Building Federal Budgets

www.illinoisresource.net
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 sound financial 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 Recordkeeping
Can 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 Reports
Can 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 Accountability
Can 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 Significant Deviations 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

Principles
• 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

Principles
• 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:
Item Computation Cost
Liability
Insurance
$1,000/year (total)/4.0
FTEs = $250 for 1.0 FTE
x 50% grant allocation
$125
National
Association
Membership
$100/year x 100% $100
Total $225

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%)
Personnel 174,000
Fringe Benefits 50,000
Travel 10,000
Equipment 8,200
Supplies 920
Contractual 4,900
Other
(Tuition)
5,400
Total Direct Costs 253,420
Indirect Costs
(8%)
19,186
Training Stipends 6,300
Total Costs 278,906

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

Thank You!

Building Federal Budgets

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