State and local cost principles full participant manual


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Slide materials for Central Ohio AGA August 6th 2012 training

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State and local cost principles full participant manual

  1. 1. Understanding and Complying withOMB Cost Principles for Grants and Other Agreements to State and Local Governments Charles W. Hester CPA, FCPA, CFF, CFE, CFS, CGFM
  2. 2. This course will cover • Cost principles –Determining Allowable Costs –Cost Allocation Plans –Indirect Cost Proposals 5/27/2012 1 OMB Guidelines STATE & LOCAL EDUCATION NON-PROFIT TITLE GOVERNMENTS INSTITUTIONS ORGANIZATIONSUniformAdministrative A-102Requirements for “Common Rule” A-110 A-110Cost Principles for A-87 A-21 A-122Cost AllocationPlans and IndirectCost Rates for ASMB C-10 OASC-1 OASMB-5Audits of A-133 A-133 A-133 5/27/2012 2 Organization of C.F.R. Title 2 • Subtitle A – Government-wide Guidance for Grants and Agreements – Chapter I – [Reserved] – Chapter II – Office of Management and Budget Circulars and Guidance • Subchapter A – General Matters – Part 1 – General • Subchapter B – OMB Circulars • Subchapter C – Other Guidance Documents • Subtitle B – Federal agency regulations for grants and agreements – Chapter III and following – Each Federal agency will establish a chapter under Subtitle B for its regulations on grants and agreements 5/27/2012 3 1
  3. 3. Revised OMB Guidelines State & Local Educational Non-Profit Title Governments Institutions OrganizationsUniform A-102Administrative “Common Rule” 2 CFR 2 CFRRequirements for: 2 CFR TBD Part 215 Part 215Cost Principles 2 CFR 2 CFR 2 CFRfor: Part 225 Part 220 Part 230Cost AllocationPlans and Indirect ASMB C-10 OASC-1 OASMB-5Cost Rates for: A-133 A-133 A-133Audits of: 2 CFR TBD 2 CFR TBD 2 CFR TBD 5/27/2012 4 OMB Uniform Cost Principles Under Federal Grants and Other Agreements to State and Local Governments Charles W. Hester CPA, FCPA, CFF, CFE, CFS, CGFM 5/27/2012 5 OMB Circular A-87 • Cost principles for state and local governmental units – Revision dated May 4, 1995 – Amended August 29, 1997 – Revised May 10, 2004 5/27/2012 6 2
  4. 4. A-87 has five attachments• A - General Principles• B - Selected Items of Cost• C - State/Local Central Service Cost Allocation Plans• D - Public Assistance Cost Allocation Plans• E - State/Local Indirect Cost Rate Proposals5/27/2012 7 OMB Circular A-87, Attachment A General Principles for Determining Allowable Costs5/27/2012 8 Establishes general principles• Grants, cost-type contracts• Indirect cost rates/allocations• Does not mandate Federal funding• Does not cover profit5/27/2012 9 3
  5. 5. Basic premises• Grantees must manage efficiently• Grantees must administer Federal funds in accordance with rules• Grantees set their own organization• Agencies will work with grantees to test new systems5/27/2012 10 Test of Allowability• Necessary and reasonable• Allocable• OK under state/local laws• Consistent treatment• OK under GAAP• Not cost sharing/matching• Net of applicable credits• Adequately documented5/27/2012 11 Reasonableness• Prudent person rule• Ordinary and necessary• Sound business practices• Arms-length bargaining• Use established practices5/27/2012 12 4
  6. 6. Allocability• Charges relate to benefits• All activities are charged a fair share• Cannot reallocate to avoid restrictions• Can reallocate if OK under either program• Indirect costs, use proper attachment5/27/2012 13 Applicable Credits• Reductions of expenses (discounts, credits, insurance refunds, etc.)• Must reduce costs claimed• Some amounts received from Federal agencies may be credits• Credits do not include income items5/27/2012 14 Total costs• Direct + Indirect (less credits)• No one rule for classification• Must be consistent5/27/2012 15 5
  7. 7. Direct costs• Identified with final cost objective, such as: – Salaries of persons working on project – Materials acquired for project – Materials used on project – Approved capital expenditures5/27/2012 16 Indirect costs• Common or joint purpose• Not readily assignable• Minor items, if treated consistently• Allocation plan can be simple or complex• May be limited by law5/27/2012 17 Interagency services• Services provided by one agency to another• May include indirect costs• Can use standard 10% rate5/27/2012 18 6
  8. 8. Grantee must certify cost allocation plan• Certify costs are acceptable• CFO or higher certifies• If not certified: – Agency can disallow all indirect – Agency can develop its own rate5/27/2012 19 OMB Circular A-87, Attachment B Selected Items of Cost5/27/2012 20 Covers 43 cost categories• Lists them individually• Excellent reference• We will not discuss every item5/27/2012 21 7
