[Audit Report on West River/Lyman-Jones Rural Water System, Mni Wiconi Rural Water Supply Project, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-519

Title: Audit Report on West River/Lyman-Jones Rural Water System,
       Mni Wiconi Rural Water Supply Project, Bureau of Reclamation

Date:  June 1,1999



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U.S. Department of the Interior
Office of Inspector General


AUDIT REPORT
WEST RIVER/LYMAN-JONES RURAL WATER SYSTEM,
MNI WICONI RURAL  WATER SUPPLY PROJECT,
BUREAU OF RECLAMATION


REPORT NO. 99-I-519

MAY 1999






MEMORANDUM


             TO:  The Secretary

           FROM:  Robert J. Williams
                  Acting Inspector General

SUBJECT SUMMARY:  Final Audit Report - "West River/Lyman-Jones
                  Rural Water System, Mni Wiconi
                  Rural Water Supply Project,
                  Bureau of Reclamation" (No. 99-i-519)

Attached for your information is a copy of the subject final
audit report. The objectives of the audit were to (1) determine
whether the costs incurred by West River/Lyman-Jones Rural Water
Systems, Inc., to plan, design, and construct its portion of the
Bureau of Reclamation's Mni Wiconi Rural Water Supply Project
were expended in  accordance with Federal law, regulations, and
funding agreements and (2) identify the source of any incurred or
projected cost overruns.  The audit was one of four audits of
non-Federal sponsors of the Project, including Systems, Inc.  The
results of the audits of the other Project sponsors will be
presented in separate reports.  The audit of the Project was
performed at the request of three members of the Congress.

We found that costs incurred by Systems, Inc., for planning,
designing, and constructing the West River/Lyman-Jones Rural
Water System were generally expended in accordance with the Mni
Wiconi Act of 1988, as amended; Federal regulations; and the
terms of the cooperative agreements between the Bureau of
Reclamation and Systems, Inc.  We also found that no cost overrun
was projected for the System. However, Systems, Inc.'s charges to
the cooperative agreements included (1) general and
administrative expenses that should have been assigned to
operations and maintenance or were overstated and (2)
construction costs that were reimbursed by the National Park
Service.  Specifically, we estimated that recorded System
expenditures were overstated by $319,956 for 1996 and 1997 for
general and administrative expenses which should have been
allocated to operations and maintenance, by $63,000 for general
and administrative expenses which were reimbursed by a related
entity, and by $555,943 for costs which were reimbursed by the
National Park Service.  As a result, we classified costs totaling
$938,899 as cost exceptions.

In its response, the Bureau agreed with the report's four
recommendations to address these issues. Based on the response,
we considered all of the recommendations resolved but not
implemented.

If  you have any questions concerning this matter, please contact
me at (202) 208-5745.

Attachment

cc: Assistant Secretary for Water and Science
Assistant Secretary for Indian Affairs
Commissioner, Bureau of Reclamation
Chief of Staff
Deputy Commissioner for Indian Affairs
Office of Communications





AUDIT REPORT                             W-IN-BOR-004-98(D)-R


Memorandum

     To:  Assistant Secretary for Water and Science

   From:  Robert J.  Williams
          Assistant Inspector General for Audits

Subject:  Audit Report on West River/Lyman-Jones Rural Water
          System, Mni Wiconi Rural Water Supply Project,
          Bureau of Reclamation (No. 99-i-519)

INTRODUCTION

This report presents the results of our audit of the West
River/Lyman-Jones Rural Water System,[1] which is part of the Mni
Wiconi Rural Water Supply Project, located in South Dakota.  The
objectives of the audit were to (1) determine whether the costs
incurred by West River/Lyman-Jones Rural Water Systems, Inc., to
plan, design, and construct its portion of the Project were
expended in  accordance with Federal law, regulations, and
funding agreements and (2) identify the source of any incurred or
projected cost overruns.  The audit was one of four audits of
non-Federal sponsors of the Mni Wiconi Project, including
Systems, Inc.  The results of the audits of the other Project
sponsors will be presented in separate reports.  The audit of the
Mni Wiconi Project was performed at the request of three members
of the Congress.

