I have had this appear in my garden at home and it has also appeared in the garden outside my office. (I brought day lillys from home and planted them outside my office two years ago)
It actually looks like an animal was sick and was throwing up. But when I spray it with the garden hose, its like a fine cocoa powder.
I am thinking it is a fungus of some sort? What do you think?
Oh my, your description is very apt, since it appears that you have a classic example of what is commonly known as “Dog Vomit Fungus”. In fact, it is actually slime mould, not a much more attractive name, admittedly!
It is harmless; just ugly. It grows in mulch or on lawns and gardens under very hot, wet conditions, exactly as we have been experiencing this summer.
If your mulch stays steadily wet, you might want to stir it up a bit to let it dry out to prevent more mould growing.
Once the slime mould itself dries out, you can just dig it up and throw it in the garbage. It is more common on the coloured mulches.
Here’s a good discussion of the mould at the University of Guelph web site.