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Dear Governor and Legislative Leaders:
This letter report provides an update on our assessment of the State’s management of federal funds related to Coronavirus Disease 2019 (COVID-19) as a high risk statewide issue. In August 2020, we designated the State’s management of federal COVID-19 funds as high risk and indicated that the likelihood of mismanagement of these funds is great enough to create substantial risk of serious detriment to the State and its residents. This audit focuses on one of the sources of federal COVID-19 funds, the Coronavirus Relief Fund (CRF). The Department of Finance (Finance) is the state agency responsible for overseeing and reporting on the State’s use of $9.5 billion in federal funds from the CRF. We found that Finance’s allocation of CRF funds resulted in smaller counties receiving significantly less funding per person than larger counties. We also have concerns with the Governor’s Office of Emergency Services’ informal review of cities’ adherence to public health directives, which treated some cities inconsistently. Finally, Finance implemented a monitoring plan in late 2020 that, if implemented properly, will allow it to determine whether local governments’ and state departments’ uses of CRF funds comply with the requirements of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
In March 2020, Congress enacted the CARES Act, which provided $150 billion to the CRF for the U.S. Treasury to make payments to state and local governments for certain expenditures related to their response to the COVID-19 pandemic. 1 The CARES Act requires state and local governments to use CRF funding only for necessary expenses that meet all of the following three conditions:
- The expense was incurred due to the public health emergency with respect to COVID-19.
- The expense was not accounted for in the budget the state or local government most recently approved as of March 27, 2020.
- The expense was incurred between March 1, 2020, and December 30, 2020. 2
In accordance with the CARES Act, the U.S. Treasury allocated in May 2020 $15.3 billion in CRF funding to California, which included $5.8 billion that the U.S. Treasury paid directly to counties and cities with populations greater than 500,000. The U.S. Treasury paid the remaining $9.5 billion directly to the State to use for necessary expenses incurred because of the COVID-19 public health emergency. The U.S. Treasury is responsible for monitoring and overseeing CRF funds and requires recipients to periodically report on their uses of those funds. Additionally, the U.S. Treasury is authorized to recover CRF funds from recipients if their uses do not comply with requirements of the CARES Act.
Finance is the state agency generally responsible for, among other things, overseeing and managing the $9.5 billion in CRF funds that the U.S. Treasury paid to the State, and for reporting to the U.S. Treasury on amounts received, spent, or obligated, and the uses of the funds. As part of the State’s fiscal year 2020–21 budget process, Finance proposed allocations of the State’s CRF funds and the Legislature approved the final allocations, which we present in Figure 1. Because the budget directly allocates CRF funds to the California Department of Education, the Board of Governors of the California Community Colleges, and the California Department of Housing and Community Development, these departments are responsible for overseeing and managing their CRF funds. The Legislature also authorized Finance to reallocate unspent CRF funds for other allowable activities 10 days after providing a written notice to the Joint Legislative Budget Committee.
The Legislature Allocated $9.5 Billion of the State’s Coronavirus Relief Funds to Five Priority Areas
Source: The Governor’s summary of the State’s enacted budget for fiscal year 2020–21.
Finance Disadvantaged Smaller Counties When Allocating State CRF Funds
The method that Finance used to allocate $1.3 billion in CRF funds to counties in the State disadvantaged smaller counties because they received significantly less funding per person than the State’s 16 largest counties. Although the U.S. Treasury directly provided a total of $4.5 billion in CRF funds to California’s 16 largest counties, Finance also allocated half of the State’s CRF funds designated for counties, to these large counties. Finance included a schedule of allocations totaling $1.3 billion to counties in the May revision to the fiscal year 2020–21 budget. In approving the State’s budget in June 2020, the Legislature directed Finance to allocate $1.3 billion of the State’s CRF funds to counties based on the share of each county’s population relative to the total population of the State. The Legislature did not further specify how to allocate the funds to counties, but it directed Finance to take into account prior funding that the U.S. Treasury allocated directly from the federal CARES Act, including CRF funding to counties with populations greater than 500,000. In July 2020, Finance reported to the Legislature the final amounts of CRF funds allocated to cities and counties. Finance indicated that the final allocations included some small adjustments to the May revision amounts to account for more recent population numbers. These allocations included 50 percent of the $1.3 billion earmarked on a per-person basis to the 42 counties that did not receive CRF funds directly from the U.S. Treasury.
