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RREEAADDYY FFOORR DDIISSAASSTTEERR RREECCOOVVEERRYY??
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Government organizations are all too familiar with the
tremendous impact of a disaster like Hurricane Katrina, but
what about disasters that are smaller in magnitude? Whether
it’s local flooding, wildfires, or a tornado, governments have
always had to deal with disaster preparation and recovery.
Recent events, however, have shown just how financially
vulnerable local governments can be when disaster strikes.
A critical step in providing aid to constituents is receiving the
appropriate federal funding,which is often thousands,or hundreds
of thousands of dollars. In order to avoid devastating delays
in receiving funds,the financial manager must understand how
the grants are funded, how to apply for the grant, and most
importantly, how to ensure the costs will be recuperated at the
end of the project. Effective financial preparation means that
local governments are focused on helping those impacted
when disaster strikes – not worrying about how the financial
system will track costs and expenses.
IInnttrroodduuccttiioonn
This document provides local government financial managers
with recommendations for the quick and effective management
and disbursement of emergency funds should disaster strike.
An overview of the historical cost of previous disasters and
funding sources gives insight into the potential magnitude of
devastation for which any government might need to request
or disburse monetary aid. In addition, an overview of the Public
Assistance Grant serves as an example of what financial
managers might expect when requesting, disbursing or
managing disaster grants or funds. Also, a summary of key
disaster accounting elements should be considered by a
financial manager when setting up a financial management
system, particularly reporting and tracking requirements. A
checklist of factors enables financial managers to assess how
financially prepared their organization is for disaster.
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To better understand a local government financial manager’s
role in managing disaster relief funds, it’s important to have a
historical perspective on the government’s role in creating and
disseminating these grants.
In October 2000,Congress instituted the Robert T.Stafford Disaster
Relief and Emergency Assistance Act, which declared that the
federal government must provide“an orderly and continuing
means of assistance”to state and local governments“to alleviate
the suffering and damage which result from disasters.” This Act
provides federal funding to help organizations prepare for disasters
through Disaster Preparedness and Mitigation Assistance, which
is available by grant to states for preparation and training,as well
as for disaster relief through Major Disaster and Emergency
Assistance. A “major disaster” is declared by the President if a
natural catastrophe, such as a hurricane, tornado, or flood, causes
damage of“sufficient severity and magnitude to warrant major
disaster assistance”and an“emergency”is any occasion which
the President determines that “federal assistance is needed
to supplement state and local efforts and capabilities to save
lives and to protect property and public health and safety,
or to lessen or avert the threat of a catastrophe in any part
of the United States.”
The Department of Homeland Security began operations in
March 2003. Following a Presidential declaration of a major
disaster or an emergency, the Federal Emergency Management
Agency (FEMA), which is organized under the Department
of Homeland Security, may award grants for public assistance
to the states.
On November 21, 2003, the Senate passed the Homeland
Security Financial Accountability Act (S.1567) to amend the
Chief Financial Officers Act of 1990. With this amendment, the

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Department of Homeland Security was included as a CFO Act
Agency requiring them to obtain an audit opinion on its
internal controls. As a result, increased financial accountability
required within the Department of Homeland Security results in
more stringent processes in organizations reporting into the
Department, including FEMA. And as the funding trickles down,
so does the requirement for tracking the funds. States seeking
FEMA assistance, or local governments or individual organiza-
tions seeking aid from the state, will be required to
demonstrate accountability for the funds.
FEMA’s monetary disbursement of disaster aid in the past five
years is unprecedented. In 2001, FEMA responded to 50 major
disasters, including the September 11 attacks,Tropical Storm
Allison, the Seattle-Tacoma earthquake, and 15 emergencies
which cost approximately $3.5 billion in disaster relief funds.
The FEMA disaster relief budget in fiscal year 2003 was $3.6
billion, an increase of $3.2 billion over 2002. According to the
Budget of the United States Government for fiscal year 2007,
Hurricanes Katrina and Rita resulted in FEMA distributing more
than $5.7 billion in federal aid, as well as paying more than $12
billion in claims from their National Flood Insurance program
with another estimated $10 billion in additional claims to be
paid out in the next several months. FEMA is providing $79
million in housing subsidies to the Department of Housing and
Urban Development (HUD) with another $390 million for near-
term needed subsidies. The Small Business Administration has
allocated more than $2 billion in disaster loans. And most
recently, though minor in comparison to the Southeast
hurricanes, the California floods in December 2005 and January
2006 resulted in $3.4 million in state and federal assistance.
These are just some of the known and documented figures. As
a result of the longer-term recovery from these disasters, the
final accounting might not be completed for several more years.
Although these tragic events can unexpectedly strike
anywhere, what is unchanging – and has been made a
prominent issue by many FEMA critics – is the need to expend
aid as quickly and efficiently as possible to victims and organi-
zations who offer some type of relief or re-building service.
