Building Federal Budgets

Building Federal Budgets
Illinois ResourceNet
2010
Jay Readey, JD, MBA

Federal Grant Budgeting
Session Objectives: to understand…
The threshold levels of financial management necessary before applying for Federal grants
Direct vs. Indirect Costs
Matching/cost sharing
Allowable Federal rates
Accounting compliance requirements
Budget completion and budget narrative principles

Preparing your grant budget
The starting point is…… your organization’s financial management
Let’s define soundfinancial management
It includes budgeting, creating effective tracking systems and reporting the organization’s financial activity and plans.
When carried out effectively, financial management enables an organization to plan and monitor financial activities, and show that all financial resources are responsibly applied to an organization’s charitable mission.
Source: ACH Region V

Planning and Monitoring:
Thresholds for applying for Federal grants:
Budgeting
Financial recordkeeping
Financial reports
Financial accountability

Budgeting Can you answer yes?
We have an annual organization-wide budget that is monitored (planned vs. actual) every month
The budget includes expenditures for all salaries, services, space, supplies, etc.
The budget includes revenue from all income categories
The board analyzes, discusses, modifies, if necessary, and approves the annual budget

Financial RecordkeepingCan you answer yes?
All financial transactions (i.e. receipts, expenses, deductions, credits, etc.) are recorded in a systematic way
The organization has a computerized bookkeeping system
We track separately fundraising, program and general management expenses and we use a project cost accounting or fund accounting system
Supporting documentation of all financial transactions is systematically filed and retained
Cash balances are reconciled monthly
Person(s) maintaining financial records are knowledgeable and skilled in the area
Financial data is backed up on a regular basis with a copy of electronic data maintained off-site

Financial ReportsCan you answer yes?
We have an established fiscal year for which income and expenses are reported and tracked
We use either a cash or accrual accounting method to report income and expenses
Cash basis: records revenue when money is actually received and records and expenses are paid
Accrual basis: records revenue when earned and expenses when incurred
The ED and board have a clear understanding of finances and review on a regular basis (budget vs. actual)
Financial reports are concise, easy to understand and produced on a timely basis
An annual audit is conducted and reviewed by the board

Financial AccountabilityCan you answer yes?
Board reviews and authorizes major financial commitments
Budget is reviewed prior to any authorization of expenses
The board assures submission of required state, Federal, and other reporting to maintain tax-exempt status (e.g. filing IRS Form 990)
Federal, state and local tax obligations are met
The board assures the organization has the proper insurance coverage
Processes for handling finances and money (“internal controls”) are documented and followed
The use of restricted funds is monitored
Financial statements are reviewed in an independent audit conducted by a CPA

The Grant Budget
Follow the instructions
What can I include in my budget?
Budget MUST follow the program
Allowable Federal costs (this is technical)
OMB Circular A-122 – Allowable costs for nonprofits
Is there a cost-sharing (i.e. match) requirement?
Most grants require a budget narrative
Check, re-check and triple check the math

Dialogue Between Program Staff and Budgeting Personnel
What costs relate to the proposed activities?
Does the program proposal track the requirements of the grant application?
Later: does the budget narrative match the program proposal? (come back and check)
Do other sources pay some of the Direct Costs for the program activities? (more on costs in a moment)

Cost Principles

Cost Principles
Total Costs = allowable direct costs + allowable indirect costs – any applicable credits
Total costs = allowable Federal reimbursement
Direct Costs: costs specifically relating to program activities for purposes of the grant
Question: What would be some examples of Direct Costs?
Question: What might credits be?

Allowability of Costs
Costs must be:
Reasonable (to the performance of the award)
Conforming (to limits in the award)
Consistent (with non-Federal activities of the organization)
Consistent (treated the same over time and across program categories)
Determined in accordance with GAAP
Not included in other Federal awards (no double-dipping)
Adequately documented

Reasonable Costs
Costs are reasonable if they are…
Ordinary and Necessary (for the organization or performance of the award)
Bound by sound and accepted business practices (e.g. arm’s length negotiation)
Incurred by persons acting with prudence in the circumstances
Not SignificantDeviations from established practices
Question: what would be some unreasonable costs?

Allowability of Costs
Question: other examples of unallowable costs?
What would make a cost inconsistent with other non-federal programs?

Unallowable Costs:
Which of the following should be allowed for a federal grant?
Advertising and Public Relations
Alcoholic beverages
Bad debts
Contingency reserves for uncertain events
Contributions to others
Entertainment costs
Capital expenditures
Fines and penalties
Housing as fringe benefits
Interest expenses
Lobbying
Social and country club memberships
Costs of corporate organizing and reorganizing

Allocable Costs
A cost is allocable to a Federal award if it is treated consistently with other costs incurred for the same purpose in like circumstances and if it:
Is incurred specifically for the award;
Can be distributed in reasonable proportion to the benefits if it is allocable both to the award and other work; or
Is necessary to the overall operation of the organization, even if a direct relationship to a cost objective can’t be shown.
Don’t shift costs among Federal awards in order to overcome funding deficiencies, or to avoid restrictions of law or the award!