However, because Finance allocated the remaining 50 percent of $1.3 billion in CRF funds to the 16 largest counties that had already received U.S. Treasury allocations, those counties received a total per-person amount of CRF funding that was nearly double the total per-person amount Finance provided to the 42 smallest counties. As Figure 2 shows, large counties—those with more than 500,000 residents—initially received amounts equivalent to $174 per person directly from the U.S. Treasury. Then, with its allocation to those same counties, Finance increased the per-person amount to at least $190. In contrast, the 42 counties with fewer than 500,000 residents (small counties)—the ones that did not receive any CRF funds directly from the U.S. Treasury—received amounts equivalent to just $102 per person from Finance, resulting in small counties receiving significantly less funding per person than larger counties.
Large Counties Received Nearly Double the CRF Funds per Person Than Did Small Counties
Source: Analysis of federal and state CRF allocations and county populations.
* For the 16 largest counties, Finance allocated $290 million to five counties, or $16 per person, and $354 million to 11 counties, or $23 per person.
In explaining the reason for the additional allocations of state CRF funds to the 16 large counties, Finance indicated that it believed there was a higher spread of COVID-19 in the 16 larger counties because of their greater population density. However, COVID-19 case data maintained by the California Department of Public Health (Public Health) does not support Finance’s assertion. Specifically, for April through June 2020, both large and small counties had greater than 500 total COVID-19 cases per 100,000 residents, as Figure 3 shows. In fact, while two of the 16 large counties—Los Angeles County and Riverside County—had 989 and 776 COVID-19 cases per 100,000 residents, respectively, two smaller counties—Imperial County and Kings County—had significantly higher numbers of COVID-19 cases per 100,000 residents during the period—3,215 and 1,525 cases per 100,000 residents, respectively. Based on the COVID-19 case data for all counties, the needs of many small counties, as reflected in case rates, were at least the same if not greater than the needs of large counties, which is contrary to Finance’s reason for allocating additional state CRF funds to the large counties.
Some Small Counties Had COVID-19 Case Rates as High or Higher Than Large Counties
Source: Analysis of Public Health COVID-19 data and county populations; and analysis of federal and state CRF allocations.
Given the high COVID-19 case rates in both small and large counties, Finance should have allocated more CRF funds to small counties. Through a CRF frequently-asked-questions document issued in late May 2020, the U.S. Treasury recommended that states should treat local governments equitably, regardless of their population size. To equitably allocate the $1.3 billion in CRF funds to all counties, given that the U.S. Treasury had already allocated $4.5 billion in CRF funds to the 16 largest counties, Finance should have first allocated $1.1 billion to the 42 smaller counties and the remaining $200 million across all counties on a per-person basis, which would have resulted in all counties receiving $179 per person in CRF funds. This allocation methodology would have addressed more counties’ needs for COVID-19-related funding because each county would have received the same funding per person. Consequently, by not equitably providing counties with funds, there is greater risk that more small counties’ COVID-19-related funding needs were unmet.
The State Did Not Consistently Evaluate Cities’ Adherence to State Public Health Orders
Finance relied on the Governor’s Office of Emergency Services (Emergency Services) to evaluate whether cities met the requirements to receive CRF funding from the State, but Emergency Services could not demonstrate that it used a consistent process for conducting such evaluations. In the fiscal year 2020–21 budget, the Legislature directed $500 million in CRF funds to cities contingent on their adherence to, among other things, the State’s stay-at-home orders and other health requirements as directed in gubernatorial executive orders, and all Public Health’s orders issued in response to the COVID-19 public health emergency. Cities were required to certify compliance to Finance in July 2020 using a form Finance developed. However, Finance also relied on Emergency Services to assess cities’ adherence to public health orders because, according to Finance, Emergency Services has expertise in working with cities during emergencies and has developed contacts with local governments.
Based on information Emergency Services provided, Finance withheld CRF funds from two cities. In July 2020, Emergency Services sent letters to the cities of Coalinga and Atwater stating that each city had passed a resolution that was inconsistent with the State’s public health orders and each was thus ineligible to receive CRF funds from the State totaling $212,000 and $387,000, respectively. Emergency Services explained that it became aware of these resolutions while working with local jurisdictions as they responded to the COVID-19 emergency and that it held meetings with Coalinga and Atwater to discuss their problematic resolutions and offer a solution. In the letters to the two cities, Emergency Services notified them that, in order to be eligible for funding, the cities needed to rescind their respective resolutions. Ultimately, Emergency Services determined that the cities did not rescind their resolutions, and as a result of this determination, Finance withheld all of the CRF funds it had designated for the two cities.