Funding for disaster recovery is a government priority at every
level. With recent criticism of disaster fund management,
accountability and awareness of how funds are being used
have become essential to ensure loans and grants are allocated
to organizations providing critical recovery services.
Although the responsibility of FEMA to disburse funds and
execute relief plans has been seemingly unchanged since the
adoption of FEMA into the Department of Homeland Security in
March 2003, fund disbursement has become highly scrutinized
because of the disorganized response in the aftermath of
Hurricane Katrina. As a result, the Department of Homeland
Security Inspector General received $15 million in supplemental
funds to increase the oversight of spending for Katrina-related
recovery projects with an additional $11 million budgeted for
fiscal year 2007. This is a strong message from President Bush
that monies spent by and for relief organizations must be
accounted for.
The Public Assistance Grant – A FEMA Relief Fund
The Public Assistance (PA) Grant is only one of many federal
assistance programs that are available for disaster relief (for a
complete list of rules and regulations for all FEMA grants, visit
www.FEMA.gov). The PA grant is a good example of the
requirements for local government finance managers to
support these types of grants.
Upon the declaration by the President of a major disaster or
emergency, FEMA and the Department of Homeland Security
award grants for public assistance to states. The state may then
use the funds to repair or restore its own disaster-damaged
projects, and award subgrants to local governments and select
nonprofit facilities for reparation and relief programs. The state
acts as the grant administrator for all funds provided under the
PA program. The grant administrator’s responsibilities include:
• Providing technical advice and assistance
to eligible subgrantees
• Providing State support for damage survey activities
• Ensuring that all potential applicants are aware
of assistance available
• Submission of documents necessary for grant awards (44
CFR sections 206.200 through 206.349).
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To fulfill the grant requirements, tracking, documentation and
reporting of all costs accrued in the disaster relief must comply
with the guidelines of the individual grant.
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Regardless of which disaster relief grant is being administered,
the primary concern of the financial manager is to be able to
close the books, to ensure project outlays are recovered and to
account for all the funds spent on the relief project. It takes
years to reconcile disaster grants with the potential for them to
be revoked for various reasons, and it is the financial manager’s
responsibility to mitigate the risks as competently as possible.
With thousands or millions of dollars at stake – and the need for
accountability that endures public scrutiny – the fund
accounting system needed to facilitate fulfillment of these
responsibilities must be comprehensive and customizable,
while maintaining prudent processing rules and guardrails to
mitigate errors. It must help managers save time by providing
automated functions and calculations to eliminate errors and
duplicate data entries.The system should allow for multiple
funds to be established with their own set of books so that
designated fund managers can more accurately oversee each
assigned fund. Ideally, tracking the funds through each book
should be seamless with minimal need for repeated log-ins and
re-entry of similar data. In addition, the financial manager
shouldn’t need to expend extra time and money learning a
separate“disaster recovery only”financial module that may or
may not integrate with other components within their
accounting system.
Many government financial applications used today are strong
in some of these functionalities, but not necessarily all of them.
Some applications have extensive reporting capabilities, but
might not be efficient in tracking multiple funds. Others might
be able to track wages and salaries, but cannot support
multiple earnings types or earning codes at the department
and/or supervisor level.
A fund accounting system should aid the financial manager in
administering a disaster relief grant. In these situations,
financial managers will be called upon for:
• Managing the project costs,which entails confirming the costs
are eligible, submitting project worksheets or proposals,
detailed tracking of project costs to confirm completion,
providing documentation or reporting to aid in project audits
• Commitment Account tracking, which ensures funds that
are granted today will not be mistakenly reallocated for
projects that might not be completed for months or years
• Allocation management,which ensures costs are shared across
the project and allocated based on a set of business rules
• Reporting and compliance, which entails meeting the
financial reporting and documentation requirements and
maintaining compliance with the stipulations set forth by
the grant’s source of funding.
Unfortunately, even with all the technical advancements in
weather monitoring and earthquake detection, the events of
the past several years clearly demonstrate the difficulty of
predicting the magnitude of destruction that can be caused by
a natural or manmade disaster. Therefore, it is impossible to
predict when a financial manager will be called upon to start
tracking the cost of damages to adequately apply for disaster
relief aid. But undoubtedly, the last problem anyone would
want to worry about is how to track project costs, whether or
not costs are reimbursable, and which financial management
system should be used to help get the job done.
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WWiitthhssttaanndd DDiissaasstteerrss??
A comprehensive financial management system should offer a
suite of several stand-alone financial software modules that function
both individually to support multiple funds simultaneously, or
fully integrated to create a feature-rich end-to-end fund
accounting system. Many financial systems are designed for the
business world in mind, but the needs of local governments are
different. The financial system should be designed to benefit
and work for governments that have more limited resources,
but require substantial regulated reporting and documentation
not readily available through most commercial software products.