BACKGROUND

The Mni Wiconi Project Act of 1988 (Public Law 100-516)
authorized and directed the Secretary of the Interior to
construct the Mni Wiconi Rural Water Supply Project to provide a
safe and adequate municipal, rural, and industrial water supply
for both Indian and non-Indian residents of South Dakota.  The
Act authorized construction of the Oglala Sioux Rural Water
Supply System to serve the Oglala Sioux Tribe on the Pine Ridge
Reservation and the West River and Lyman-Jones Rural Water
Systems, which were merged into one system in 1994, known as the
West River/Lyman-Jones Rural Water System, to serve the residents
of seven counties in South Dakota.[2]  The Mni Wiconi Act
Amendments of 1994 (Title 8 of Public Law 103-434) added the
construction of the Rosebud Sioux and the Lower Brule Sioux Rural
Water Systems to serve the respective reservations, thereby
increasing the number of Project sponsors to four.  The
Amendments also raised the authorized appropriation ceiling for
the Mni Wiconi Project from $87.5 million to $263.2 million,
subject to indexing,[3] and provided that the Project would
generally be constructed in accordance with the Project's "Final
Engineering Report," dated May 1993.

The Act, as amended, authorized the Secretary to enter into
cooperative agreements with the three tribes, subject to the
provisions of the Indian Self-Determination and Education
Assistance Act (Public Law 93-638), as amended, to provide funds
for planning, designing, constructing, operating, maintaining,
and replacing their respective water systems.  Section 4 of the
amended Act also authorized the Secretary to enter into
cooperative agreements and provide funds for planning, designing,
and constructing the West River/Lyman-Jones Rural Water System
and provided that Systems, Inc., is responsible for a 20 percent
share of these costs.  In addition, Systems, Inc., is solely
responsible for the  costs of operating, maintaining, and
replacing the System.  The Bureau of Reclamation serves as the
oversight agency for the Project, with the authority and
responsibility to enter into cooperative agreements and to
provide the technical and administrative oversight necessary to
complete the planning, design, and construction of the Project.

The overall Project includes a water treatment plant, 4,500 miles
of pipeline, 60 booster pump stations, and 35 water storage
reservoirs.  The Project will ultimately serve more than 50,000
people, including more than 40,000 Indians on the three
reservations.

In its May 1998 "Master Plan,"[4] the Bureau estimated that the
total cost to complete the Project would be $387 million, or $60
million more than the indexed Project cost of $327 million.  The
projected overrun was attributable to the Oglala Sioux and the
Lower Brule Sioux Rural Water Systems.  In the "Master Plan," the
Bureau also estimated that at current funding levels,[5] the $327
million would not be fully appropriated until 2006.  However, the
authorization to appropriate funds for the Project expires in
2003.  According to Bureau data, as of September 30, 1998, the
Bureau had allocated Federal funds of $107.5 million to Project
sponsors, including $4.3 million for Bureau administrative and
oversight charges.

The West River/Lyman-Jones Rural Water System as authorized
includes more than 2,700 miles of pipeline.  The cost of the
System, originally estimated at $64.5 million, was indexed in the
"Master Plan" to $81.9 million (October 1999 dollars), which
consisted of a Federal share of $66.1 million and Systems, Inc.'s
contributions of $15.8 million.  As of September 30, 1998, about
$17 million (26 percent of the $66.1 million Federal share) had
been allocated, about $12 million of which had been expended,
with an additional $8 million expended as Systems, Inc.'s
contribution, for total expenditures of $20 million.

SCOPE OF AUDIT

Our fieldwork included a review of Systems, Inc.'s expenditures
from November 12, 1993, through September 30, 1998, and was
performed at the offices of Systems, Inc., in Murdo, South
Dakota, and Systems, Inc.'s accounting firm in Rapid City, South
Dakota.  To meet our audit objectives, we reviewed the Mni Wiconi
Act, as amended; three cooperative agreements and the water
service agreement between the Bureau and Systems, Inc.;
construction contracts; the contract between the National Park
Service and Systems, Inc.; minutes of Board of Directors
meetings; and engineering and single audit reports.  In addition,
we interviewed officials from the Bureau's field office in
Pierre, South Dakota; Systems, Inc.; Systems, Inc.'s accounting
firm and engineering consulting firm; the National Park Service's
Office of Operations Engineering in Denver, Colorado; and
Badlands National Park in South Dakota.

Our analysis of the financial status of the System was based on a
review of expenditures, cost estimates, and other financial and
planning data available as of September 30, 1998.  As such, our
conclusions regarding any actual or projected cost overrun may be
affected by subsequent events concerning the cost and design of
the System.  These events include modifications to, additions to,
and deletions of construction components; revisions of cost
estimates based on current data; increases in authorized Project
costs attributable to cost indexing; and efforts by the Bureau
and Systems, Inc., to implement cost-saving measures. In that
regard, the Bureau issued a draft Cost Containment Report in
December 1998, which includes various options for reducing
Project costs.