  9. 9. Always unallowable costs• Alcohol• Bad debts• Contingencies• Contributions• Entertainment• Fund raising• Under-recovery on other Federal grants5/27/2012 22 Compensation for personnel services• Rules changed in 1995 revision• Salary plus fringe benefits generally OK• Must be reasonable, treated consistently5/27/2012 23 Fringe benefits include time not worked• Cash basis - charge when paid• When employment terminates, payments for leave are indirect costs• Can accrue leave costs: – Must conform to GAAP – Allowable is lesser of accrued or funded5/27/2012 24 8
  10. 10. Pension plan costs• Pay-as-you-go is OK• Accrual is OK too, provided: – Use actuarial method – Fund within 6 months of year-end – Agency can extend 6-month period• Can convert to accrual if amortize the unfunded liability• Agency gets share of credits5/27/2012 25Post-retirement health benefits• Similar rules to pensions• Current funding must be paid to insurer or trustee5/27/2012 26 Severance pay• Must be required by law, agreement or policy• Charged as general indirect cost• Mass severance pay allowable only if approved5/27/2012 27 9
  11. 11. Support for salaries• Work only on single indirect cost activity – Regular payroll records sufficient• Work only on single Federal project – Semi-annual certification – Signed by employee or immediate supervisor• Work on multiple activities – Requires more extensive support5/27/2012 28 Work on multiple activities• After-the-fact distribution• Consider total work time• Report every month, signed by employee• Budget estimates only for interim charges• Agency can approve statistical techniques5/27/2012 29 Donated services• Unallowable as direct or indirect• Can meet cost sharing• Indirect costs allocated to them• Same kind of support as salaries5/27/2012 30 10
  12. 12. Depreciation and use allowance • Compensate for use of fixed assets • Use acquisition cost or use FMV if donated • Must be supported by property records 5/27/2012 31 Depreciation • Must analyze data to determine rate • Can separate components from building • Cannot change method without approval • Can claim use allowance on fully depreciated assets 5/27/2012 32 Use allowances• Real property - allowance is 2% – Cannot separate components from building• Equipment - allowance is 6-2/3% – Can separate affixed equipment from building 5/27/2012 33 11
  13. 13. General governmental costs are unallowable• Governor, state legislature, judiciary, etc.• Agency may approve travel costs related to specific award5/27/2012 34 Insurance costs• Generally OK• Self-insurance fund OK – But must be properly set up• Uninsured losses are unallowable – Deductible amounts are OK5/27/2012 35 Interest• Generally unallowable• Building-related interest after October 1, 1980, is OK• Negotiation required if interest plus depreciation exceeds grantee disbursements• Interest on equipment is OK5/27/2012 36 12
  14. 14. Rental costs• Generally OK• Only cost of ownership allowed – Sale and leaseback arrangements – Less-than-arms-length lease5/27/2012 37 Taxes• OK if legally required to pay• Effective January 1, 1998: – Not OK if self-assessed and disproportionate effect on Federal programs5/27/2012 38 Travel• Generally OK• Must conform to grantee’s policies• If no policy, use Federal rules• First or business class unallowable• Costs limited to commercial rates5/27/2012 39 13
  15. 15. OMB Circular A-87, Attachment C State/Local-Wide Central Service Cost Allocation Plans 5/27/2012 40 What are central service CAPs? • Some units serve other units – For example, motor pool, computer center, etc. • CAP provides process to distribute charges • Plan based on agency’s accounting records • OMB and DHHS guide available 5/27/2012 41 Submission requirements• Prepare annually, 6 months after year-end• Submit to Cognizant Federal Agency• Show actual for last year• Show estimates for next year• Grantees monitor sub-grantees 5/27/2012 42 14
  16. 16. Presentation is complex• Obtain OMB and DHHS guide• Obtain training in cost allocation plans• Contact Cognizant Agency representative• CFO or higher must certify5/27/2012 43 OMB Circular A-87, Attachment D Public Assistance Cost Allocation Plans5/27/2012 44 Allocates cost of state public assistance agency• Agency administering public assistance programs• Programs include Child Welfare Services, Family Preservation & Support Services, Food Stamps, etc.• Plan covers all administrative costs• DHHS sets the rules5/27/2012 45 15
  17. 17. Plan submission and approval• State agencies submit to DHHS• DHHS acts for all Federal agencies• DHHS approves or disapproves• State updates as necessary• Support is primarily narrative (logic)• “Single Audit” should cover CAPs5/27/2012 46 OMB Circular A-87, Attachment E State and Local Indirect Cost Rate Proposals5/27/2012 47 Indirect costs• Not assignable to individual function• Include costs of department or agency• Include costs from central service CAP• Usually charged via a rate5/27/2012 48 16