The financial management system should be customizable so
that the various modules can be modified to meet regulated
requirements for both routine accounting and financial
reporting, as well as for the unfortunate – but possible –
occasion when disaster strikes.

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Here are some key disaster recovery functions the financial
management system should facilitate for the financial manager:
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Some of the main summary records to track and required for
disaster relief grant reporting may include personnel costs,
equipment costs, materials taken out of stock or purchased,
rented or leased equipment costs, or contracted work. Data
entry of these costs should be easy to manage with as few
repeat entries as possible to avoid the possibility of errors and
duplicating work. As costs are entered,the financial management
system would ideally allow for categorization and grouping of
funds to facilitate reporting these costs to different audiences
as needed. Regardless of which accounting book is being used
– General Ledger,Accounts Payable,Accounts Receivable,Payroll,
Budgeting, Allocation Management or Fixed Assets – the data
or transactions entered should be captured and updated in
each book automatically as needed.
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As previously mentioned, it can take years to complete the entire
grant cycle, which spans from the time of grant application to
the time the books are closed to actually receiving reimbursement.
As a result, as the project is being completed, multiple reporting
years may need to be tracked to sufficiently document each
expense and cost that will require reimbursement. The financial
manager should also be able to pre-set or modify the fiscal year
for each fund or grant as they may differ from one to the other.
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The ability to manage the allocation of costs and funds should
be integrated with the General Ledger module to ensure that
costs are shared across projects and will produce an audit trail
to facilitate project tracking and reporting. The financial
manager should be able to modify and control the allocation of
indirect costs based on grant or contract-specific indirect cost
rates. The ability to set these costs up to automatically test for
“not to exceed”limits should also be available to reduce the
likelihood of overcharging funding sources.
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The payroll module of the financial management system should
allow for tracking the hours an employee worked,such as straight
or regular salaries and benefits, and the hours which may or may
not be eligible in calculating the cost of eligible work for relief
projects. The ability to allocate employee expenses across multiple
departments, projects or grants should also be available. The
financial management system should be able to accommodate each
of these variables and nuances so that employees who work on
various projects for varying amounts of hours can be easily tracked.
RReeppoorrttiinngg
Each disaster relief grant will have its own specifications on
reporting requirements. Ideally,the financial management system
would have built-in report templates to allow for quick and easy
reporting capabilities at the time of installation. If these reports
are not suitable, the option of creating customized reports for
various audiences, crossing different time periods by using a
method as simple as drag and drop should also be available.
The ability to create reports based on program type, fund type,
grant or contract type or manager should be available with each
of the different accounting books.
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The ability to access financial systems and files is another obstacle
to overcome during a time of crisis. After the initial state of shock
and immediate recovery, managers will want to check on the
state of their business affairs. Whether the managers will be at
their office or somewhere else when an emergency arises, they
will need the ability to access their financial records and data as
soon as possible to ensure the health and well-being of their
employees.For example,they may want to possibly pull up company
employee records for contact information to determine if everyone
is accounted for, or be able to issue checks to ensure that their
employees can be paid. However, access to the financial files
may be problematic if the server that housed the data was
damaged possibly by flood, fire or any other element, or if the
person needed to back up the data files each night had been
actually out for the past week prior to the disaster hitting and forgot
to have someone else do it. These might be extreme circumstances,
but these situations will make it difficult if not nearly impossible
to recover all the necessary data needed to get a business back
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up and running after disaster strikes. To mitigate or avoid losing
critical data and files, and to provide workers and managers
remote access to their systems to recover from a disaster as
quickly as possible, managers are beginning to adopt software
as a service (SaaS) applications. This way, a software provider
houses and safeguards the software through the Web to any
customer who is in need of the software.
CCoonncclluussiioonn
Responding to disasters is challenging enough without
worrying about the financial housekeeping of all expenses
being accrued to provide for the relief efforts, or be concerned
about whether or not the servers were damaged and all the
mission-critical files were destroyed. Tracking material and
labor costs, ensuring costs are properly allocated and paid for,
meeting multi-year reporting requirements and providing
routinely regulated reporting to various audiences are tasks
essential to completing the disaster relief grant cycle.
Taking the time to evaluate the government’s financial system
as part of disaster preparation planning is critical. If and when
disaster strikes your community, careful financial preparation,
including a financial system equipped to receive and account
for emergency funds, saves precious response time. It’s better
to evaluate the accounting system now, rather than in a later
investigation into what went wrong.
The preceding material is not intended as legal advice,including
without limitation relating to any Federal (or State) tax issue,and it
cannot beusedby the recipient,for the purpose of (i) avoiding
penalties under the Internal RevenueCode or (ii) promoting,
marketing or recommending to another party any transaction or
matter addressed herein.
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To find out more ab out how KK ii nn tt ee rr aa FF uu nn dd WW aa rr ee fund accounting sof twa re can help
your government financially prepare for disaster recovery, contact one of our Business
Development Representatives at 880000..555511..44445588..