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CITY OF SALEM, MASSACHUSETTS REPORTS ON FEDERAL AWARD PROGRAMS FISCAL YEAR ENDED JUNE 30, 2005 ---PAGE BREAK--- CITY OF SALEM, MASSACHUSETTS REPORTS ON FEDERAL AWARD PROGRAMS FISCAL YEAR ENDED JUNE 30, 2005 TABLE OF CONTENTS Page Independent auditors’ report on compliance and on internal control over financial reporting based on an audit of financial statements performed in accordance with Government Auditing Standards 1 Independent auditors’ report on compliance with requirements applicable to each major program and internal control over compliance in accordance with OMB Circular A-133 3 Independent auditors’ report on the schedule of expenditures of federal awards 5 Schedule of expenditures of federal awards 6 Notes to schedule of expenditures of federal awards 8 Summary of Auditors’ Results 9 Schedule of findings and questioned costs 10 ---PAGE BREAK--- 1 INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Honorable Mayor and Members of the City Council City of Salem, Massachusetts We have audited the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Salem, Massachusetts, as of and for the fiscal year ended June 30, 2005, which collectively comprise the City of Salem, Massachusetts’ basic financial statements and have issued our report thereon dated October 6, 2005. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether the City of Salem, Massachusetts’ basic financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of basic financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City of Salem, Massachusetts' internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the basic financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the basic financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. However, we noted other matters involving the internal control over financial reporting that we have communicated to the management of the City of Salem, Massachusetts, in a separate letter dated October 6, 2005. ---PAGE BREAK--- 2 This report is intended solely for the information and use of management of the City of Salem, Massachusetts, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. October 6, 2005 ---PAGE BREAK--- 3 INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 To the Honorable Mayor and Members of the City Council City of Salem, Massachusetts Compliance We have audited the compliance of the City of Salem, Massachusetts, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the fiscal year ended June 30, 2005. The City of Salem's major federal programs are identified in the summary of auditors’ results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of the City of Salem's management. Our responsibility is to express an opinion on the City of Salem's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City of Salem's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the City of Salem's compliance with those requirements. In our opinion, the City of Salem, Massachusetts, complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal programs for the fiscal year ended June 30, 2005. However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as item 05-1. Internal Control Over Compliance The management of the City of Salem, Massachusetts, is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City of Salem's internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133. ---PAGE BREAK--- 4 Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts and grants that would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses. This report is intended solely for the information and use of management of the City of Salem, Massachusetts, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. October 6, 2005 ---PAGE BREAK--- 5 INDEPENDENT AUDITORS’ REPORT ON SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS To the Honorable Mayor and Members of the City Council City of Salem, Massachusetts We have audited the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Salem, Massachusetts, as of and for the fiscal year ended June 30, 2005, and have issued our report thereon dated October 6, 2005. Our audit was performed for the purpose of forming opinions on the financial statements that collectively comprise the City of Salem, Massachusetts’ basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by OMB Circular A-133 and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. This report is intended solely for the information and use of management of the City of Salem, Massachusetts, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. October 6, 2005 ---PAGE BREAK--- Federal CFDA Federal Grantor/Program Title Number Expenditures U.S. DEPARTMENT OF AGRICULTURE: Passed