However, Emergency Services could not demonstrate that it had evaluated all cities. Emergency Services used an informal process to evaluate Coalinga’s and Atwater’s adherence with State public health orders, stating that it reviewed the resolutions, the subsequent city council meeting minutes, and the meeting webcasts to make its determination, but it did not develop written evidence of its assessments. In contrast, Public Health provided Finance with a robust analysis that displayed how it evaluated each of the 58 counties against several criteria related to COVID-19 testing and contact tracing, among others. This formal analysis allowed Finance to understand how Public Health arrived at its conclusions of each county’s compliance with state public health guidance.
Emergency Services did not provide to Finance a similarly robust evaluation of all 476 cities’ compliance with state public health orders. Instead, Emergency Services only provided information to Finance about Coalinga and Atwater. Because Emergency Services was unable to demonstrate that it reviewed all 476 cities, we question whether other cities may have passed similar resolutions and may not have been eligible for CRF funds. In fact, our review found that the city of Imperial (Imperial) passed a resolution in August 2020, the intent of which was to allow businesses to reopen without adhering to the State’s timelines for reopening businesses. During its discussion of the resolution, the city council even considered the risk that the State could withhold its CRF funds if it passed the resolution, similar to how the State withheld CRF funds from Coalinga and Atwater because of their resolutions. However, Imperial continued to receive CRF funding of $246,000. Emergency Services told us that it was aware of Imperial’s resolution but believed that it was a symbolic gesture and had concluded that the resolution itself did not conflict with the State orders. However, according to a webcast of the meeting in which it passed the resolution, the city council discussed that the resolution would authorize local businesses to open ahead of the reopening timelines the State and county developed. Based on the discussion during that city council meeting, we believe the city council passed its resolution with the clear intent of not complying with the State’s required timelines for reopening businesses, which should have also made Imperial ineligible to receive CRF funds.
Finance recently took steps to ensure residents of Coalinga and Atwater received at least some benefit from their allocated CRF funding. In late October 2020, we shared our concerns with Finance about the potential negative fiscal impact of withholding CRF funds from Atwater and Coalinga. Subsequently, Finance reallocated the CRF funding it withheld from Coalinga and Atwater—totaling about $600,000—to Public Health to support additional testing in Coalinga and Atwater for COVID-19 so that these funds have tangible benefits for their residents. Specifically, under a contract Public Health has with a health provider, tests were to be offered during November and December 2020 in Coalinga and Atwater for individuals at high-risk of contracting COVID-19. However, if the State receives additional federal funding similar to the CRF funding and provides it to local jurisdictions, Finance should ensure it, or its designee, provides for equitable treatment of all cities by conducting a complete and documented review of their adherence to any requirements to receive the funding.
Finance Recently Implemented Additional Procedures to Improve Its Monitoring of CRF Expenditures
For allocations of CRF funds shown in Figure 1, has taken steps to validate the expenditure data it collects from state departments, cities, and counties, but can improve its monitoring by continuing to implement its recently developed monitoring plan to ensure that recipients of CRF funds have appropriate documentation to demonstrate that their expenditures comply with the CARES Act. For the $9.5 billion in federal CRF funds, the State must ensure that its use of the funds complies with the requirements of the CARES Act—for necessary expenses incurred because of the COVID-19 public health emergency—and that it follows the reporting and record retention requirements issued by the U.S. Treasury. Specifically, the U.S. Treasury requires the State to report the amount of CRF funds spent or obligated in specific categories and return funds that it determines the State spent on ineligible expenditures, or funds the State did not spend or obligate for costs incurred between March 1 and December 30, 2020. 3 The State must also maintain for at least five years all documents and financial records sufficient to demonstrate that those expenditures adhere to the requirements of the CARES Act.
To comply with these reporting requirements, Finance developed a web portal to gather expenditure information from the state departments, cities, and counties that use State CRF funds and to facilitate the required reporting to the U.S. Treasury. Finance also provided guidance to state departments, cities, and counties that were recipients of CRF funding from the State. For example, Finance provided two training sessions to cities and counties that outlined the CARES Act requirements on the use of CRF funds and record retention, the U.S. Treasury’s guidance on eligible CRF expenditures, and the process for reporting expenditures to Finance through the web portal—all of which mirrored the information issued by the U.S. Treasury. The guidance Finance provided to recipients of state-allocated CRF funding helps to ensure those recipients are aware of the requirements regarding how they may use the funds and how they must report those uses.
