Keys to Successful Financial Management of Grant & Contribution Funding

1. Keys to Successful Financial Management of Grant & Contribution Funding Scott W. Gold, CPA BKD, LLP October 12, 2006

2. Today’s Agenda • Grants and contributions defined • Contents of the grant/contribution file • Tracking revenues and expenditures • Cash draw procedures • Proper financial accounting treatment • Compliance and reporting • Financial status report issues • Strategic planning opportunities

3. Grants and Contributions Defined

4. Grants vs Contributions • Exchange vs Non-exchange transactions • Guidance in FASB No 116 on distinguishing contributions from other transactions • Generally governmental funding awards are considered exchange transactions (grants), however there are exceptions • The first step is to determine grant vs contribution for all types of awards you have

5. Grants vs Contributions • Get it in writing • Notice of Award • Letter from Donor • Importance of the original source of the funding • Inquiry to knowledgeable person • Grants defined • Federal • State • Local government

6. Grants vs Contributions • Contributions defined • Private source foundations • Many private foundations use the term “grant” in their agreements • Donors • Why do we care about the distinction? • Proper accounting • Restrictions on use of funds

7. Contents of the Grant/Contribution File

8. Documentation is King • It is important to maintain detailed files for each grant or contribution your organization receives • These files should be maintained for at least three years after the acceptance of the award • It is important to be able to identify specific expenditures that were charged to each grant or contribution

9. Contents of File • Copy of original signed application, if applicable • Notice of grant/contribution award (all copies, all pages) • Copies of all correspondence • Copies of required reporting (UDS, FSR, other) • Copy of audited financial statements • Detail record of all revenues and expenditures (including inventory of fixed assets purchased)

10. Tracking Grant Revenues and Expenditures

11. General Ledger Maintenance • Multiple grants should be tracked independently • Tracking for grants with specific restrictions • Important to ensure that enough specific expenditures have been incurred to justify grant funding • Consider if indirect costs can be allocated • Tracking for grants that have similar purposes (“double-dipping” issue)

12. Cash Draw Down Procedures

13. Grant Draw Processes & Procedures • Important to establish consistent methodology for conducting grant draws • Advance drawing of grants is generally negative absent a unique financial situation • Federal CHC grant is a reimbursement grant • Grant funds must be expended within 3 business days of federal cash receipt • Grant funds requested must be supported by known incurred expenditures

14. Contribution Cash Processes & Procedures • Advance basis • Cash is restricted until used for specific purpose • Reimbursement basis • Submission of expenditures for reimbursement

15. Proper Financial Accounting Treatment

16. Revenue & Expenditure Recognition • Revenue should be recognized only as qualified expenditures are incurred • Grant funds drawn in advance of qualified expenditures is recorded as deferred revenue (liability) • Contribution revenue received in advance is recorded as temporarily restricted net assets (equity)

17. Revenue & Expenditure Recognition • Expenditures include operating expenses, capital asset transactions & other • OMB Circular A-122 rules only apply to federal cash expenditures

18. Accounts Receivable and Cash Recording • Restricted Cash when received in advance • Grants receivable booked when expenditures have been incurred before cash receipt • Contribution receivable booked when promise is made

19. Grant Example • We have received a federal grant for HIV. • Revenue and expenditure recognition: • At the time the expenditure is incurred • Debit expense or capital asset • Credit accounts payable or cash • Debit grants receivable if cash has not yet been drawn or deferred revenue if cash was drawn in advance • Credit grant revenue • At the receipt of the cash • Debit cash • Credit grants receivable if expenditure has been made or deferred revenue if drawn in advance

20. Contribution Example • We have received a grant from a private source foundation for a restricted purpose • Revenue and expenditure recognition: • At the time of the notice of award • Debit contribution receivable • Credit temporarily restricted net assets • At the time of the expenditure is incurred • Debit expense or capital asset • Credit accounts payable or cash • Debit temporarily restricted net assets (TRNA) • Credit TRNA released from restriction (contribution revenue) • At the receipt of the cash • Debit cash • Credit grants receivable

21. Contribution Example • What if the private source contribution is unrestricted? • Implied restriction of time until it is expended • Same accounting as for restricted contribution (previous example) • Many times contributions are received and expended in the same fiscal period

22. Compliance and Reporting

23. PIN 98-23 • Financial System Expectations • Accounting & Internal Controls • Budget • Billing & Collections • Independent Financial Audit

24. Budget • Reflects the level & scope of services to be provided within the constraints of the health center’s resources • Should reflect available resources & required expenditures • Should be approved by the health center’s governing body • Particular emphasis on health center revenue streams

25. Grant Funds:No Strings Attached? • If you accept the grant, accept the rules • It is the responsibility of health center management to understand the set of rules that accompanies each grant award • Noncompliance with any grant rules could result in significant risk to those with fiduciary responsibilities at the health center

