Eye on disaster recovery - EY - United · PDF file4 | Eye on disaster recovery The Federal...

Eye on disaster recoveryInsights on disaster recovery through insurance and federal grantsIssue #3 | October 2016

2 | Eye on disaster recovery

3Eye on disaster recovery |

A message from Allen Melton, Partner, Americas Practice Leader, Insurance & Federal Claims ServicesThe last issue of Eye on disaster recovery addressed the importance of incorporating nancial preparedness and recovery into an organization’s overall disaster recovery plan. It addressed activities crucial to maintaining nancial stability following a catastrophic disaster such as generation of revenue, mitigation of expenses and recovery of funds from insurance and other sources.

This issue of Eye on disaster recovery expands upon that theme by focusing on nancial preparedness for organizations that qualify for FEMA Public Assistance grants, including state and local governmental entities, private nonpro ts and Native American tribes. We have also included a basic nancial preparedness checklist that applies to all organizations.

The actions you take before a catastrophic event can have a signi cant impact on your ability to expedite and maximize nancial recovery. They represent a key part of an organization’s overall disaster recovery plan and help create an enhanced level of resiliency.

We are pleased to share our experience and knowledge in this area and welcome your feedback and questions.

Sincerely,

Allen Melton


The Federal Emergency Management Agency (FEMA) plays a vital role in the wake of a disaster in supporting states (“recipients” — formerly known as grantees) and subrecipients (formerly known as subgrantees), including state agencies, local governments, tribal governments and quali ed private nonpro ts. FEMA Public Assistance (PA) grants can provide a crucial source of funding to supplement funds received from insurance. These grants must, however, comply with a myriad of guidelines and policies governing the use of federal funds.

Recipients and subrecipients of FEMA PA grants that fail to comply with federal laws, regulations and guidelines may be required to reimburse the state or FEMA for all or part of the funding deemed ineligible or noncompliant. This process, commonly known as a “deobligation,” can occur at any time during the grant life cycle, but more often at completion of a project. Deobligation of federal disaster funding has grown in recent years as the number of disasters and related funding has increased. In addition, due to budget shortfalls, there has also been increased scrutiny on disaster spending. Therefore, it is imperative that recipients and subrecipients understand and comply with all federal requirements or risk losing funding provided by these grants.

The Department of Homeland Security Of ce of Inspector General (OIG) is responsible for independent oversight of disaster programs, including disaster grants. Each year, the OIG conducts a number of audits and reviews of disaster grants, including FEMA PA and Hazard Mitigation grants throughout the United States. On an annual basis, it summarizes systemic issues identi ed in the reports and produces a “Capping Report” for FEMA management.

A summary of the Capping Reports from FY 2011 through FY 2014 is included in the chart below. It indicates the OIG conducted audits of approximately $7 billion of funds, resulting in recommendations to disallow or deobligate (“questioned costs and recommendations”) approximately $2 billion (28% of the funds audited).

Fiscal year Amount audited (billions)

Questioned costs and

recommendations (millions)

Percentage of questioned

costs to amount audited

2011 $1.2 $337 28%

2012 $1.3 $416 32%

2013 $1.3 $308 24%

2014 $3.4 $972 29%

Total $7.2 $2,033 28%

Financial preparedness for FEMA Public Assistance grants

By Matt Jadacki, Michael Herman, Reena Panchal and Carlos Zapata

When the wind is still blowing and the water is rising is not the time to review all the federal requirements attached to disaster grant funding.


These ndings are signi cant and, in many cases, were the result of recipients and subrecipients not fully understanding requirements surrounding the use of federal funding for disaster recovery. The OIG stated in its FY 2014 report that “we continue to nd problems with grant management, ineligible and unsupported costs, and noncompliance with federal contracting requirements.”

The magnitude and nature of these ndings highlight the need for increased nancial preparedness by applicants eligible for FEMA PA grants. When the wind is still blowing and the water is rising is not the time to review all the federal requirements attached to disaster grant funding. A solid understanding of the grant process is crucial before disasters strike in order to maximize recovery through federal disaster grants and minimize deobligations. After all, what matters most is not how much a recipient or subrecipient is awarded but how much it gets to keep.

This article addresses key areas of nancial preparedness that can help maximize recovery through FEMA PA grants and help increase the certainty that those funds are retained.

Understanding the requirements

The FEMA PA program is authorized by the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5201–5207 (the “Stafford Act”) and has been amended several times, most recently by the Sandy Recovery Improvement Act (SRIA) of 2013 (P.L. 113-2). It provides assistance for debris removal, emergency protective measures and permanent restoration of infrastructure and equipment to state and local governments, certain private nonpro t entities and tribal governments following Presidentially declared disasters. The state typically acts as the recipient for the PA program, and the “federal share” is typically 75% or more of eligible costs.

In addition to guidelines established by the Stafford Act and SRIA, the FEMA PA program is also guided by other statutes and regulations that apply to all federal grants, including those addressing grant management and procurement. The primary regulations pertinent to the FEMA PA program are found in titles 2 CFR (Code of Federal Regulations) — Grants and Agreements, and 44 CFR — Emergency Management and Assistance. Together, these statutes, regulations and policies de ne eligibility requirements and guidelines for the documentation and reporting of costs and offsetting revenues. The starting point for nancial preparedness is familiarity with these requirements and guidelines before a disaster occurs so that proper protocols, procedures, systems and controls are understood and in place when you need them.