Our audit was conducted in accordance with the "Government
Auditing Standards," issued by the Comptroller General of the
United States.  Accordingly, we included such tests of records
and other auditing procedures that were considered necessary
under the circumstances to accomplish our audit objectives.  As
part of our audit, we reviewed the Secretary's Annual Statement
and Report to the President and the Congress, required by the
Federal Managers' Financial Integrity Act, for fiscal years 1994
and 1995; the Departmental Reports on Accountability for fiscal
years 1996 and 1997, which include information required by the
Act; and the Bureau's annual assurance statements on management
controls for fiscal years 1997 and 1998.  Based on these reviews,
we determined that no material weaknesses were reported which
directly related to the objectives and scope of our audit.

We also reviewed the single audit reports for Systems, Inc.'s
fiscal years 1994 through 1997 and the certified public
accountant's working papers for fiscal year 1997.  The 1997
single audit report identified a material internal control
weakness relating to "a lack of segregation of duties resulting
from the size of the staff"[6] and recommended that Systems,
Inc., continue its review of the monthly financial statements and
"attain as much segregation of duties as feasible."  The manager
of Systems, Inc., stated that expenses are approved by the Board
of Directors, all checks require two signatures, and monthly
financial statements are reviewed by him and by the Board.  We
concluded that this explanation was reasonable, considering the
small size of Systems, Inc.'s staff.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the Office of Inspector General
nor the General Accounting Office has issued any reports on the
Mni Wiconi Rural Water Supply Project.  However, an Office of
Inspector General audit report issued in May 1995 addressed
grants for rural water projects administered by the Bureau of
Reclamation's Great Plains Region.  The audit included an
evaluation of transactions executed under the cooperative
agreements between the Bureau and Systems, Inc.  The report
"Grants for Rural Water Projects, Great Plains Region, Bureau of
Reclamation" (No. 95-I-947) stated that the Bureau needed to
improve its processes for monitoring project costs to preclude
funding activities that are ineligible for Federal reimbursement.
The report did not contain any recommendations but suggested that
the Bureau review the costs charged to rural water projects,
including Systems, Inc., to ensure that only costs allowable
under the regulations were charged to the Mni Wiconi Project.

In August 1996, the Bureau completed an on-site review of the
three cooperative agreements between the Bureau and Systems,
Inc., which included a review of the propriety of non-Federal
costs and overhead allocations.  The Bureau reported that the
non-Federal costs and the overhead allocations were properly
accounted for.  However, during our audit, we found that Systems,
Inc's general and administrative expenses,[7] which should have
been allocated between System construction and operations and
maintenance, were assigned solely to System construction, thus
resulting in System construction costs being overstated.  This
condition is addressed in the Results of Audit section of this
report, and our recommendations, if implemented, should correct
this condition.

**FOOTNOTES**

[1]:The System is being constructed by West River/Lyman-Jones
Rural Water Systems, Inc., which is a nonprofit entity
established under the laws of the State of South Dakota.

[2]:The seven counties are Haakon, Jackson, Jones, Lyman,
Mellette, Pennington, and Stanley.

[3]:Indexing is the process of updating the Congressionally
authorized appropriation ceiling of a project for changes
generally attributable to economic factors, usually inflation.

[4]:The "Master Plan" established the construction schedule for
each segment of the Project and documented historical and
projected costs to enable the Bureau and Project sponsors to
track the status of the Project.  The Plan also enabled the
Bureau and Project sponsors to estimate the effect of changes in
annual appropriations and prices on the construction schedule.
The Plan projected a Project construction ceiling of $327
million, indexed through October 1999, as presented in Bureau
budget documents for fiscal year 2000.  The Plan also included a
breakdown of this ceiling for individual Project sponsors.  The
total estimated Project costs of $387 million were based on
information provided by Project sponsors.  The Bureau plans to
periodically update the Plan.

[5]:In fiscal years 1996 through 1998, Federal funding levels for
the Project averaged about $25 million.

[6]:The office staff consists of the manager, a
bookkeeper/secretary, and a billing clerk.

[7]:According to Part 31, Section 001, of the Federal Acquisition
Regulation, a general and administrative expense is any
management, financial, and other expense that is incurred by or
allocated to a business unit for the general management and
administration of the business unit as a whole.