  18. 18. Developing indirect cost rates• Complex process• OMB and DHHS have issued a guide• Obtain training before you try one• Objective is to allocate costs reasonably5/27/2012 49 Two possible methods• Simplified method – Unit has one major function, or – All major functions benefit proportionally• Multiple allocation base method – Indirect costs benefit major functions in varying degrees5/27/2012 50 Simplified method• Classify all costs as direct or indirect• Exclude capital expenditures and unallowable costs• Divide indirect costs by equitable base• Base can be total direct costs, total direct salaries and wages, etc.• Apply rate to each program5/27/2012 51 17
  19. 19. Multiple allocation base method• Group costs that can be allocated together• Use as many groups as necessary – But keep to practical limits• Allocate each group by appropriate measure• Base must be equitable• Base must be common to all functions5/27/2012 52 Develop a single indirect cost rate• Allocate each pool to every major function• Total the indirect costs for each function• Determine the overall base (see simplified method)• Divide pool by base5/27/2012 53 Special indirect cost rate• Sometimes a program is unique, e.g.: – It uses special services – It is located in unusual facilities – It requires unusual level of support• If so, a special rate may be best• May be required because of legal limits – Restricted rate5/27/2012 54 18
  20. 20. Submission of proposal• Submit it to cognizant agency• Due 6 months after year-end• Otherwise maintain proposal until requested• “Common Rule” establishes retention period5/27/2012 55 Documentation of proposal• Reconcile all data to formal accounting records• Central service costs should tie to CAP• Provide support for the allocation base(s)• Provide organization chart and functional statements• CFO or higher must certify5/27/2012 56Negotiation and approval of rates• Cognizant agency reviews and negotiates• All other Federal agencies will accept rates• Results of negotiations will be written• Can be reopened if major problem found• Fringe benefit rates can be negotiated5/27/2012 57 19
  21. 21. Summary• Indirect cost rates can be complex• Get training before you try to develop them• With training, you can do it• Remember, use your common sense 5/27/2012 58 Audit Requirements for Agreements • Selected definitions • Audit threshold requirements • Allowable audit costs • Program-specific audits • Cognizant agency responsibilities 5/27/2012 59 So what is different under ARRA? • American Recovery and Reinvestment Act of 2009 (Pub. Law 111-5) – Division A – Appropriations Provisions – Division B – Tax, Unemployment, Health, State Fiscal Relief, and Other Provisions • 407 pages – about $790 billion in discretionary and formula-based program funds! • Effective April 23, 2009 5/27/2012 60 20
  22. 22. Purpose of ARRA• Increase or extend certain benefits payable under Medicaid, unemployment compensation and nutrition assistance programs.• Spur clean energy, encourage science and technology research.• Modernize transportation infrastructure, expand health care and improve education.5/27/2012 61 Other unique provisions of ARRA• Established an oversight board of inspectors general called the Recover Accountability and Transparency Board (RAT Board) – To ensure recipients of Recovery Act funds are transparent and accountable.• Created, a searchable Web site that will allow the public to see how Recovery Act funds are spent. – Unlike 62 ARRA funds must be issued and spent quickly• Recipients must obligate all formula and discretionary fund within one year from the date the funds become available for obligation. – Must expend at least 60 percent of grant funds within two years of the date they become available. – Must expend 100 percent of the funds within one additional year. • Awarding agencies will recapture any funds that fail to be obligated or expended with these time limits.5/27/2012 63 21
  23. 23. White House mandate to Federal Agencies• Develop and use merit-based selection criteria to choose grant projects. – Projects that deliver programmatic results; achieve economic stimulus by creating and saving jobs; achieve long-term public benefits; and satisfy transparency and accountability objectives. • Funds may not be used for “imprudent projects,” such as a casino, aquarium, zoo, golf course or swimming pool.5/27/2012 64 Office of Management and Budget (OMB) Guidance• M-09-21 – Implementing Guidance for the Reports on Use of Funds Pursuant to the ARRA, June 22, 2009• M-09-18 – Payments to State Grantees for Administrative Costs of ARRA Activities, dated May 11, 2009• M-09-16 – Interim Guidance Regarding Communications With Registered Lobbyists About ARRA Funds, dated April 7, 2009• M-09-15 – Updated Implementing Guidance for ARRA, dated April 3, 20095/27/2012 65 ARRA requirements differ from traditional grant management practices.• Grant objectives – must provide measurable outcomes and promote ARRA goals of job creation and preservation.• Competition – promote to the maximum extent practicable. – Also maximize local hiring and opportunities for small businesses.• Existing grants – may consider, but must track and account for Recovery funds separately.5/27/2012 66 22