through State Department of Education: Food Distribution 10.550 $ 134,729 School Breakfast Program 10.553 186,959 National School Lunch Program 10.555 658,716 TOTAL AGRICULTURE 980,404 U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT: Direct Program: Community Development Block Grant 14.218 1,609,171 CDBG - Brownfields Economic Devel Initiative 14.246 15,680 Passed through North Shore Home Consortium: Home Investment Partnerships Program 14.239 295,158 TOTAL HOUSING 1,920,009 U.S. DEPARTMENT OF JUSTICE: Direct Program: Grants to Encourage Arrest Policies 16.590 64,671 Law Enforcement Trust Fund 16.592 28,401 Local Law Enforcement Block Grant 16.592 8,723 TOTAL JUSTICE 101,795 U.S. DEPARTMENT OF LABOR: Passed through State Commonwealth Corporation: Pathways to Success by 21 17.225 215 Best Initiative - Older Youth 17.267 39,792 Passed through State Division of Career Services: Work Incentive Disability - Wagner Peyser 17.207 29,642 Unemployment Insurance 17.225 8,734 Workforce Investment Act - Adult Program 17.258 374,700 Workforce Investment Act - Youth Activities 17.259 693,004 Workforce Investment Act - Dislocated Worker 17.260 594,144 Workforce Investment Act - Section 173E 17.260 103,043 Workforce Investment Act - Career Center Seminars 17.260 8,071 National Emergency Grant - Citicorp 17.260 596,288 National Emergency Grant - Airlines 17.260 66,584 Workforce Investment Act - Navigator 17.266 57,699 Passed through Community Transportation Association of America: Transportation Access Project 17.261 53,663 TOTAL LABOR 2,625,579 U.S. ENVIRONMENTAL PROTECTION AGENCY: Direct Program: Brownfield Pilot Project 66.811 131,999 (continued) SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE FISCAL YEAR ENDED JUNE 30, 2005 City of Salem, Massachusetts 6 Report on Federal Award Programs ---PAGE BREAK--- Federal CFDA Federal Grantor/Program Title Number Expenditures SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE FISCAL YEAR ENDED JUNE 30, 2005 U.S. DEPARTMENT OF EDUCATION: Direct Program: Teaching American History 84.215X 196,701 Smaller Learning Communities 84.215L 158,086 Bilingual Education: Comprehensive School Grants 84.290 515 Foreign Language Assistance 84.293 59,113 Foreign Language Incentive Program 84.294 4,463 Passed through State Department of Education: Adult Education - State Grant Program 84.002 11,038 Title I Distribution 84.010 1,190,731 SPED 94 - 142 Allocation 84.027 1,054,163 SPED Professional Development 84.027 18,694 SPED - Corrective Action 84.027 11,000 SPED - Mental Health Support 84.027 1,027 SPED - Specialized Training 84.027 3,365 SPED - Program Improvement 84.027 12,868 Vocational Education 84.048 32,151 Title V 84.151 25,871 Emergency Immigration Act 84.162 208 Eisenhower Professional Development 84.164 1,497 SPED - Early Childhood Allocation 84.173 56,618 Drug Free Schools 84.186 24,429 School Support Program 84.218 12,818 Goals 2000 84.276 123 21st CCLC 84.287 130,580 Enhanced Education Through Technology 84.318 78,554 Project Focus 84.323 5,000 Class Size Reduction 84.340 344 Reading First 84.357 296,053 English Language Acquisition Grant 84.365 84,357 Teacher Quality 84.367 283,618 Passed through Town of Rockport: Enhanced Education Through Technology 84.318 17,492 TOTAL EDUCATION 3,771,477 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES: Passed through North Shore Elder Services, Inc: Title IIIB - Special Programs for the Aging 93.044 20,532 Title IIIC - Nutrition Program for the Aging 93.045 62,238 TOTAL HEALTH & HUMAN SERVICES 82,770 CORPORATION FOR NATIONAL AND COMMUNITY SERVICE: Passed through State Department of Education: Learn and Serve School Based 94.004 5,552 U.S. DEPARTMENT OF HOMELAND SECURITY: Direct Program: Assistance to Firefighters 83.554 10,010 Passed through Mass Emergency Management Agency: Snowstorm Assistance 97.036 166,442 State & Local All Hazards 97.051 10,179 TOTAL HOMELAND SECURITY 186,631 TOTAL $ 9,806,216 (concluded) See notes to schedule of expenditures of federal awards. City of Salem, Massachusetts 7 Report on Federal Award Programs ---PAGE BREAK--- Notes to Schedule of Expenditures of Federal Awards Fiscal Year Ended June 30, 2005 City of Salem, Massachusetts 8 Reports on Federal Award Programs Note 1 - Definition of Reporting Entity The accompanying Schedule of Expenditures of Federal Awards presents the activity of all federal financial assistance programs of the City of Salem, Massachusetts. All federal financial assistance received directly from federal agencies as well as federal financial assistance passed through other governmental agencies is included on the schedule. Note 2 - Significant Accounting Policies The accounting and reporting policies of the City of Salem, Massachusetts are set forth below: Basis of Presentation - The accompanying Schedule of Expenditures of Federal Awards is presented on the modified accrual basis of accounting. School Lunch Program - Program expenditures represent federal reimbursement for meals provided during the year. ---PAGE BREAK--- Schedule of Findings and Questioned Costs Fiscal Year Ended June 30, 2005 City of Salem, Massachusetts 9 Reports on Federal Award Programs A. Summary of Auditors’ Results 1. The auditors’ report expresses an unqualified opinion on the basic financial statements of the City of Salem, Massachusetts. 