Legislative audit of Alaska’s $290 million small business coronavirus aid program finds a “high percentage” of grants paid to ineligible recipients, a “much lower than expected” percentage of grants awarded Seriously Inadequate” monitoring post-distribution treatment.
Several lawmakers expressed concern about the auditor’s findings, saying it should be a “learning experience.” State program managers argue they are working as quickly and efficiently as possible in the challenging circumstances of the pandemic. The Alaska Department of Commerce is investigating whether the $1.2 million in grants identified as misused can be recovered.
Small business relief comes from the $1.25 billion federal coronavirus package awarded to Alaska in March 2020. The program was originally designed to pay out $5,000 to $100,000 in grants to small business owners who missed out on federal relief, but the eligibility criteria have changed repeatedly.
Rep. Chris Tuck, an Anchorage Democrat who chaired the Legislative Budget and Audit Committee at the time, called for an audit in early 2021. He said last week that there was a problem with the grant scheme and that it was “written on the wall”.
Legislative auditor Kris Curtis released her 184-page report last Tuesday. She found that of the $290 million, $282 million was disbursed through 5,754 grants, or 97 percent of Alaska’s total small business grants.
Grant distribution was slower than expected. By the end of the second month, only $18 million had been paid instead of $150 million per month. In total, it took more than six months to distribute the grants. The auditors also found high rates of disbursement of “disallowed grants,” meaning recipients were not considered eligible for aid.
To administer the program, the state Department of Commerce has partnered with the state-owned investment company, the Alaska Industrial Development and Export Administration. Two independent contractors were hired to help with grant processing.
Alan Weitzner, executive director of AIDEA, noted that once the online application portal was launched, distribution rates increased significantly. He said the “unprecedented” challenges posed by the COVID-19 pandemic made grant management difficult.
“Overall, we do believe that grant applications were processed as quickly as possible given the impact of the health emergency and the complexity of program guidelines,” he wrote in response to Curtis’ report.
About $7 million of the $290 million is for administrative costs. The final $823,000 was not disbursed as a grant despite 699 applications still pending. Instead, the remaining money was deposited into the state’s unemployment compensation fund.
Commerce Department management could not explain why because key staff members have left, Curtis said.
“Not Allowed” Grants
A random sample of 155 grants found that 39% had at least one error, and 13% were deemed “disallowed”. Some failed eligibility guidelines, others had addresses outside the state, and a commercial fisherman was found to have been awarded two grants.
In the report, Curtis wrote that the rate of problems was high, and that the total amount of misused funds she found was more than $1.2 million. She advised Commercial Commissioner Julie Sande to try to recover the money. Sander wrote in a letter in August that the agency had asked the Legal Department for input on how it should proceed.
“The department will follow any advice and advice from the Legal Department on this matter,” Sand said.
28% of grants went to commercial fishermen after they were qualified, followed by food and tourism at 12.3%. Six percent of the grant, worth $19 million, went to commercial fishermen with a mailing or physical address outside the state, Curtis said.
In her survey, she found that 83 of the 155 recipients she sampled also received federal relief. That’s allowed after eligibility guidelines were expanded, but Tucker believes those who miss out on federal aid should be given priority for state aid.
After the grants were paid, auditors found “no effective way” to ensure they were used for eligible expenses, although AIDEA hired an accounting firm to review the 5% grant.
Grantees were told to upload their information to an online portal within a week. It is said that some people feel that the turnaround is too fast. Others thought the request might have been a scam, or they didn’t understand why they were being asked to submit data to the state again. The company’s review was never completed.
Curtis found that as of March 2021, only one grant recipient had been investigated for potential fraud. She added that a “grossly inadequate” monitoring process meant “there is a high risk of a large number of disallowed grants going undetected.”
To get the money out quickly, two independent contractors were brought in to do the heavy lifting: Credit Union 1 and the Juneau Economic Development Council.
Wetzner said the state-owned investment firm “obviously” needed additional staff in a challenging environment to help with the high volume of applications it expected to receive. Despite the desire for speed, it took 3 1/2 months to get these two contractors hired and working.
Part of the reason, Curtis found, is that the program changes frequently, including some changes in the legislature and changes in guidelines from state law departments. One changed it from a loan to a grant program, while others revised eligibility guidelines and “assessment criteria.” Proceedings challenging these eligibility criteria have created further delays.
Legislative auditors found many problems with the procurement process AIDEA used for contractors. Compliance rules were not followed, some modifications to the contract were not properly announced, and other potential bidders were “discouraged” to apply through the process used.
In his letter to Curtis, Wetzner noted that he was pleased the auditors found AIDEA “generally complied with procurement regulations.” He acknowledged that the contracting process had room for improvement.
“We acknowledge and agree with the report’s view that the procurement process is suboptimal,” he said.
One change that has since been implemented is that AIDEA now has its own procurement team and will not share one with the Alaska Energy Authority. “Procedures have been defined to maintain adequate procurement documentation,” Weitzner added.
Once the grant program was developed, auditors identified inconsistencies in the way it was administered. She found small business owners received money they didn’t apply for, while others received conflicting information when they appealed their rejection letters.
Curtis also found that Credit Union 1 required hundreds of applicants to open accounts in order to receive grants. This created a significant “bottleneck” that required additional staffing before the requirement was later lifted.
“No more shortcuts”
The Alaska legislature adjourned amid debate on how to pay small business benefits. It uses a novel approach to authorize appropriations programs through a legislative committee that doesn’t require lawmakers to reconvene at the state capitol during the pandemic.
A Juneau man sued, saying it violated the state constitution’s appropriation process. The legislature briefly reconvened to approve the rubber-stamp method it used. There is now a general consensus in the State Capitol that the regular appropriation process, including multiple committee hearings and public testimony opportunities, will lead to a better-designed appropriation program in the first place, requiring fewer changes.
For him, Tucker said, the first lesson was “to stop taking shortcuts.” He said he wasn’t asking the audit to “find fingers”, but the issues found could and should have been addressed, even with the many challenges of the pandemic.
“It’s not a comedy of errors,” Tucker added. “This is a tragedy of the wrong. We could have done better for our business — a natively owned business in Alaska. We failed in almost every way.”
Natasha von Imhof, the current chair of the Republican Senator’s Legislative Budget and Audit Committee, said the audit had identified the program’s “strengths and weaknesses” that should serve as a guide to how the country can better A “learning experience” for allocating funds. Short time frame, including implementing standard processes to ensure businesses are in good standing with state and federal governments for relief.
Jon Bittner, executive director of the Alaska Small Business Development Center, said he understood the frustration of lawmakers and those who missed out on funding, but he also wanted the audit to be seen as a learning experience. His agency has helped connect small businesses to federal relief during the pandemic, and he said aid programs at all levels of government are working to get help quickly and efficiently.
Bittner said it’s hard to estimate how many Alaskan small businesses have permanently closed during the pandemic, but in the early stages, it appears that many more will close.
“At the end of the day, I think the message is that they do make a lot of money off the street,” he said. “And it does a lot of good things.”
Wetzner is also looking on the positive side. He was pleased to see auditors finding no conflict of interest issues in the way grants were allocated and that state agencies were able to respond to rapid changes, many of which were beyond their control.
“We are fortunate to look back on the events of 2020 and see that most small businesses in Alaska have survived the unprecedented economic impact of the COVID-19 pandemic,” he said.
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