Auditor says state agencies had millions in ‘questioned’ spending of federal funds

LINCOLN — A new state audit is questioning whether state agencies properly spent millions of dollars of pandemic-related federal funds, raising the possibility that Nebraska might need to repay those funds.

“They’re big dollar items, and they should not happen,” said State Auditor Mike Foley on Friday.

At least two state agencies disagreed with the audit’s findings and maintained that their spending was justified.

Corrections, Military, DHHS

A 244-page, annually required report on spending of federal dollars found millions of dollars of “questioned costs.” Among them:

— $12 million of personnel costs shifted from the state to the feds to cover COVID-19 personnel costs incurred by the Nebraska Department of Corrections. Auditors said they could find no difference between pre-COVID spending on overtime and on-call expenses, and those incurred during the pandemic. ” … Long-standing staffing challenges at correctional facilities were not caused primarily by COVID-19,” the auditor’s office stated in press release.

— About $3.6 million in excessive administration costs charged to a federal rent- and utility-assistance grant administered by the Nebraska Military Department. The audit said the state received $158 million in pandemic aid to assist low-income families, of which most was funneled to local governments to spend. The firm, Deloitte & Touche, was hired to administrate the program, and was given up to $14.6 million to do that.

The problem, Foley said, was that because most of the funds were forwarded to cities and counties to hand out, the amount that needed administration by Deloitte & Touche became much smaller. The report noted that the state was allowed 10% for administrative costs, or about $6.2 million for the remaining state funds, but that about $9.7 million was spent.

Supporting documents were lacking, the report said, to determine whether the company’s expenses “were reasonable.” Auditors said that amount of overcharged administrative expenses is likely to rise because the problem is ongoing and was not addressed in a report a year ago.

The Military Department, in its written response, said it disagreed with the auditor’s conclusion. The agency said it will be able to show that the administrative costs are “related to the delivery of the program in a timely fashion and is aligned with US Treasury Guidance.”

Spending justified

— $800,000 in expenses by the Nebraska Department of Health and Human Services which were questioned due to inadequate accounting and poorly written contracts. DHHS received about $47 million in federal funds for laboratory and epidemiology expenses related to COVID-19. Auditors noted that the $800,000 in “questioned cost” was based on a limited sample and that up to $4.3 million of additional federal dollars might be at risk.

On the positive side, auditors found that DHHS may have mistakenly not charged the feds for administrative costs associated with the Child Care and Development Block Grant program. That could amount to $1.85 million in expenses being incurred by the state instead of the federal government, the audit stated.

Prison officials disagree with audit

The Corrections Department, in its written response contained in the report, said it disagreed with the auditor’s interpretation on the use of the COVID funds and felt the expenses were allowable.

“COVID conditions resulted in significant vacancies in NDCS’ facilities. Mandatory overtime was necessary for the majority of staff, especially those who had direct contact with incarcerated individuals,” the department stated.

Messages from the Examiner seeking comment from the other agencies cited were not immediately returned Friday morning.

Foley said the annual report on spending of federal funds, called the “federal single audit,” will be forwarded to the proper federal agencies. He said they will decide whether to require the state to repay the questioned costs, reduce what federal funds Nebraska gets in the future or just ignore it.

‘Mistakes’ were made

According to Friday’s audit, the state spent nearly $5.4 billion in federal funds, which includes regular grants for things like operating veterans homes and social service programs, as well as COVID-19 aid.

The auditor added that the federal government quickly distributed billions of dollars in aid to states due to the pandemic, which, in turn, was doled out quickly by states.

“Which is not a good combination,” Foley said. “So mistakes got made.”

Friday’s report also pointed out more than $80 million in accounting errors in the unemployment insurance fund administered by the Department of Labor with the assistance of the Department of Administrative Services.

The DAS, in a response in the report, blamed the errors on “limitations in (Labor Department’s) tax and benefit system” which are being addressed.