2. No reportable conditions relating to the audit of the financial statements are reported in the Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards. 3. No instances of noncompliance material to the financial statements of the City of Salem, Massachusetts, were disclosed during the audit. 4. No reportable conditions relating to the audit of the major federal award programs is reported in the Report on Compliance with Requirements Applicable to Each Major Program and Internal Control Over Compliance in Accordance with OMB Circular A-133. 5. The auditors’ report on compliance for the major federal award programs for the City of Salem, Massachusetts, expresses an unqualified opinion. 6. There was one audit finding related to federal award programs. 7. The programs tested as major grants include: CFDA Program Title Number Community Development Block Grant 14.218 Workforce Investment Act – Adult Program 17.258 Workforce Investment Act – Youth Activities 17.259 Workforce Investment Act – Dislocated Worker 17.260 Workforce Investment Act – Section 173E 17.260 Workforce Investment Act – Career Center Seminars 17.260 National Emergency Grant – Airlines 17.260 National Emergency Grant – Citicorp 17.260 Teaching American History 84.215X Smaller Learning Communities 84.215L 8. The threshold for distinguishing Types A and B programs was $300,000. 9. The City of Salem, Massachusetts, was determined to be a low-risk auditee. B. Findings-Financial Statements Audit None. ---PAGE BREAK--- Schedule of Findings and Questioned Costs Fiscal Year Ended June 30, 2005 City of Salem, Massachusetts 10 Reports on Federal Award Programs C. Findings and Questioned Costs-Major Federal Award Programs Audit U.S. DEPARTMENT OF EDUCATION 05-1 Teaching American History Grant – CFDA No. 84.215X Smaller Learning Communities Grant – CFDA No. 84.215L Condition and Criteria: The City was not in compliance with Federal Regulations for Cash Management, which requires grantees to follow procedures to minimize the time elapsing between the transfer of funds from the U.S. Treasury and the disbursement of the funds. Additionally, the City was not in compliance with Federal Regulations requiring interest earned on advances by local government grantees to be submitted at least quarterly to the federal agency. Effect: On the Teaching American History Grant, the City requested and received the entire grant of $877,472 in the first year of a three year grant program. The cash was pooled with other City funds in interest-bearing bank accounts. Expenditures on the program totaled $148,853 in year 1 (fiscal year 2004), and $196,701 in year 2 (fiscal year 2005). Consequently, the City accumulated approximately $25,500 in interest revenue which it did not report or remit to the federal awarding agency as required. On the Smaller Learning Communities Grant, the City requested and received $85,000 in year 1 (fiscal year 2004), and $175,000 in year 2 (fiscal year 2005), of a 3 year grant. The cash was pooled with other City funds in interest-bearing bank accounts. Expenditures on the program totaled $44,233 in year 1 and $158,087 in year 2. Consequently, the City accumulated approximately $2,000 in interest revenue which it did not report or remit to the federal awarding agency as required Cause: The City does not have procedures in place to minimize the time elapsing between the transfer of funds from the U.S. Treasury and disbursement of the funds. Specifically, when requesting a draw of funds from the U.S. Treasury, the City is required to certify that the funds will be expended within 3 days of receipt. This certification was required for the transfer to take place. The funds were then not expended within 3 days and were not returned to the grantor. Questioned Costs: Approximately $27,500 Auditor’s Recommendation: We recommend the City return the unreported interest earnings to the awarding federal agencies. We also recommend the City adopt procedures to minimize the time elapsing between the transfer of funds from the U.S. Treasury and the use of the funds for program purposes.