RESULTS OF AUDIT

We found that costs incurred by West River/Lyman-Jones Rural
Water Systems, Inc., for planning, designing, and constructing
the West River/Lyman-Jones Rural Water System were generally
expended in accordance with the Mni Wiconi Act of 1988, as
amended; Federal regulations; and the terms of the cooperative
agreements between the Bureau of Reclamation and Systems, Inc.
We also found that no cost overrun was projected for the System.
However, we found that Systems, Inc.'s charges to the cooperative
agreements included (1) general and administrative expenses which
should have been assigned to operations and maintenance or were
overstated and (2) construction costs which were reimbursed by
the National Park Service.  The Mni Wiconi Act, as amended, and
the cooperative agreements require that Systems, Inc., pay a 20
percent share of the cost of its System and that operations and
maintenance costs not be reimbursed or used to meet the 20
percent cost-sharing requirement.  In addition, the agreements
incorporate, by reference, Office of Management and Budget
Circular A-110, "Uniform Administrative Requirements for Grants
and Agreements With Institutions of Higher Education, Hospitals,
and Other Non-Profit Organizations," which states that funds
received by an entity under another Federal grant or other
agreement cannot be used to meet that entity's non-Federal
cost-sharing requirement, and Office of Management and Budget
Circular A-122, "Cost Principles for Nonprofit Organizations,"
which states that  for a cost to be allowable it "must . . . not
be included as a cost . . . of any other federally financed
program in either the current or a prior period."  The manager
and the consulting engineer of Systems, Inc., stated that (1) all
general and administrative expenses were assigned to System
construction because they both believed that the administrative
expenses allocable to operations and maintenance were minimal and
(2) funds reimbursed by the Park Service were considered to be
"late sign-up fees."  As a result, we classified costs totaling
$938,899 as cost exceptions (see Appendix 1).  Specifically, we
estimated that recorded System expenditures were overstated by
$319,956 for 1996 and 1997 (see Appendix 2) for general and
administrative expenses that should have been allocated to
operations and maintenance, by $63,000 for general and
administrative expenses that were reimbursed by a related  entity
(West River Water Development District), and by $555,943 for
costs that were reimbursed by the Park Service.

General Compliance

We found that Systems, Inc., generally complied with the Act, as
amended, and the terms of the cooperative agreements.
Specifically, as of September 30, 1998, Systems, Inc., had
contributed $8 million for its share of the System's costs, which
represented 40 percent of the $20 million expended as of that
date.  As such, Systems, Inc., was on schedule to meet its
overall 20 percent cost-sharing requirement.  In addition,
Systems, Inc., had established a group of accounts to segregate
operations and maintenance costs (which are not funded under the
cooperative agreements) from construction costs and generally had
not included operations and maintenance costs in requests for
funds except as discussed in the section "General and
Administrative Expense Allocation."  Further, the Bureau, based
on information provided by Systems, Inc., projected that the
System's total costs would be $78.9 million, or $3 million less
than the indexed costs of $81.9 million.  Based on our analysis
of expenditures for completed construction, contracts for
construction in progress, and projected changes, we estimated
that if the System is completed as currently designed and within
the revised cost estimates as determined by our audit, the
System's costs would be approximately $72.3 million, or about
$9.6 million less than its indexed costs of $81.9 million and
$6.6 million less than the $78.9 million cost projected by the
Bureau (see Appendix 3).

General and Administrative Expenses

Although Systems, Inc., generally did not include direct
maintenance costs in its charges to the System, it
inappropriately charged the System for all general and
administrative expenses, some of which should have been assigned
to operations and maintenance.  Cooperative Agreement No.
0-FC-60-01550, dated May 18, 1990, and Cooperative Agreement No.
4-FC-60-04090, dated March 11, 1994, state that Systems, Inc.,
"may incur such reasonable administrative costs that are
allocable to work pursuant to . . . [the] agreement[s]."
However, Systems, Inc., assigned all of its general and
administrative expenses ($314,578 in 1996 and $374,289 in 1997)
to the System and none to the operations and maintenance
function, even though construction had been completed for several
segments of the System.  Both the manager of Systems, Inc., and
the consulting engineer stated that they thought that the costs
allocable to operations and maintenance would be minimal and that
only the salary of the employee who billed the water users should
be assigned to operations and maintenance.  They also stated that
as more construction was completed, the costs assignable to
operations and maintenance would increase.  Based on our review,
we believe that additional costs are allocable to operations and
maintenance.  For example, all salary and expenses for the
manager of Systems, Inc., and per diem and other expenses for the
Board of Directors are charged to general and administrative
expenses, which are charged to the System, even though the
manager's and the Board of Directors' responsibilities are not
all construction related. Systems, Inc.'s General Policy states:

The Manager's primary functions are to provide adequacy of the
physical system in relation to the needs of existing and
potential consumers, the budgeting of all resources, developing
and maintaining an operating program designed to keep the
Corporation service to its members at maximum efficiency through
the maintenance of lines and services and adequate power supply.

