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect (F&A) costs."

Recommendation

We recommend the County exclude the Construction Contract cost from the indirect cost pool on future ICRP. The County is required to review all billings using the FY 2015/16 accepted rate to Caltrans and reimburse the difference between the accepted and audited rate.

Summary of Auditee's Response

The County agrees with the finding and indicated that they have revised their rate calculation. In addition, the County indicated they would adjust future invoices for amounts due to Caltrans. See Attachment II for the County's response.

Analysis of Auditee's Response

We appreciate the County's implementation of corrective action. The County's corrections were implemented after our fieldwork and have not been audited or reviewed.

Audit Adjustment for Construction Management Inspection Division FY 2015/16

*Includes Pension Obligation Bond (POB) of $632,932

On January 24, 2018, the County of Sacramento Department of Finance (Finance) and the California Department of Transportation Independent Office of Investigations Unit (Caltrans) conducted a formal exit conference to discuss the County of Sacramento's Indirect Cost Rate Proposal (ICRP) Audit draft report, findings and recommendations.

Attached is Finance's response to the Caltrans Indirect Cost Rate Proposal Audit findings. The attached document provides responses to both of the following two findings identified in the draft audit report:

1. The County of Sacramento Departments of General Services and Transportation Do Not Bill Actual Costs
2. Unallowable Costs Included in the Indirect Cost Pool

We understand that the attached Finance response will be incorporated into Caltrans' final audit report. 

Finding 1 — The County of Sacramento Departments of General Services and Transportation Do Not Bill Actual Costs.

The County has implemented reconciliation processes beginning July 1, 2016 whereas, labor costs billed to Caltrans using average labor rates will be reconciled with actual labor costs incurred annually and at project completion. We will also adjust project billings for any variances identified between the average labor costs and actual labor costs calculations annually and at project completion.

Finding 2—Unallowable Costs Included in the Indirect Cost Pool

We agree with the finding and have revised the rate calculation to exclude the construction contract cost identified and all direct cost line items from the indirect cost pool on the County's ICRP calculation. The County has reviewed and recalculated all Caltrans billings using the FY 2015/16 accepted rate and has determined that the charged difference between the accepted rate and audited rate to be an immaterial amount. The County will adjust its future invoices to account for the amount due back to Caltrans.