Although Finance has taken steps to validate the data it collects from recipients on their uses of CRF funds, it can further strengthen its monitoring by continuing to implement its recently developed plan to review documentation to ensure that recipients’ uses of CRF funds are appropriate. As described in the Background, the CARES Act places three requirements on the use of CRF funds. Finance has collected reports of expenditure data from state departments, cities, and counties—one in early September 2020 and one in mid-October 2020. 4 Finance reviewed the amounts and types of expenditures that recipients reported to ensure the amounts did not exceed the allocations and were placed into the federal reporting categories the U.S. Treasury developed. Through this review process, Finance was sometimes able to identify when local governments reported expenditures that did not comply with the CARES Act. For example, at least one entity reported expenditures in a category it created for indirect costs, which are not allowable expenditures. Because the recipient created a category named indirect costs, Finance was able to identify that these expenditures were not allowable. However, Finance only requires recipients to classify their total expenditures under each federal reporting category and does not require recipients to provide documentation that supports the nature of expenditures. Without reviewing more detailed information, Finance cannot evaluate whether recipients’ expenses are appropriate. During our audit, Finance indicated that it had developed a plan to conductrobustmonitoring of cities’ and counties’ uses of CRF funds. Although Finance asserts the details of its plan are confidential, based on our review, we believe its plan, if implemented as designed, will allow it to identify expenditures that do not comply with requirements of the CARES Act. Because Finance only began implementing its monitoring plan in late 2020 and has not completed any reviews, we were unable to assess whether it was following its plan appropriately.
In addition to increasing its monitoring of CRF funds through its monitoring plan, Finance should also work with departments to mitigate any risks it identified associated with departments’ management of federal COVID-19 funding. In mid-2020, Finance conducted reviews of state departments’ readiness to receive, spend, track, and report federal COVID-19 funding. As we discussed in our report 2020-602, State High Risk Update: The California State Auditor Has Designated the State’s Management of Federal COVID-19 Funding as a High Risk Issue, several state agencies cited readiness reviews Finance conducted of them as evidence that they were poised to properly manage the federal COVID-19 funding they received or expected to receive. We reviewed, but cannot disclose, the contents of these reviews because Finance asserted they are confidential under the deliberative process privilege. However, we found that Finance followed a reasonable methodology to conduct the assessments and that the departments it designated as highest risk that received federal COVID-19 funds generally aligned with the risk assessment that we completed, which focused on each grant of federal COVID-19 funding. We believe readiness reviews are a valuable tool to identify risks in departments’ management of COVID-19 funding and to help them develop appropriate strategies to mitigate those risks. To the extent that its readiness reviews identified risks, Finance should continue to monitor the respective departments to ensure they are taking appropriate steps to address those risks. Finance indicated that it has numerous broad responsibilities that include activities in which federal funding is reviewed, such as coordination of the single audit, tracking and monitoring the uses of federal COVID-19 funds by state and local governments, and informal check-ins with local governments. However, Finance does not have plans to conduct further reviews related to the specific concerns it identified in its readiness assessments.
In the event that the federal government provides California with additional funding that is similar to CRF funds and the Legislature decides to again direct such federal COVID-19 funds to local governments contingent on their adherence to certain requirements, Finance should ensure equitable treatment of local governments by doing the following:
- Propose a method to the Legislature to provide equitable funding to counties on a per-person basis or other basis that treats counties fairly and equitably.
- Ensure that it or its designee uses a formal process to evaluate all cities’ adherence to the Legislature’s requirements, and that this evaluation is documented and retained.
To prevent the State from having to return CRF funds to the federal government for inappropriate expenditures, Finance should continue to implement its monitoring plan to evaluate whether selected expenditures comply with the CARES Act.
To follow up on any concerns Finance may have identified during its readiness reviews, it should ensure that affected state departments have taken appropriate steps to resolve those issues.
Finance agreed to consider implementing two of our recommendations, but it indicated that it does not intend to implement our recommendation to follow up on concerns it may have identified during its readiness reviews.
We conducted this audit under the authority vested in the California State Auditor by Government Code section 8543 et seq. and according to 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 specified in the Scope and Methodology section of the report. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
ELAINE M. HOWLE, CPA
California State Auditor