Obligations, Tydings and Complying with Cash Management Requirements

1. Obligations, Tydings and Complying with Cash Management Requirements Michael Brustein, Esq.mbrustein@bruman.com Brustein & Manasevit, PLLC Fall Forum 2013

2. “Take Aways” from this session… • When “obligations” matter? • When “expenditures” matter? • When may I begin to expend funds? • When does interest begin to accrue? • How do I prevent the lapsing of funds? • What are the OIG concerns on cash management? Brustein & Manasevit, PLLC

3. Basic Rule • All grantees / subgrantees must maintain accounting records on “source” and “application” of federal funds • 34 CFR 80.20 (b)(2) Brustein & Manasevit, PLLC

4. Basic Elements of Cash Management • Awards – “GAN” • Obligations – Commitments made that will require payments • Unobligated Balances – Portion not obligated from grant • Expenditures - Outlays / Disbursements • Liquidation – Disburse funds to satisfy obligations • Income – Gross income directly generated by grant supported activity Brustein & Manasevit, PLLC

5. Question: Is the focus on “obligation” of “expenditure”? • Answer: Depends! Consider the following eight case studies Brustein & Manasevit, PLLC

6. Case Study #1 • Where a “funding period” is specified, a grantee may charge to the award only costs from “obligations” of the funding period Brustein & Manasevit, PLLC

7. Case Study #2 • Under State-Administered programs, States may “obligate” if (1) Secretary may “obligate” and (2) State plan in “substantially approvable form” • 34 CFR 76.703 Brustein & Manasevit, PLLC

8. A State cannot use “obligations” for matching or MOE purposes if obligations are made during a period when obligations are unallowable (black-out period) • 58 Federal Register 65856, 12/16/93 Brustein & Manasevit, PLLC

9. Case Study #3 • Subgrantees may “obligate” for “formula” programs if (1) State may “obligate” and (2) local plan is “substantially approvable” • 34 CFR 76.708 (a) • For competitive programs, subgrantees, may obligate after date subgrant is made • 34 CFR 76.708 (c) Brustein & Manasevit, PLLC

10. Under Bifurcated S/A Programs (ESEA, IDEA, Perkins), subgrantees may fund “pre-award” obligations (July 1 to September 30) retroactively, from 2nd installment (75%) • Source: Oct 1, 2013 GAN Brustein & Manasevit, PLLC

11. Case Study #4 • Carryover funds must be “obligated” in accordance with new laws, regulations, application • 34 CFR 76.710 Brustein & Manasevit, PLLC

12. Case Study #5 • Are interest calculations based on date of “obligation” or date of “expenditure”? Brustein & Manasevit, PLLC

13. Quick Tutorial on theCash Management Act of 1990 (CMIA) Brustein & Manasevit, PLLC

14. Goal of CMIA • Improve the efficiency and effectiveness of fund transfers between the federal government and States • Federal agencies determine if funds used for allowable purposes • States required to ensure federal funds used solely for program purposes Brustein & Manasevit, PLLC

15. CMIA establishes the “Treasury-State Agreement” • Methods for calculating interest and identifying federal programs subject to “Subpart A” of 31 CFR 205 Brustein & Manasevit, PLLC

16. What programs are subject to Subpart A? • If State total federal programs less than $10 billion, any program exceeding .60 percent of total amount. • If State total federal program is greater than $10 billion, then greater of .30 percent of total federal assistance of $60 million Brustein & Manasevit, PLLC

17. For Subpart A programs, State must minimize time elapsing between transfer from treasury and State’s “payout” Brustein & Manasevit, PLLC

18. 31 CFR 205.12(b)(4) Three Day Drawdown Window Brustein & Manasevit, PLLC

19. For Subpart A programs, State interest liability accrues if federal funds are received by a State prior to the date the State “pays out” the funds • 31 CFR 205.15(a) Brustein & Manasevit, PLLC

20. Subpart B programs (smaller programs) are not subject to the agreement Brustein & Manasevit, PLLC

21. Treasury requires, for Subpart B programs, State must minimize time between drawdown and disbursement, and comply with A-102 (34 CFR Part 80) Brustein & Manasevit, PLLC

22. Treasury regulations provide that States must not incur interest liability for programs under Subpart B • 31 CFR 205.33(b) Brustein & Manasevit, PLLC

23. But EDGAR 34 CFR 80.21(i)… • Interest earned, minus $100 annually, by grantees and subgrantees on advances shall be remitted to ED (Tab A) • No exception for LEAs or Subpart B programs • Direct conflict with Treasury Brustein & Manasevit, PLLC

24. ED calculates interest based on date of expenditures, not obligations (Tab A) Brustein & Manasevit, PLLC

25. ED / CFO 9/5/13 (Tab A) • Time between federal grant funds “drawn” and date those funds are “disbursed” expenditure Brustein & Manasevit, PLLC

26. ED/CFO Interprets “reimbursement” (34 CFR 80.21 9 (d)) as payment to grantee after evidence of outlay / disbursement. Brustein & Manasevit, PLLC

27. Compliance Supplement requires costs must be paid by the recipient before reimbursement is requested. Brustein & Manasevit, PLLC

28. Case Study #6 • FIFO Accounting based on “obligations” • See 5/28/70 Memo (Tab B) Brustein & Manasevit, PLLC

29. Case Study #7 • “Linkage” and preventing “Lapsing” based on “obligations” • Appeal of California (Tab C) Brustein & Manasevit, PLLC

30. “The legally relevant question is when the obligation arose, not in what account such obligation may have been initially recorded” (Tab C) Brustein & Manasevit, PLLC

31. Case Study #8 • Question: How to measure the five year statute of limitations to bar recovery? • Answer: Date of “obligation” plus five years. “ED has consistently held that “expended” as used in the statute means “obligated.” - Appeal of the State of Michigan Docket No. 8(272)88, 9/14/89 Brustein & Manasevit, PLLC

32. OIG Issues on Cash Management • Council of Inspectors General for Integrity and Efficiency (CIGIE) • 20 Federal Agencies covering 94% of $1.2 trillion in direct federal awards covered by A-133 Brustein & Manasevit, PLLC

33. OIG • Request OMB require recipients and subrecipients to provide interim financial statements • Such statements must contain basic line item information on how federal funds are spent • Without such interim statements pass-throughs and federal agencies cannot effectively monitor grantees Brustein & Manasevit, PLLC

34. OIG - Cash Management • Recommend specific time frames for which recipient can draw cash • Terms such as “minimize” or “anticipated needs” are too general and not auditable Brustein & Manasevit, PLLC

35. OIG - Cash Management • Clarify the type of working capital analysis that is required of federal agencies prior to providing advance payments Brustein & Manasevit, PLLC

36. OIG - Cash Management • All recipients should account for program income using the “deduction method” unless federal agency indicates otherwise Brustein & Manasevit, PLLC

37. OIG - Cash Management • Align Circular with Compliance Supplement on “Reimbursement” • Compliance Supplement requires that costs must be paid by the recipient before reimbursement is requested. • Under accrual accounting, a cost could be expensed on an award that has not been paid. Brustein & Manasevit, PLLC

38. OIG - Cash Management • Recommends that federal funds never be placed in non-insured depository accounts Brustein & Manasevit, PLLC

39. Disclaimer This presentation is intended solely to provide general information and does not constitute legal advice. Attendance at the presentation or later review of these printed materials does not create an attorney-client relationship with Brustein & Manasevit, PLLC. You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances. Brustein & Manasevit, PLLC