Systems, Inc., had not developed a method for allocating general
and administrative expenses. Accordingly, we used two different
bases for estimating general and administrative expenses
applicable to operations and maintenance for fiscal years 1996
and 1997 (see Appendix 2).  Using salaries as a basis for
allocation, we estimated that general and administrative expenses
of $319,956 would have been allocated to operations and
maintenance for this period. Using total construction costs and
total operations and maintenance costs as a basis for allocation,
we estimated that general and administrative expenses of $328,068
would have been allocated to operations and maintenance for this
period.  Accordingly, we classified general and administrative
expenses of $319,956[8] as cost exceptions.  An allocation was
not made for 1998 because the 1998 costs were not available at
the completion of our fieldwork.  In addition, an allocation was
not made for years prior to 1996 because Systems, Inc., had not
established separate accounts for construction and operations and
maintenance.

Further, general and administrative expenses were overstated by
$63,000 for the period 1994 through 1997 for expenses erroneously
charged to the System.  Systems, Inc., provided services to and
was reimbursed by the West River Water Development District, but
Systems, Inc., did not reduce the charges to the System.

We believe that the Bureau should work with Systems, Inc., to
develop an equitable basis for allocating general and
administrative expenses and should monitor the costs reimbursed
under the agreements to ensure that general and administrative
expenses are properly allocated between construction and
operations and maintenance.

National Park Service Reimbursement

In December 1993, the National Park Service contracted with
Systems, Inc., to design and construct a water line to the nearby
Badlands National Park in South Dakota.  The contract as modified
contained 10 modifications, including 7  modifications that
involved funding increases  totaling $555,943 as of September 18,
1996.  The other three  modifications did not provide additional
funding but cumulatively extended the contract term to September
30, 1999, while the National Park Service awaited funding to
complete the work.  Systems, Inc., included costs of the work
completed for the Park Service as part of the construction of the
Creighton and Kadoka segments of the System.  The Creighton
segment included about 4.5 miles of additional pipeline to extend
the water line to Badlands National Park, while the Kadoka
segment increased the size of the lines to accommodate service to
the Park.  Systems, Inc., received payments totaling $555,943
from the Park Service between December 1993 and April 1997 for
the work performed.

The cooperative agreements require that all payments made by the
Bureau to Systems, Inc., be in accordance with Office of
Management and Budget Circulars A-110 and A-122. Subpart
C.23(a)(5) of Circular A-110 states that an entity receiving
funds under another Federal grant or other agreement cannot use
these funds to meet non-Federal cost-sharing requirements.  In a
May 19, 1994, letter to the Bureau, Systems, Inc., requested
approval to use the funds paid by the Park Service to help meet
the non-Federal cost-sharing requirements.  In its July 11, 1994,
response, the Bureau stated that these funds could not be used
for cost sharing because the construction would be funded by the
Park Service and not under the cooperative agreement.  Circular
A-122 states that for a cost to be allowable, it "must . . . not
be included as a cost . . . of any other federally financed
program in either the current or a prior period."  However, the
cost of work completed for the Park Service was recorded in the
System's costs.  As a result, the System's costs were overstated
by $555,943, and we classified this amount as a cost exception.

We discussed the inclusion of these costs with the engineering
consultant, who stated that the Park Service's costs were
recorded as the System's costs because, although not funded under
the cooperative agreement, these costs were part of the costs of
Systems, Inc.'s rural water systems.  However, the engineering
consultant agreed that these costs should not have been included
as costs to be reimbursed by the Bureau.  Bureau personnel said
that the information provided by Systems, Inc., was not
sufficient for the Bureau to determine whether the Park Service's
costs were included in the requests for funds made by Systems,
Inc.  We also discussed the inclusion of the Park Service's costs
with the manager of Systems, Inc., who stated that he considered
the revenues from the Park Service to be "late sign-up fees."[9]
The engineering consultant said that he and the manager agreed
that the System's costs would be reduced by the amount received
from the Park Service.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation:

1. Instruct officials of West River/Lyman-Jones Rural Water
Systems, Inc., to determine an equitable method for allocating
past and future general and administrative expenses between
System construction and operations and maintenance.

2. Instruct officials of West River/Lyman-Jones Rural Water
Systems, Inc., to reallocate to operations and maintenance an
equitable share of general and administrative expenses and adjust
their accounting records accordingly.

3. Instruct officials of West River/Lyman-Jones Rural Water
Systems, Inc., to reduce recorded System expenditures for the
amount of the reimbursement received from the West River Water
Development District and from the National Park Service.