Project and cost accounting

All costs submitted to FEMA for reimbursement through a PA grant must be related to the speci c disaster, be reasonable and necessary, and be incurred for completion of eligible work in one of the following categories:

• Debris removal: funding is generally provided for eligible debris removal to remediate immediate threats to public health and safety, signi cant damage to public or private property and economic recovery of affected communities to the bene t of the communities-at-large.

• Emergency protective measures: these are costs incurred before, during and after a disaster to protect public health and safety, and prevent damage to public and private property. Eligible costs include emergency evacuations, security in disaster areas, overtime payroll for rst responders, temporary generators for health and safety services, emergency operations centers and others.

• Permanent repairs and restoration: these are costs incurred to restore pre-disaster design, function and capacity for the following types of facilities and related equipment:

• Roads and bridges

• Water control facilities

• Buildings and equipment

• Utilities

• Parks, recreational facilities and other facilities or items

Eligible costs incurred in each of the above categories must be accounted for and reported on a project-by-project basis utilizing “Project Worksheets,” (also referred to as “PWs.”) These costs must be related directly to the project scope and conditions of the PW.

Procurement guidelines

Applicants must follow federal procurement regulations for contractual as well as non-contractual expenditures in order for costs reported on federal grants to be eligible. Noncompliance with these regulations places applicants at high risk.

In December 2014, FEMA implemented the new “Government-Wide Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” also known as the OMB Super Circular, codi ed at 2 CFR, Part 200. These requirements apply to disasters declared on or after December 26, 2014. Some of these requirements include:

• Following guidelines regarding the use of ve different methods of procurement

• Maintaining oversight to verify that contractors are performing in accordance with awarded contracts

• Engaging full and open competition for contracts

• Maintaining written standards of conduct covering con icts of interest

• Maintaining records regarding the history of procurements

• Taking all necessary steps to make certain women’s business enterprises, minority businesses and labor surplus area rms are used when possible

• Performing a cost or price analysis in connection with procurements

• Negotiating pro t as a separate element of the price for contracts in which there is no price competition

• Utilizing time and materials type contracts only if no other contract is suitable and if the contract includes a ceiling price

• Avoiding the use of cost plus a percentage of cost, and percentage of construction cost type contracts

It is important to note that while the speci c provisions of the OMB Super Circular are relatively new, the substance of many of those provisions predate its creation and as such, often applied to federal funding for disasters prior to its legislation.

Record keeping and documentation

Applicants must maintain proper record keeping systems and make sure that relevant records and dowcumentation are maintained, not only throughout the restoration process but throughout the entire FEMA PA grant life cycle, including grant closeout and subsequent audits. FEMA has de ned and publishes an extensive list of the types of records that will satisfy documentation requirements. This guidance is particularly important since FEMA PA grants can take years to closeout and even then, are still subject to audit by the OIG and other oversight agencies.

Force account labor and equipment

“Force account labor” refers to an applicant’s use of its own employees rather than outside contractors. There are speci c FEMA guidelines that address eligibility of force account labor, such as the eligibility of straight time versus overtime and limits on amounts that can be charged. The guidelines vary based on the category of work being performed (i.e., debris removal, emergency protective measures or permanent restoration). Since force account labor can represent a signi cant cost, relevant guidance needs to be well-understood and factored into nancial preparedness plans in order to avoid potential ineligibility of costs.

“Force account equipment” refers to an applicant’s use of its own equipment versus non-owned equipment. FEMA has established speci c eligible equipment rates, and in certain cases, the applicant may be allowed to claim state or local rates. Again, it is important to be familiar with the numerous FEMA guidelines that apply in this area before an actual loss occurs in order to plan accordingly.

Eligibility of facilities

Federal regulations require that the applicant be legally responsible for the damaged facility at the time of the disaster in order to qualify for federal disaster assistance. If the applicant is the lessee (tenant), facility repairs are not eligible unless the lease speci cally states that the lessee is responsible for the repairs. The facility must also be in active use at the time of a disaster. Failure to meet any of these and other facility-related guidelines can result in the loss of funds related to the damaged facilities.

Insurance coverage guidelines

There are numerous guidelines pertaining to insurance with respect to FEMA PA grants, including the following (certain of which may be granted exemption under speci c circumstances):

• Applicants are required to pursue payments through their insurance coverage, the receipt of which is handled as an offset against the amount of eligible damages requested from FEMA.

• As a condition to receiving FEMA PA grants for permanent work, applicants must obtain and maintain insurance coverage on facilities for the hazard that caused the damage. At a minimum, the coverage must be in the amount of the estimated eligible damages for the speci c structure(s).

• Damages sustained in current or future disasters of the same type will not be eligible for FEMA assistance if the requirements to obtain and maintain insurance are not met.