Direct Costs: More Detail
Direct costs are “those that can be identified specifically with a particular final cost objective”
i.e., a project, service or direct activity of the organization
Not allowed as Direct Costs:
Fundraising Costs
Services to members:
Maintenance of membership rolls
Public information, public relations and lobbying
Meetings and conferences
Investment of funds not used in operations
Administration of group benefits

Indirect Costs
Indirect costs are “those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective
Two broad categories:
Facilities
Administration

Indirect Costs: Facilities
Facilities costs include:
Depreciation and use allowances on buildings, equipment and capital improvements
Interest on debt associated with such capital items, and
Operations and maintenance expenses

Indirect Costs: Administration
Administration costs include:
General administration and general expenses such as the director’s office
Accounting, finance, general counsel, IT support
Administrative personnel & clerical staff
Library expenses, office supplies, postage, local telephone

Indirect Cost Rate: Simple Calculation
Determine portion of organizational expenses attributable to Management & General (M&G)
 Form 990 M&G expense reporting
Fractional ratio for indirect costs:
M&G Total Expense
________________________________________________
Total of Program Expenses + Fundraising Expenses
Numerator is called the “base”, and there are several variants, chosen by the organization

Matching & Cost Sharing

Matching and Cost Sharing
Many grants contain requirements for a non-Federal share
Section 23 of OMB Circular A-110 gives details
Question: What are non-Federal sources?
Specific requirements may obtain for the cash match
Accounting for the non-Federal share
Third party, in-kind contributions and how to value them

Contributions are accepted as matching funds if they are:
Verifiable from records
Not counted as contributions for another Federally-assisted program
Necessary and reasonable for achievement of project objectives
Allowable under applicable cost principles
Not paid for by Federal Government under another award
Identified in the budget

Contributed services and property count:
As valued on the books at donation, or
At current fair market value
Volunteer services count if:
The work would otherwise incur a cost to the organization, valued at prevailing market rates
Ex.: legal, consulting, IT, plumbing
Loaned executive valued at regular rate of pay
Donated property, equipment and buildings shall not be valued at more than FMV at time of donation

Requirements for supporting records:
Cash match must be accounted for separately in fund accounting system
Volunteer Services shall be documented and, if feasible, supported by the same accounting principles that an organization uses for its employees
Basis for determining value of donated goods, services, equipment and property must be documented

Allowable Federal Rates
For some agencies, or some grants, published rates may limit the amount that will be reimbursed by the Federal Government
Example: Department of Education limits indirect rates to 8% of a MTDC base
Example: travel rates can be found at GSA.gov, click on “Per Diem Rates”
Example: Consultant Fees per day
Most other costs are allowable or not based on principles of reasonableness, prudence, and consistency (see “Allow ability of Costs”)

Budget Narratives

Budget Narrative Principles
Describe in detail how grant funds will be allocated and spent in each applicable category
Show:
Basis for computation
Total amount of costs for each category
If applicable, further explanation of how requested costs were determined
Also describe all non-Federal funds that will be used to meet a cost-sharing or matching requirement
Describe sources, contributions by budget category, and how value was determined for in-kind matches

Sample Budget Narrative Principles
Personnel Salaries
List name and title by position
Salary rate x % of time devoted to grant project
Taxes/benefits
List name and title
Compute taxes and benefits by a percentage, with description (again observing time devoted to project)
Travel
Itemize travel expenses by purpose
Observe Federal per diem rates

Training
Show the basis for computation, e.g. a table:
Purpose of training, location, cost per unit, and computation
Expense Items: Printing/Copying, Supplies
List by type; describe sample costs and list computations to arrive at total costs
Equipment
List and describe non-expendable items (e.g. computers) to be purchased with grant funds
Items over $1500 and copiers are not allowed

Rent and Utilities
Include rent (are utilities included? CAM?)
Telephone and Internet service
Show and describe computations of totals
Other
List by type, with calculations; example:

Sample Budget Form
Remember: In the end, it’s not that different from the budgets you know!
This is a sample Education Department Budget
Direct Costs are modified by subtracting equipment and tuition (MTDC), then multiplied by an indirect cost rate (8%)

Questions?hank you!
Jay Readey
jay_readey@yahoo.com

Thank You!

Building Federal Budgets

by Illinois ResourceNet on Nov 15, 2010

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Building Federal Budgets — Webinar Transcript