26. Applicable Rules & Regulations • Governing federal regulations - most of which are available on the internet • OMB Circulars A-110, A-122 & A-133 • A-110 - Management of federal grant funds • A-122 - Cost principles • A-133 - Audit requirements • Section 330 of the Public Health Services Act • Code of Federal Regulations • Policy Information Notices (PIN) & Program Assistance Letters (PAL)

27. Scope of Project • Important to know what activities are included & excluded from your scope of project as defined by the BPHC • Changes in the scope of project should be communicated to & approved by the BPHC in writing • Important to designate management level position to monitor compliance

28. Scope of Project • Risks of not including qualified health center activities in the scope of project • FTCA Coverage • Medicare & Medicaid FQHC reimbursement • Pharmacy benefits • Other

29. Grant Reporting • Required reports to be filed under the community health center grant include: • FSR (annually) • UDS (annually) • Federal Cash Transactions Report (quarterly) • Other • Federal reporting accomplished through submission of an annual FSR

30. Financial Status Report (FSR) Issues

31. FSR – A General Overview • The FSR is an official claim of expenditures submitted to the federal granting agency • It is a comprehensive report of all financial transactions relative to the approved project • It identifies allowable total outlays & the revenue sources utilized to satisfy such outlays

32. FSR – A General Overview • Upon completion, the amount, if any, of unobligated federal grant funds, and/or undisbursed (“excess”) program income will be determined • Section 330 programs are generally “last dollar” programs - necessary to understand & monitor spending order of health center funds

33. FSR Terminology • Total outlays • Program Income • State, local & other operational funding • Unobligated balance of federal grant funds • Undisbursed (“excess”) program income

34. Total Outlays • Total outlays represent expenditures incurred for the budget period prepared on the “modified” accrual basis of accounting • Generally begins with total expenses reported in the audited financial statements on the “full” accrual basis of accounting • Reconciliation from “full” to “modified” accrual basis is required

35. Program Income • Represents the amount of fees, premiums & third-party reimbursements accrued from health center operations during the budget period • Generally, will be net patient service revenue less provision for bad debts • Comparison will be made to expected program income included on the NGA

36. State, Local & Other Operational Funding • Represents all resources from the approved project that are not program income or Section 330 federal grant funds • Resources from state, local & other sources (other than net patient service revenue) that are not designated for the approved project may be excluded from the FSR

37. Unobligated Balance of Federal Funds • Represents grant funds authorized for the budget period not required to satisfy allowable outlays (unspent grant funds) • What should I do if this situation occurs?

38. Undisbursed (“Excess”) Program Income • Represents the amount of fees, premiums & third-party reimbursements, after adjustments for uncollectible accounts, which exceeds the amount of expected program income identified on the NGA • What implication does this have for my health center?

39. FSR Issues • Appropriate budgeting of program income is critical (best advice - be realistic, but conservative) • Interim planning is important for management of program revenues • Financial statement audit should reconcile with the FSR

40. FSR Example • ABC Community Health Center • Total allowable outlays = $7,000,000 • Program income = $4,000,000 • Budgeted program income = $3,000,000 • Other sources of revenue = $1,000,000 • Federal CHC grant = $3,000,000 • In above circumstance, ABC CHC would have excess program income of $1,000,000 & $0 of unobligated federal funds

41. FSR Example • ABC Community Health Center • Total allowable outlays = $7,000,000 • Program income = $4,000,000 • Budgeted program income = $4,000,000 • Other sources of revenue = $1,000,000 • Federal CHC grant = $3,000,000 • In above circumstance, ABC CHC would have excess program income of $0 & $1,000,000 of unobligated federal funds

42. FSR Issues • Strategies for avoiding unobligated federal funds • Establishment of authorized reserve funds • Accurate assessment of net realizable value of accounts receivable • Accurate recording of cost report settlements • Accrual of expenses in accordance with generally accepted accounting principles • Prepayment of known recurring non-salary costs

43. Strategic Planning Opportunities

44. Current Financial Issues • Increased pressure to grow & expand services without increasing reimbursements • Increased scrutiny of financial results by the federal granting agency & other external users of audited financial statements • Recent BPHC focus on current ratio, use of federal grant money & overall health center financial viability • The President’s initiative is over – now what?

45. Current Financial Issues • Increased tightening of state budgets resulting in reduced services and/or payments • Strategic financial planning is now more important than ever before

46. Opportunities • What do we want funded? • Current operations - • Expanded services - • Defined service • Medical, Dental, Mental Health, Pharmacy • Capital needs

47. Opportunities • Would we do this without the funding? • Will the money continue into the future? • Are there other revenue streams generated by the funded activity? • The compliance trap and opportunity cost • Seek funding with less restrictions

48. Best Wishes for Financial Success for Your Health Center! sgold@bkd.com, BKD, LLP 417 865-8701