A legislative audit of Alaska’s $290 million small business coronavirus aid program found “a high rate” of grants paid to ineligible recipients, the rate at which the grants were issued “fell far short of expectations,” and there was a “materially deficient” monitoring process once they were distributed.
Several legislators have expressed concern at the auditor’s findings and say this should be a “learning experience.” State program administrators argued that they worked as quickly and effectively as they could in the challenging circumstances of the pandemic. The Alaska Commerce Department is investigating whether it can recoup $1.2 million identified as misspent grants.
The small business relief came from a $1.25 billion federal coronavirus package appropriated for the state of Alaska in March 2020. It was originally intended to pay grants between $5,000 and $100,000 to small business owners who had missed out on federal relief, but eligibility guidelines changed repeatedly.
Anchorage Democratic Rep. Chris Tuck, then-chair of the Legislative Budget and Audit Committee, asked for the audit in early 2021. He said last week that “the writing was on the wall” that the grant program had problems.
Kris Curtis, legislative auditor, released her 184-page report last Tuesday. She found that $282 million of the $290 million was disbursed through 5,754 grants, or 97% of the total funds appropriated for Alaska small businesses.
The grant distribution rate was slower than predicted. Instead of paying out $150 million per month, only $18 million had been disbursed by the end of the second month. In total, it took over six months to issue the grants. The auditor also found a high rate of “unallowable grants” were paid out, meaning that the recipient was not considered eligible to receive the aid.
To administer the program, the state Commerce Department worked with the Alaska Industrial Development and Export Authority, a state-owned investment corporation. Two independent contractors were brought on to help with the grant processing work.
Alan Weitzner, AIDEA’s executive director, noted that the distribution rate significantly improved once it launched an online application portal. He said the “unprecedented” challenges of the COVID-19 pandemic made administering the grants difficult.
“Overall, we do believe that the grant applications were processed as expeditiously as possible given the impacts of the health emergency and the complexity of the program guidelines,” he wrote in response to Curtis’ report.
Around $7 million of the $290 million went to administration costs. A final $823,000 was not paid as grants despite the fact that 699 applications were still pending. Instead, that leftover money was deposited into the state’s Unemployment Compensation Fund.
Curtis said management at the Commerce Department was unable to explain why because key staff members had left.
A random sampling of 155 grants found 39% had at least one error and 13% were considered “unallowable.” Some failed eligibility guidelines, others had out-of-state addresses and one commercial fisherman was found to have received two grants.
In the report, Curtis wrote that was a high rate of issues and that the misused funds she identified totaled over $1.2 million. She recommended that Commerce Commissioner Julie Sande work to recoup that money. In a letter sent in response in August, Sande wrote that the agency has requested an opinion from the Department of Law about how it should proceed.
“The department will follow any advice and suggestions provided by the Department of Law on this matter,” Sande said.
Twenty-eight percent of grants went to commercial fishermen after they became eligible, followed by the food and travel industry at 12.3%. Six percent of grants, worth $19 million, went to commercial fishermen with out-of-state mailing or physical addresses, Curtis said.
In her investigation, she found that 83 of the 155 grantees she sampled had also received federal relief. That was allowed after eligibility guidelines had been expanded, but Tuck argued that those who had missed out on federal aid should have been prioritized for the state grants.
After the grants were paid, the auditor found there was “no effective means” of ensuring that they were used for eligible expenses, despite AIDEA hiring an accounting firm to review 5% of the grants that were awarded.
The grantees were told to upload their information within a week to an online portal. Some were said to have felt like that was too fast a turnaround. Others felt like that request might be a scam or they didn’t understand why they were being asked to submit their data to the state again. The firm’s review was never completed.
Curtis found that as of March 2021, only one grant recipient had been subject to an investigation for potential fraud. She added that the “materially deficient” monitoring process meant that “there is a high risk that a significant amount of unallowable grant awards went undetected.”
To get the money out quickly, two independent contractors were brought in to the heavy lifting: Credit Union 1 and the Juneau Economic Development Council.
Weitzner said the state-owned investment corporation had “a distinct” need for extra staff in a challenging environment to help with the high number of applications it expected to receive. Despite a desire for speed, it took 3 1/2 months to get those two contractors hired and working.
Curtis found that was partly because of the frequent changes being made to program, including some from the Legislature and others following changing state Department of Law guidelines. One changed it from a loan to a grant program, others amended eligibility guidelines and “evaluation criteria.” A lawsuit challenging those eligibility guidelines caused further delays.
The legislative auditor found numerous issues with the procurement process used by AIDEA for the contractors. Compliance rules were not followed, several amendments to the contract were not properly published, and other potential bidders were “discouraged” from applying through the process used.
Weitzner noted in his letter to Curtis that he was pleased the auditor had found that AIDEA had “generally followed procurement regulations.” He conceded there had been room for improvement with the contracting process.
“We recognize and concur with the report’s observations that the procurement process was not optimal,” he said.
One change that has since been implemented is that AIDEA now has its own procurement team and it won’t share one with the Alaska Energy Authority. “Procedures have been defined to maintain adequate documentation of procurements,” Weitzner added.
Once the grant program had been established, the auditor found inconsistencies in how it was administered. She discovered instances where small business owners received money they didn’t apply for, and others received conflicting information if they appealed a rejection letter.
Curtis also found that Credit Union 1 required hundreds of applicants to open accounts to receive their grants. That created a significant “bottleneck,” which required additional staffing before that requirement was later rescinded.
‘No more shortcuts’
The Alaska Legislature was recessed during debates over how to disburse the small business relief. It used a novel method to authorize the grant program through a legislative committee, which didn’t require legislators to reconvene in the state Capitol during the pandemic.
A Juneau man sued, arguing that violated the state constitution’s appropriations process. The Legislature reconvened briefly to ratify the rubber-stamp approach it had used. There is now widespread agreement in the state Capitol that a regular appropriation process, with multiple committee hearings and public testimony opportunities, would have led to a better-designed grant program at the outset, requiring fewer changes.
Tuck said the first lesson for him is “no more shortcuts.” He said he didn’t ask for the audit to engage in “finger pointing” but that the problems identified could and should have been resolved, even with the many challenges of the pandemic.
“This was not a comedy of errors,” Tuck added. “This was a tragedy of errors. We could have done a much better job for our businesses, locally owned businesses here in the state of Alaska. And we just failed on almost all fronts.”
Republican Sen. Natasha von Imhof, current chair of the Legislative Budget and Audit Committee, said the audit had identified “the strengths and weaknesses” of the program and that it should be used as a “learning experience” for how the state can better distribute funds in a short time frame, including implementing a standard process to ensure businesses are in good standing with the state and federal governments to receive relief.
Jon Bittner, executive director of the Alaska Small Business Development Center, said he understands the frustration from legislators and those who missed out on grants, but he echoed the hopes that this audit is viewed as a learning experience. His agency helped connect small businesses to federal relief during the pandemic, and he said aid programs at all levels of government struggled to get help out quickly and effectively.
It’s hard to estimate how many small Alaska businesses closed permanently during the pandemic, Bittner said, but in its beginning stages, it appeared like many more businesses would fold.
“At the end of the day, I think the message is that they did get a lot of money out of the street,” he said. “And it did a lot of good.”
Weitzner is also looking at the positives. He was happy to see there were no conflict of interest issues identified by the auditor with how the grants were distributed, and that state agencies were able to respond to rapid changes, many of which were outside of their control.
“We are fortunate to be able to look back on the events of 2020 to see that the majority of Alaska’s small businesses survived the unprecedented economic impact of the COVID-19 pandemic,” he said.