Equipment – Excessive Costs

Appeal Brief

Summary Paragraph

The OIG conducted an audit of the Applicant’s projects related to a severe winter storm in 2006 and recommended disallowing $91,582.00 from PW 65 due to excessive force account equipment costs resulting from using the FEMA equipment rates.  FEMA concurred and de-obligated $91,582.00 from PW 65.  In its first appeal, the Applicant asserted that the locally established equipment rates do not reflect actual cost, and for this reason, the FEMA/State team advised using the FEMA equipment rates during PW preparation.  The Regional Administrator denied the first appeal because PW 65 included excessive equipment costs based on the higher FEMA equipment rates rather than the lower Applicant equipment rates.  In the second appeal, the Applicant reiterated the first appeal arguments.  FEMA obtained the OIG audit working documents, and found that the OIG’s recalculation of the total equipment cost using a hybrid set of the Applicant and FEMA equipment rates was not supported by a reasonable interpretation of FEMA regulations and policy.  FEMA has determined that the Applicant has provided sufficient documentation to certify that the locally established equipment rates do not reflect actual costs, and the use of the FEMA equipment rates was appropriate. 

Authorities and Second Appeals

• 44 C.F.R. § 206.228(a)(1)(ii) (2006).
• PA Guide, at 38 (Oct 1999).

Headnotes

• 44 C.F.R. § 206.228(a)(1)(ii) provides that where local guidelines are used to establish equipment rates, reimbursement will be based on those rates or rates in a Schedule of Equipment Rates published by FEMA, whichever is lower.  If an applicant certifies that its locally established rates do not reflect actual costs, reimbursement may be based on the FEMA Schedule of Equipment Rates, but the applicant will be expected to provide documentation if requested.

• The OIG audit finding of excessive equipment cost was based on the OIG calculation method of creating a new hybrid set of equipment rates consisting of the lower rate (between the Applicant and FEMA equipment rates) for each piece of equipment.  This hybrid method is not supported by FEMA’s interpretation of its regulation.
• The Applicant certified that its locally established equipment rates do not reflect actual costs.  Therefore, the Applicant is eligible to receive reimbursement based on the FEMA equipment rates.

• PA Guide also states that where local rates have been developed, reimbursement is based on the local rates or the FEMA rates, whichever is lower.  If the local rate is lower and the applicant certifies that the rates do not reflect all actual costs, the higher FEMA rates may be used.

• The guidance does not support the use of hybrid equipment rates.  The Applicant is justified in receiving reimbursement based on the FEMA equipment rates, since it certified local rates do not reflect all actual costs.

Appeal Letter

Appeal Analysis

Background

During the severe winter storm incident period from December 14 to December 15, 2006, the utility system owned and operated by the Snohomish County Public Utility District No. 1 (Applicant) sustained a variety of storm-related damages.  FEMA obligated Project Worksheets (PWs) 45, 48, and 65 for approximately $5.6 million to repair the Applicant’s utility system damaged by the declared disaster.

On June 19, 2009, the Department of Homeland Security Office of Inspector General (OIG) issued Audit Report Number DS-09-07 (Audit Report) based on an audit of the Applicant’s three PWs.  The Audit Report recommended disallowing a total of $286,533.00 for several reasons, including: lack of supporting documentation; unreasonable and ineligible costs; duplicate costs due to accounting errors; and ineligible public utility taxes paid to other applicants. 

In particular, the Audit Report Finding B identified ineligible costs on PW 65[1], which was prepared using “FEMA’s standard equipment rates rather than using [the Applicant’s] lower rates for selected equipment items.”[2]   For each piece of force account equipment claimed on PW 65, the OIG compared the Applicant equipment rate with the FEMA equipment rate and selected the lower rate.  Using this hybrid method of selecting the lower of the two rates for each piece of equipment, the OIG recalculated the total force account equipment cost.  The difference between the recalculated total force account equipment cost and the original total force account equipment cost on PW 65 was $91,582.00, which the OIG recommended for disallowance as excessive equipment costs.

FEMA concurred with the Audit Report Finding B and agreed to disallow $91,582.00 in excessive equipment costs from PW 65.  FEMA de-obligated this amount in June 2012.

First Appeal

On August 3, 2012, the Applicant submitted its first appeal request to the State of Washington Military Department Emergency Management Division (Grantee), appealing FEMA’s de-obligations on PWs 45 and 65 based on the OIG audit findings.  The Grantee transmitted the Applicant’s first appeal to Region X on October 1, 2012, indicating its support of the appeal.

Regarding FEMA’s de-obligation of $91,582.00 from PW 65, the Applicant argued that its own equipment rates, while used internally between departments, do not reflect the actual cost to operate its equipment, nor do the rates incorporate the same cost components comprising the FEMA equipment rates.  For these reasons, the Applicant indicated it was directed by the FEMA-State team to use the FEMA equipment rates during the disaster kick-off meeting.  The Applicant further argued, FEMA continued to advise the Applicant to use the FEMA equipment rates during the three declared disasters following FEMA-1682-DR-WA.

