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Audit recommends FEMA take back $1.78 million from Duluth flood grants

A government audit of a $13 million grant provided to the city of Duluth in the wake of major flooding in 2012 recommends that the Federal Emergency Management Agency recover nearly $1.8 million.

Flood
Debris smashes into a pedestrian bridge over Kingsbury Creek at the Lake Superior Zoo as flash flood waters flow through the area in June, 2012 after record rainfall hit the Duluth, Minn., area. (File photo / News Tribune)

A government audit of a $13 million grant provided to the city of Duluth in the wake of major flooding in 2012 recommends that the Federal Emergency Management Agency recover nearly $1.8 million.

The Department of Homeland Security's Office of Inspector General conducted the audit and issued its report on Aug. 24. It looked at a $13.34 million Public Assistance grant given to the city after the flooding in June 2012; 75 percent of that grant money came from FEMA, according to the report.

The city agrees with some of the report findings while opposing other findings in the report, said David Montgomery, the city's chief administrative officer. The city was notified last year that it was one of the communities chosen by the Office of Inspector General to be audited, he added.

"The city did not follow federal procurement standards in awarding $3.08 million for 12 contracts - $1.54 million for eight non-exigent (non-emergency) contracts and $1.54 million for four exigent contracts," the audit claims.

The report goes on to state that "the city did not always account for and expend FEMA grant funds according to federal regulations and FEMA guidelines. ... As a result, FEMA has no assurance that small and minority businesses, and women's business enterprises had sufficient opportunities to bid on federally funded work."

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The report also states "in some instances, FEMA also has no assurance that costs were reasonable." That was referring to an architectural and engineering (A/E) contract for $163,231 that, the audit claims, was awarded to a firm the city had done business with in the past, without "full and open competition."

In total, the audit recommends that FEMA disallow $1.78 million of the grant money as being spent on ineligible costs, including the $1.54 million spent on non-emergency work and about $226,000 for spending that was covered by insurance proceeds.

"The improper procurements occurred, in part, because Minnesota, as the grantee, incorrectly advised the city to follow its own procurement procedures without further qualifying that those procedures must conform to applicable federal procurement standards."

The audit recommends that FEMA take steps to improve the state's grant management.

On the lack of solicitation of women- and minority-owned businesses in the bidding process, the city feels that the issue is a "pure process issue" and the city used an open process, Montgomery said. The FEMA regulation says the city should go out and individually solicit women- and minority-owned business. The city instead used its standard bidding process in compliance of local and state regulations, as it was directed by FEMA and the Minnesota Division of Homeland Security and Emergency Management, Montgomery said. The Office of Inspector General is using technical aspects of regulations to find the city at fault, while the city believes it followed the "spirit of the regulations," all local and state regulations and the instructions of state and federal agencies, he said.

"We believe that all contractors, whether minority-owned or not, had equal opportunity to bid on this work," Montgomery said. "We relied upon what were told. We relied upon their instructions."

"What's important to note here ... there is no indication whatsoever of misuse of funds. There is no indication of fraud or malfeasance. There is no indication that we didn't use these funds for proper projects," Montgomery said. "What the Office of Inspector General complaints are is about process and they came up with a handful of basically four concerns, two of which we agree with."

The two issues involved an insurance allocation for the Lake Superior Zoo and zoo debris cleanup billing, Montgomery said.

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FEMA can grant an exception for the $1.78 million cited in the audit, the report states. But the Office of Inspector General states in the report that "FEMA has the authority, and we believe the fiduciary duty, to enforce federal statutes and regulations. ... We do not agree with the city's characterization of its noncompliance as an infraction of a minor rule."

The audit asks that FEMA provide a written response within 90 days to the audit's findings, including a corrective action plan.

At this point, FEMA hasn't requested the city return the funding and if it does, it will come out of the city's funding that it's still using to repair damages due to the flooding, Montgomery said.

However, he noted, the city wasn't made financially whole following the 2012 flood due to damage to the zoo, bridges and roads that wasn't covered.

"As a matter of course in these matters, there's always some things that aren't covered even though they are very real damages the city ends up having to pay for," Montgomery said. "So on top of that, to then ask for nearly $1.8 million back - not because it was misspent, not because it was on unauthorized project, not because there was any indication of malfeasance or impropriety - but because we didn't we follow a technical requirement to identify minority- and women-owned businesses in the region who could potentially even respond, to us, seems inappropriate and not at all in the intent of those regulations."

Read the Department of Homeland Security's Office of Inspector General audit here.

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