4. Monitor costs reported by West River/Lyman-Jones Rural Water
Systems, Inc., to ensure that corrective actions are taken so
that future System construction costs claimed are eligible for
Federal funding under Federal law, regulations, and cooperative
agreements.

Bureau of Reclamation Response and Office of Inspector General
Reply

In the May 25, 1999, response (Appendix 4) to the draft report
from the Commissioner, Bureau of Reclamation, the Bureau
concurred with the four recommendations.  Based on the response,
we consider the recommendations resolved but not implemented.
Accordingly, the unimplemented recommendations will be referred
to the Assistant Secretary for Policy, Management and Budget for
tracking of implementation.

Since the report's recommendations are considered resolved, no
further response to the Office of Inspector General is required
(see Appendix 5).

The legislation, as amended, creating the Office of Inspector
General requires semiannual reporting to the Congress on all
audit reports issued, the monetary impact of audit findings
(Appendix 1), actions taken to implement audit recommendations,
and identification of each significant recommendation on which
corrective action has not been taken.

We appreciate the assistance of Bureau and Systems, Inc.,
personnel in the conduct of our audit.

**FOOTNOTES**

[8]:The amount classified as a cost exception represents the
lower of the two estimates.

[9]:Systems, Inc.'s policy was to charge a fee, which it termed a
"late sign-up fee," to customers who contracted for water service
after the System had been designed.  The fee included the cost of
the additional construction required to accommodate the customer.


APPENDIX 1


CLASSIFICATION OF MONETARY AMOUNTS


-----------------------------------------
|                             |Questioned
|Finding                      | Costs
|                             | (Cost
|                             |Exceptions)
-----------------------------------------
General and Administrative Expense
-----------------------------------------
Allocation*             |    $319,956
-----------------------------------------
District Reimbursement  |      63,000
-----------------------------------------
National Park Service          555,943
-----------------------------------------
Total                 |       |$938,899
-----------------------------------------


*We used two different bases for estimating general and
administrative expenses applicable to operations and maintenance
for fiscal years 1996 and 1997 (see Appendix 2).  The questioned
costs represent the lower of the two estimates.  However, as
recommended in the report, Systems, Inc., needs to determine an
equitable method for allocating general and administrative
expenses and adjust its records accordingly.

APPENDIX 2


GENERAL AND ADMINISTRATIVE EXPENSE ALLOCATION
BASED ON CONSTRUCTION AND OPERATIONS AND MAINTENANCE SALARIES AND
ON TOTAL CONSTRUCTION AND OPERATIONS AND MAINTENANCE COSTS


-----------------------------------------------------------
Allocation Based on Salaries[1]
-----------------------------------------------------------
|       |General    |                    |
|       | and       | Construction       |Operations and
|Fiscal |Administrative|                 | Maintenance
|Year   |Expenses   |                    |
|       |  To       |                    |
|       |  Be       |                    |
|       |Allocated[2]|                   |
-----------------------------------------------------------
|Percent    |Amount  |Percent     |Amount
|  To       |Allocated| To        |Allocated
|  Be       |        |  Be        |
                                   |Allocated  |
|Allocated   |
-----------------------------------------------------------
1996     $296,578    59.14   $175,396     40.86    $121,182
-----------------------------------------------------------
1997      356,289    44.21      157,515   55.79     198,774
-----------------------------------------------------------
Two-    |                       |                     |
year    |$652,867               |$332,911             |$319,956
Total   |                       |                     |
-----------------------------------------------------------


Allocation Based on Total Construction Costs and
Operations and Maintenance Costs[3]
-----------------------------------------------------------
|       |General    |                    |
|       | and       | Construction       |Operations and
|Fiscal |Administrative|                 | Maintenance
|Year   |Expenses   |                    |
|       |  To       |                    |
|       |  Be       |                    |
|       |Allocated2 |                    |
-----------------------------------------------------------
|Percent    |Amount  |Percent     |Amount
|  To       |Allocated| To        |Allocated
|  Be       |        |  Be        |
|Allocated  |        |Allocated   |
-----------------------------------------------------------
1996     $296,578    63.24   $187,556     36.76    $109,022
-----------------------------------------------------------
1997      356,289    38.52      137,243   61.48     219,046
-----------------------------------------------------------
Two-    |                       |                     |
year    |$652,867               |$324,799             |$328,068
Total   |                       |                     |
-----------------------------------------------------------

**FOOTNOTES**

[1]:Percentages used for cost allocations based on salaries were
obtained by adding construction salaries and operations and
maintenance salaries obtained from Systems, Inc.'s general
ledgers for fiscal years 1996 and 1997 and dividing each category
by the total.