Along with the Applicant’s appeal request, the Grantee included its own analysis to provide additional details to support the Applicant’s appeal arguments.  First, the Grantee stated that the Applicant provided a written statement detailing the cost components and actual costs of the Applicant equipment rates.  Some of the cost components are the same between the Applicant and the FEMA equipment rates, including: depreciation; overhead; all maintenance; field repairs; fuel; lubricants; and tires.  However, while the Applicant equipment rate cost components include parts and material, labor, and professional services, the FEMA equipment rates cost components include OSHA equipment and incidental costs. 

Next, the Grantee explained that the Applicant certified that its own equipment rates do not reflect actual costs, because its fleet management software only tracks operation hours for vehicles assigned to a specific work order in the system, and not any other support or maintenance vehicles necessary for the total equipment operation.  The Grantee asserted that the Applicant’s equipment rates do not reflect actual costs, because the software only monitors 221 out of 464 vehicles, with the remaining vehicle operation hours unaccounted for by the system.

Finally, the Grantee stated that it was not provided a copy of the OIG’s working documents, and therefore could not determine how the recommended disallowance of $91,582.00 was calculated.  The Grantee presented its own analysis of the total equipment cost using two different methods.  This analysis showed that had the Applicant equipment rates been used instead of the FEMA equipment rates to formulate PW 65, the total equipment cost would have actually increased by $21,527.87. The analysis also indicated that if the calculation method utilized by the OIG had been used to select the lower of the Applicant or FEMA equipment rate for each piece of claimed force account equipment, the total equipment cost should have decreased by only $48,167.82, instead of $91,582.00 as determined by the OIG audit.

The FEMA Region X Regional Administrator (RA) denied the first appeal on August 8, 2013.  The RA referenced 44 C.F.R. § 206.228(a)(1)(ii) which requires that where local rates are used to establish equipment rates, reimbursement will be based on those rates or the FEMA rates, whichever is lower.[3]  The RA stated that the Applicant semi-annually conducted rate adjustments for all fleet vehicles and could have set the local rates to reflect current operating costs.  The RA agreed with the OIG’s original finding that the Applicant inappropriately used the higher FEMA equipment rates than the lower local rates, justifying the de-obligation based on the OIG audit.

Second Appeal

On December 9, 2013, the Grantee transmitted and positively endorsed the Applicant’s second appeal letter dated October 4, 2013.  The second appeal reiterated the Applicant’s first appeal argument pertaining to only PW 65. 

The Grantee again included its own analysis to support the Applicant’s position, presenting the same arguments provided with the first appeal.

Discussion

Title 44 Code of Federal Regulation (44 C.F.R.) § 206.228(a)(1)(ii) states: “[w]here local guidelines are used to establish equipment rates, reimbursement will be based on those rates or rates in a Schedule of Equipment Rates published by FEMA, whichever is lower.”[4] (emphasis added). 

FEMA interprets the use of the plural noun “rates” in the regulations[5] as an indication that the regulatory intent is for FEMA to select one set of rates over another set of rates between the Applicant equipment rates and the FEMA equipment rates.  Public Assistance guidance further clarifies that “[w]here local rates have been developed, reimbursement is based on the local rates or FEMA’s rates, whichever is lower.[6]”

As such, FEMA regulations and guidance support the use of either the applicant’s equipment rates or the FEMA equipment rates, whichever set of equipment rates is lower.[7]  FEMA regulations also provide that if an applicant certifies that the locally established rates do not reflect actual costs, reimbursement may be based on the FEMA Schedule of Equipment Rates, but the applicant will be expected to provide documentation if requested.[8]

The Applicant informed FEMA and the Grantee at the time of PW preparation in 2007 that the locally established equipment rates did not reflect actual costs.  Accordingly, the Applicant was advised to use the FEMA equipment rates to calculate the total force account equipment cost on PW 65.  The Applicant also provided a written statement detailing the components of the locally established equipment rates, certified that they do not reflect actual cost, and provided the necessary justification for requesting reimbursement based on the FEMA equipment rates.

As part of the audit, the OIG recalculated the total force account equipment cost on PW 65 by selecting the lower rate between the Applicant equipment rate and the FEMA equipment rate for each piece of equipment, effectively creating a hybrid set of both equipment rates.  Although the intent of this method was to ensure FEMA reimbursement based on the lowest possible total equipment cost, the hybrid approach to calculate the total equipment cost is neither practical to implement in every PW preparation scenario, nor supported by FEMA’s interpretation of its regulations and guidelines regarding equipment rates.[9]

Conclusion

FEMA has determined that the reimbursement of the force account equipment cost should be based on the locally established equipment rates or the FEMA rates, whichever set of rates is lower, instead of creating a new hybrid set of lower rates.  Furthermore, the Applicant has provided sufficient documentation to certify that the locally established equipment rates do not reflect actual costs, in order to receive reimbursement based on the FEMA equipment rates in accordance with FEMA regulations and policy.  Therefore, the reimbursement of the Applicant’s total equipment cost on PW 65 should be based on the FEMA equipment rates.  As such, reobligation of $91,582.00 is appropriate.