Slide materials for Central Ohio AGA August 6th 2012 training

1. Understanding and
Complying with
OMB Cost Principles
for Grants and
Other Agreements
to State and Local
Governments
Charles W. Hester
CPA, FCPA, CFF, CFE, CFS, CGFM

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 ORGANIZATIONS
Uniform
Administrative A-102
Requirements for “Common Rule” A-110 A-110
Cost Principles for A-87 A-21 A-122
Cost Allocation
Plans and Indirect
Cost Rates for ASMB C-10 OASC-1 OASMB-5
Audits 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
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1

3. Revised OMB Guidelines
State & Local Educational Non-Profit
Title Governments Institutions Organizations
Uniform A-102
Administrative “Common Rule” 2 CFR 2 CFR
Requirements for: 2 CFR TBD Part 215 Part 215
Cost Principles 2 CFR 2 CFR 2 CFR
for: Part 225 Part 220 Part 230
Cost Allocation
Plans and Indirect ASMB C-10 OASC-1 OASMB-5
Cost Rates for:
A-133 A-133 A-133
Audits of: 2 CFR TBD 2 CFR TBD 2 CFR TBD
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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
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2

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
Proposals
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OMB Circular A-87,
Attachment A
General Principles for
Determining
Allowable Costs
5/27/2012 8
Establishes general principles
• Grants, cost-type contracts
• Indirect cost rates/allocations
• Does not mandate Federal funding
• Does not cover profit
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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 systems
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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 documented
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Reasonableness
• Prudent person rule
• Ordinary and necessary
• Sound business practices
• Arms-length bargaining
• Use established practices
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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 attachment
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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 items
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Total costs
• Direct + Indirect (less
credits)
• No one rule for classification
• Must be consistent
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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 expenditures
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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 law
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Interagency services
• Services provided by one agency
to another
• May include indirect costs
• Can use standard 10% rate
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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 rate
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OMB Circular A-87,
Attachment B
Selected Items of Cost
5/27/2012 20
Covers 43 cost categories
• Lists them individually
• Excellent reference
• We will not discuss every item
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9. Always unallowable costs
• Alcohol
• Bad debts
• Contingencies
• Contributions
• Entertainment
• Fund raising
• Under-recovery on other Federal grants
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Compensation for personnel
services
• Rules changed in 1995 revision
• Salary plus fringe benefits
generally OK
• Must be reasonable, treated
consistently
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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 funded
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8

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 credits
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Post-retirement health benefits
• Similar rules to pensions
• Current funding must be paid to
insurer or trustee
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Severance pay
• Must be required by law,
agreement or policy
• Charged as general indirect cost
• Mass severance pay allowable only
if approved
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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 support
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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
techniques
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Donated services
• Unallowable as direct or indirect
• Can meet cost sharing
• Indirect costs allocated to them
• Same kind of support as salaries
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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
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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
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Use allowances
• Real property - allowance is 2%
– Cannot separate components from
building
• Equipment - allowance is 6-2/3%
– Can separate affixed equipment from
building
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13. General governmental costs
are unallowable
• Governor, state legislature,
judiciary, etc.
• Agency may approve travel costs
related to specific award
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Insurance costs
• Generally OK
• Self-insurance fund OK
– But must be properly set up
• Uninsured losses are unallowable
– Deductible amounts are OK
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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 OK
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14. Rental costs
• Generally OK
• Only cost of ownership allowed
– Sale and leaseback arrangements
– Less-than-arms-length lease
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Taxes
• OK if legally required to pay
• Effective January 1, 1998:
– Not OK if self-assessed and
disproportionate effect on
Federal programs
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Travel
• Generally OK
• Must conform to grantee’s policies
• If no policy, use Federal rules
• First or business class unallowable
• Costs limited to commercial rates
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15. OMB Circular A-87,
Attachment C
State/Local-Wide
Central Service
Cost Allocation Plans
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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
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16. Presentation is complex
• Obtain OMB and DHHS guide
• Obtain training in cost allocation
plans
• Contact Cognizant Agency
representative
• CFO or higher must certify
5/27/2012 43
OMB Circular A-87,
Attachment D
Public Assistance
Cost Allocation Plans
5/27/2012 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 rules
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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 CAPs
5/27/2012 46
OMB Circular A-87,
Attachment E
State and Local
Indirect Cost Rate
Proposals
5/27/2012 47
Indirect costs
• Not assignable to individual
function
• Include costs of department or
agency
• Include costs from central service
CAP
• Usually charged via a rate
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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
reasonably
5/27/2012 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 degrees
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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 program
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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 functions
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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 base
5/27/2012 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 rate
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20. Submission of proposal
• Submit it to cognizant agency
• Due 6 months after year-end
• Otherwise maintain proposal until
requested
• “Common Rule” establishes
retention period
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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 certify
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Negotiation 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 negotiated
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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
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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
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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 Recovery.gov, a searchable Web site
that will allow the public to see how
Recovery Act funds are spent.
– Unlike USASpending.gov.
5/27/2012 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.
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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, 2009
5/27/2012 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
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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 Grants.gov.
• 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
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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 70
Sub-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.
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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
completed
5/27/2012 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
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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-up
5/27/2012 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 (federalreporting.gov) 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.
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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:
www.federalregister.gov/articles/
5/27/2012 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 agreements
5/27/2012 81
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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 changed
5/27/2012 82
OMB presents reform ideas for
comment in three areas
• Audit Requirements
• Cost Principles
• Administrative Requirements
5/27/2012 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 requirement
5/27/2012 84
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30. Additional ideas for Single
Audits
• Streamlining requirements
• Emphasizing
– Improper payments
– Waste, fraud, and abuse
– Program performance
5/27/2012 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
approach
5/27/2012 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
issues
5/27/2012 87
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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 system
5/27/2012 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 supplies
5/27/2012 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
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32. Ideas for reforming
Administrative Requirements
• Creating one set of Administrative
Requirements
• Agencies must consider each proposal’s merit
and applicant's financial risk
• Require agencies standard format and 90-day
notice of funding opportunities
• Reiterate that information collection requests
are subject to Paperwork Reduction Act
5/27/2012 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
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