[2]:General and administrative expenses to be allocated were
based on the total general and administrative expenses remaining
for each year after excluding expenses of $18,000 for which
Systems, Inc., was reimbursed by the West River Water Development
District.

[3]:Percentages used for allocations based on total costs were
obtained by adding total construction costs, except for contract
costs, and total operations and maintenance costs obtained from
Systems, Inc.'s general ledgers for fiscal years 1996 and 1997
and dividing each category by the total.

APPENDIX 3
Page  1  of  2


----------------------------------------------------------------
WEST RIVER/LYMAN-JONES RURAL WATER SYSTEM
ESTIMATED COST PER AUDIT
BASED ON MAY 1998 "MASTER PLAN"*
----------------------------------------------------------------
|              |Estimated|       |        |         |
|              |System   |       |        |Revised  |
|              |Cost     |Additions|Deletions|Estimates|
|Description   |Per      |Per    |Per     |Per      |Comments
|              |Master   |Audit  |Audit   |Audit    |
|              |Plan     |       |        |         |
----------------------------------------------------------------
Creighton    | $2,936,876        $243,948 $2,692,928Creighton
Area
Service      |                                construction costs
Area        |                                      included
$243,948
|                                      that was reimbursed
|                                      by the Park
|                                      Service.
----------------------------------------------------------------
Elbon        | 3,719,312 $2,809           3,722,121 Completed
Service      |                             construction costs
Area        |                                  were more than
|                                                  estimated.
----------------------------------------------------------------
Kadoka and   | 3,511,731         203,174  3,308,557 Kadoka Area
Grindstone  |                                      construction
costs
North       |                                      included
$203,174
|                                      that was reimbursed
|                                      by the Park
|                                      Service.
         -------------------------------------------------------
Grindstone   | 1,884,210 18,721           1,902,931 Completed
South        |                                      construction
costs
Service     |                                      were more than
Area        |                                      estimated.
-----------------------------------------------------------------
Reliance     | 1,325,000         5,554        1,319,446 Completed
North        |                                 construction costs
and South   |                                      were less than
|                                                      estimated.
         --------------------------------------------------------
Ft. Pierre-  | 1,451,000 364,353          1,815,353 Vivian and
Vivian
Vivian/      |                                      North were
combined
Vivian      |                                      into one
contract
North       |                                      for
$1,815,353.
----------------------------------------------------------------
Administration|839,000   42,500            881,500   Still under
and         |                                      construction.
Maintenance |
Building    |
----------------------------------------------------------------
Mellette     | 4,582,000        2,613,9501,968,050 Some Mellette
County       |                                       County West
West        |                                      customers
declined
|                                      service.  In
|                                      addition, Parmalee
|                                      North and South and
|                                      Cedar Butte were
|                                      combined and bid as
|                                      one contract.
----------------------------------------------------------------
Mellette     | 5,835,337                 5,835,337 Scheduled for
County       |                                      construction
in
East        |                                      fiscal years
1998-
|                                      2000.
----------------------------------------------------------------


*The Bureau of Reclamation estimated construction and noncontract
costs of $78.9 million, indicating that the System could be
constructed for $3 million less than indexed System costs of
$81.9 million.  Based on our audit of completed construction and
updated costing information obtained from Systems, Inc.'s manager
and the consulting engineer, we estimated System costs to be
about $72.3 million, or $9.6 million less than the indexed cost.
The reduction results in a revised Federal share of $57.8
million.  Because the "Master Plan" was prepared by the Bureau,
the fiscal year schedule for construction ends September 30.