  24. 24. ARRA requirements differ - continued• Award timeliness – applicants and sub- recipients must obtain Dun and Bradstreet Universal Number System (DUNS) numbers and register with the Central Contractor Registration (CCR).• Catalog of Federal Domestic Assistance Numbers – Recovery Act projects must have new CFDA numbers (ARRA prefix).5/27/2012 67 One additional difference!• The terms and conditions of Recovery Act grants must state that each grantees and sub-grantees should promptly refer to an appropriate inspector general “any credible evidence that a principal, employee, agent, contractor, sub-grantee, sub- contractor or other person submitted a false claim or has committed a criminal or civil violation of laws pertaining to fraud, conflict of interest, bribery, gratuity or similar misconduct involving Recovery Act funds.”5/27/2012 68 Federal Agencies Awarding Stimulus Funds Must Meet New Rules - Immediately• Federal agencies have already begun posting Recovery Act grants on• Federal agencies have developed agency- wide and program-specific plans.• Federal agencies must issue weekly financial reports for Recovery Act funds.5/27/2012 69 23
  25. 25. Grantees Receiving Stimulus Funds Must Meet New Rules - Immediately• New terms and conditions, which are being located in a newly created 2 CFR Part 176, require recipients to provide the following information: – The name of the project or activity; – The total amount of recovery funds received; – The amount of recovery funds spent on the project or activity; – A description of the project or activity; – An estimate of the number of jobs created and/or retained; and – The purpose, total cost and rationale for State and local governments making infrastructure investments.5/27/2012 70Sub-Grantees Receiving Stimulus Funds Must Meet New Rules - Immediately• Data includes elements required to comply with the Federal Funding Accountability and Transparency Act (P.L. 109-282) including: – Sub-recipients name; – Amount of the award; – Transaction type; – Funding agency; – CFDA number; – Program source; – Location of the entity receiving the award and the primary place of performance; – A unique identifier of the entity receiving the awarded and the parent entity of the recipient; and – Names and total compensation for the five most highly compensated officers of the entity. • If the entity received 80% or more of its annual gross revenue in Federal awards and $25 million or more in annual gross revenue from Federal awards.5/27/2012 71 Other New Rules that Must be Met Immediately• Recipients involved in public buildings or public works projects: – Use American iron, steel and manufactured goods, unless specified exemptions applies (non-availability of materials, unreasonable costs or inconsistent with public interest). – Payment of Davis-Bacon wage rates to laborers and mechanics, unless specified exemptions applies.5/27/2012 72 24
  26. 26. Administrative Requirements• OMB Circular A-102 Common Rule for State, local governments and Pacific Insular Area and OMB Circular A-110 (2 CFR Part 215) for educational institutions, non-profit organizations and hospitals. – But remember, certain deadlines, such as financial reporting due dates differ under ARRA. – Also Recovery Act waives some matching and cost-sharing requirements.5/27/2012 73 Other Provisions• ARRA funds shall be used to supplement, not supplant, current program funding.• Federal agencies may adjust limits on administrative expenditures for Federal awards to help recipients defray the cost of data collection and oversight.• Environmental reviews under the National Environmental Policy Act must be completed5/27/2012 74 Single Audit Requirements• Grantees and sub-grantees that expend $500,000 or more annually in Federal financial assistance must have a single audit or program- specific audit performed under OMB Circular A-133 and the Compliance Supplement. – Federal agencies will perform risk analysis of Recovery Act programs and request the OMB to designate any high-risk program as a major program requiring a single audit.5/27/2012 75 25