• If the facility is in the Special Flood Hazard Area and ood insurance is available, FEMA will expect that facility to be insured, and may deduct the amount of insurance coverage that would have been applicable even without a policy.

Reporting of funds received from other sources

Applicants are required to track and report the source and amount of all funds received following a disaster. Requests for recovery through FEMA PA grants must be net of applicable credits, including donations. This includes funds received from insurance, federal, state and other funding sources, and in many cases, from the sale of salvage. FEMA policy requires that the applicant agree to repay all duplicated assistance to rectify any duplication of bene ts.

Summary

Financial preparedness begins with awareness and knowledge of applicable FEMA PA eligibility requirements and guidelines. This information can help applicants plan ahead and react more quickly and effectively following a disaster. By implementing the necessary protocols, procedures, systems and controls before a disaster, recipients and subrecipients can better manage nancial recovery after a disaster. Financial preparedness creates the pathway to nancial recovery and helps an entity keep the funds it receives.

By implementing the necessary protocols, procedures, systems and controls before a disaster, recipients and subrecipients can better manage nancial recovery after a disaster.


Financial preparedness can be the difference between signi cant nancial losses and substantial recovery. Planning ahead can help your organization recover in a timely manner should it incur a signi cant loss. The best time to prepare is well before that loss occurs. The following checklist summarizes some of the key areas of nancial preparedness:

Understand the organization’s risks:

• Understand risks in your operations and the potential nancial impact of those risks

• Explore opportunities to mitigate or eliminate each risk

• Determine which risks can be covered by insurance

• If the organization is eligible for assistance from FEMA, understand potential funding that can be available following a Presidentially declared disaster

Review insurance coverage:

• Review and understand your insurance coverage — perils covered, limits of liability, deductibles, waiting periods, periods of indemnity and co-insurance

• Review and update your list of covered locations and values for property and business interruption

• Discuss policy clauses and areas of coverage with your broker

• If your organization is eligible for assistance from FEMA following a Presidentially declared disaster, develop an understanding of FEMA’s requirements for insurance

Plan for continuity of operations:

• Determine how operations and sales could continue in the event of an interruption — examples might include using existing inventory, support from other company locations, leasing of a new location, outsourcing operations and other measures

• Identify alternate suppliers for merchandise, raw materials and/or key components

• Develop a plan for the retention of key employees

Financial preparedness checklist


• Develop accounting guidelines outlining post-loss accounting policies and procedures to support the recovery efforts and claim preparation, including the accumulation and retention of applicable documentation

• Develop a plan for access to required cash reserves and/or credit during a major shutdown of operations to cover funding while awaiting recovery through insurance and other sources

• Understand your xed and variable costs that are likely to continue following an interruption to operations and determine how these costs could be mitigated

Develop your team:

• Identify required management resources — include representatives of risk management, legal, operations, nance/accounting, sales, engineering, procurement and

other areas and identify their respective roles following a catastrophic event

• Identify and develop pre-loss contractual arrangements with external resources, including insurance broker, forensic accountant, legal counsel, engineers, general contractors and other consultants

Review and test your plan:

• Review and test your plan on a regular basis to ensure that key components haven’t changed

• Modify your plan as required to re ect changes in operations, new risks, modi cations in insurance coverage and other changes


EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

About EY’s Insurance & Federal ClaimsServices practiceThe EY Insurance & Federal Claims Services practice assists clients with nancial recovery from catastrophic disasters through insurance and federal grants. We help clients measure, document and prepare complex property damage and business interruption insurance claims. We also assist state, local and tribal governments, as well as quali ed nonpro ts to develop and manage disaster grants from federal agencies such as FEMA and HUD. The end result is expedited recovery via strategic management and planning of the process from start to nish.

© 2016 Ernst & Young LLP.All Rights Reserved.

SCORE no. 03259-161US1608-2014177ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

ey.com

Insurance & Federal Claims Services practice contacts

Allen Melton, Americas Practice Leader

+1 817 706 7108 [email protected]

Bradley (BJ) Nichols +1 617 680 1574 [email protected]

Robert Reeves +1 212 773 1332 [email protected]

Nigel Henley +1 214 969 8627 [email protected]

Matt Jadacki +1 202 327 6807 [email protected]

Joseph Alonso +1 713 750 4940 [email protected]

Michael Herman +1 240 938 8397 [email protected]

Steven Kral +1 202 327 6036 [email protected]

Ken Mallette +1 443 641 7171 [email protected]

Brad McCloskey +1 214 969 9563 [email protected]

Reena Panchal +1 312 879 5491 [email protected]

Jill Powell +1 312 879 4683 [email protected]

Allen Shank +1 214 478 9222 [email protected]

Christopher Siminski +1 214 969 0836 [email protected]

Michael Speer +1 312 879 3782 [email protected]

Marisa Wiethe +1 212 773 4533 [email protected]

Please direct your comments and questions to Michael Speer, editor of Eye on disaster recovery, at +1 312 879 3782 or by email at [email protected]

Eye on disaster recovery - EY - United · PDF file4 | Eye on disaster recovery The Federal...

Documents

Transcript of Eye on disaster recovery - EY - United · PDF file4 | Eye on disaster recovery The Federal...