APPENDIX 3
Page  1  of  2

----------------------------------------------------------------
Kennebec       2,022,696                  2,022,696 Scheduled for
North                                               construction
in
fiscal year 2000.
-----------------------------------------------------------------
Draper Area    4,409,237                  4,409,237 Scheduled for
construction in
fiscal years 2000-
2001.
-----------------------------------------------------------------
Okaton Area    2,698,490                  2,698,490 Scheduled for
construction in
fiscal years 2001-
2002.
-----------------------------------------------------------------
Presho Area    6,361,741                  6,361,741 Scheduled for
construction in
fiscal years 2002-
2003.
-----------------------------------------------------------------
Four Corners | 4,523,070                  4,523,070 Scheduled for
Area        |                                      construction
in
|fiscal years 2003-
|                                      2004.
-----------------------------------------------------------------
Midland Area   3,344,026                  3,344,026 Scheduled for
construction in
fiscal years 2004-
2005.
-----------------------------------------------------------------
Midland/Philip|2,848,007                  2,848,007 Scheduled for
Area        |                                      construction
in
|                                      fiscal year 2005.
-----------------------------------------------------------------
Philip/Wall    3,427,015                  3,427,015 Scheduled for
Main                                                construction
in
fiscal year 2006.
-----------------------------------------------------------------
City           5,500,000         2,500,0003,000,000 Current
estimates
Connections for city connections are less than originally
estimated.
-----------------------------------------------------------------
Subtotal/System|$61,218,748$428,383$5,566,626$56,080,505
Construction|
-----------------------------------------------------------------
Non-contract
$17,712,364$123,931$1,610,425$16,225,870Adjustments are
Costs                                           based on applying
the rate used by Systems, Inc., in the "Master Plan."
The rate used is 28.93 percent.
         --------------------------------------------------------
Total     | |$78,931,112|$552,314|$7,177,051|$72,306,375
Costs     | |         |       |        |
-----------------------------------------------------------------
Federal        $64,110,561                $57,845,100The $57.8
million
Share                                               was
calculated based on 80 percent of the revised estimates.
-----------------------------------------------------------------
Systems,     | $14,820,550                $14,461,275The $14.5
million
Inc.'s       |                                     was calculated
Share       |                                 based on 20 percent
                      |                            of the revised
                      |                                estimates.
-----------------------------------------------------------------


*The Bureau of Reclamation estimated construction and noncontract
costs of $78.9 million, indicating that the System could be
constructed for $3 million less than indexed System costs of
$81.9 million.  Based on our audit of completed construction and
updated costing information obtained from Systems, Inc.'s manager
and the consulting engineer, we estimated System costs to be
about $72.3 million, or $9.6 million less than the indexed cost.
The reduction results in a revised Federal share of $57.8
million.  Because the "Master Plan" was prepared by the Bureau,
the fiscal year schedule for construction ends September 30.


APPENDIX 4
Page  1  of  3


*The Bureau of Reclamation estimated construction and noncontract
costs of $78.9 million, indicating that the System could be
constructed for $3 million less than indexed System costs of
$81.9 million.  Based on our audit of completed construction and
updated costing information obtained from Systems, Inc.'s manager
and the consulting engineer, we estimated System costs to be
about $72.3 million, or $9.6 million less than the indexed cost.
The reduction results in a revised Federal share of $57.8
million.  Because the "Master Plan" was prepared by the Bureau,
the fiscal year schedule for construction ends September 30.


APPENDIX 4
Page  1  of  3


*The Bureau of Reclamation estimated construction and noncontract
costs of $78.9 million, indicating that the System could be
constructed for $3 million less than indexed System costs of
$81.9 million.  Based on our audit of completed construction and
updated costing information obtained from Systems, Inc.'s manager
and the consulting engineer, we estimated System costs to be
about $72.3 million, or $9.6 million less than the indexed cost.
The reduction results in a revised Federal share of $57.8
million.  Because the "Master Plan" was prepared by the Bureau,
the fiscal year schedule for construction ends September 30.


APPENDIX 4
Page  1  of  3


*The Bureau of Reclamation estimated construction and noncontract
costs of $78.9 million, indicating that the System could be
constructed for $3 million less than indexed System costs of
$81.9 million.  Based on our audit of completed construction and
updated costing information obtained from Systems, Inc.'s manager
and the consulting engineer, we estimated System costs to be
about $72.3 million, or $9.6 million less than the indexed cost.
The reduction results in a revised Federal share of $57.8
million.  Because the "Master Plan" was prepared by the Bureau,
the fiscal year schedule for construction ends September 30.


APPENDIX 4
Page  1  of  3

APPENDIX 5


STATUS OF AUDIT REPORT RECOMMENDATIONS


Finding/Recommendation
Reference

Status

Action Required
1, 2, 3, and 4
Resolved; not implemented.
No further response to the Office of Inspector General is
required.  The recommendations will be referred to the Assistant
Secretary for Policy, Management and Budget for tracking of
implementation.


*The Bureau of Reclamation estimated construction and noncontract
costs of $78.9 million, indicating that the System could be
constructed for $3 million less than indexed System costs of
$81.9 million.  Based on our audit of completed construction and
updated costing information obtained from Systems, Inc.'s manager
and the consulting engineer, we estimated System costs to be
about $72.3 million, or $9.6 million less than the indexed cost.
The reduction results in a revised Federal share of $57.8
million.  Because the "Master Plan" was prepared by the Bureau,
the fiscal year schedule for construction ends September 30.



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