  27. 27. Remember the RAT Board• Inspectors general will use risk assessment techniques to identify high-risk programs and entities to be targeted for priority audits, inspections, and investigations. – AGA’s Financial and Administrative Monitoring Tool, February 2009 – AGA’s Risk Assessment Monitoring Tool, February 2009 – ACFE’s Fraud Prevention Check-up5/27/2012 76 ARRA Recipient Reporting• Prime recipients are responsible for reporting on their use of funds as well as any sub-awards they make. – Requirements only apply to prime recipients funds through discretionary appropriations, not those receiving funds through entitlement or other mandatory programs.5/27/2012 77 Devil is always in the details?• Recipients of ARRA funds are required to submit reports to the centralized Federal reporting portal ( by October 10, 2009, followed by quarterly reports due 10 days after the end of each calendar quarter. – Recipients must also have their July 10th quarterly financial reports data ready for the October submission.5/27/2012 78 26
  28. 28. Report Contents• Recipients must report on the number and types of jobs created and retained by the program, using full-time equivalent estimates. – “Jobs created” is defined as those new positions created or filled, or previously existing unfilled positions that are filled, as a result of ARRA funding. – “Jobs retained” is defined as these previously existing filled positions that are retained as a result of ARRA funding.5/27/2012 79 So, where is OMB going?• OMB is seeking suggestions for modifying grant rules – Requested in Federal Register on February 28, 2012 – Submit comments by March 29, 2012 – Request covered many areas Request can be found at: 80 Purpose is to improve grant administration• Strengthen oversight of Federal grant dollars• Increase efficiency and effectiveness by eliminating unnecessary and duplicative requirements• OMB has developed a number of ideas for reform that could impact virtually all Title 2 requirements and OMB Circulars that affect grants and other agreements5/27/2012 81 27
  29. 29. Refers to Executive Order 13563• Intended to improve regulation and regulatory review• Agencies should confer with stakeholders before proposing new rules• Agencies should coordinate efforts• Agencies should try to reduce burdens on the public• Agencies should review existing rules to see which should be eliminated or changed5/27/2012 82 OMB presents reform ideas for comment in three areas• Audit Requirements• Cost Principles• Administrative Requirements5/27/2012 83 Ideas for modifying Single Audits• Change threshold – No audits required if Federal funds are below $1 million – More focused Single Audit for entities expending less than $3 million • Review allowable costs • Plus one other compliance requirement5/27/2012 84 28
  30. 30. Additional ideas for Single Audits• Streamlining requirements• Emphasizing – Improper payments – Waste, fraud, and abuse – Program performance5/27/2012 85 Strengthening guidance for audit follow-up• Establish senior position for audit resolution• Require agencies to develop audit-risk metrics• Encourage agencies to take a pro-active approach5/27/2012 86 Reducing burdens on pass- through entities• Require Federal agencies to follow up on findings that are not specific to sub- awards• Pass-through entities would no longer have to resolve financial and internal control issues5/27/2012 87 29
  31. 31. Ideas for reforming Cost Principles• Consolidating Cost Principles into a single document – Some variations by entity• Using flat rates instead of negotiated rates for indirect costs – OMB seeks input of an approach that would prevent “gaming” the system5/27/2012 88 More ideas for Cost Principles• Exploring alternative to time-and-effort reporting• Expanding application of Utility Cost Adjustment for research at universities• Charging directly allocable administrative support as a direct cost• Allowing some computing devices as direct cost supplies5/27/2012 89 Even more ideas for Cost Principles• Clarifying threshold for residual value of supplies• Eliminating requirement to conduct cost studies for large research facilities• Eliminating restrictions on use of indirect cost recovered for depreciation• Providing non-profits with examples of indirect cost proposals• And many more ….5/27/2012 90 30
  32. 32. Ideas for reforming Administrative Requirements• Creating one set of Administrative Requirements• Agencies must consider each proposal’s merit and applicants financial risk• Require agencies standard format and 90-day notice of funding opportunities• Reiterate that information collection requests are subject to Paperwork Reduction Act5/27/2012 91 OMB raised some overarching questions• Which suggestions would increase or decrease your workload?• Which would be most or least valuable to you?• Any ideas you don’t want implemented?• Any other reform ideas that OMB should consider?5/27/2012 92 31