Federal Funding of Local Agency Projects

1. Federal Funding of Local Agency Projects • April 17, 2009 • Oregon State University • Corvallis, Oregon

2. Cost Plans • Office of Management and Budget • OMB Circular A-87 • Cost Principles for State, Local and Indian Tribal Governments • www.whitehouse.gov/omb/circulars

3. A-87 Purpose and Scope • Objectives • Principles for determining allowable costs • Policy Guidelines • Effective and efficient administration through sound management practices • Assume responsibility for administering Federal awards per agreements • Proper and efficient administration of Federal awards

4. A-87 Basic Guidelines 1. Factors affecting allowability of costs • Necessary and reasonable • Allocable to the federal award • Authorized or not prohibited • Consistent with policies, regulations • Consistent treatment

5. A-87 Basic Guidelines • Follows GAAP • Not included in other awards • Net of all credits • Adequately documented

6. A-87 Basic Guidelines 2. Reasonable Costs • Ordinary and necessary • Restraints or requirements • Market prices • Acting with prudence • Significant deviations from established practices

7. A-87 Basic Guidelines 3. Allocable Costs • A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. • A Cost objective is a function, organization structure, contract, grant, or other activity which cost data is needed.

8. A-87 Basic Guidelines 3. Allocable Costs • All activities which benefit from the governmental unit's indirect cost, including unallowable activities and services donated to the governmental unit by third parties, will receive an appropriate allocation of indirect costs.

9. A-87 Basic Guidelines 3. Allocable Costs • Any cost allocable to a particular Federal award or cost objective under the principles provided for in this Circular may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by law or terms of the Federal awards, or for other reasons.

10. A-87 Basic Guidelines 3. Allocable Costs • Where an accumulation of indirect costs will ultimately result in charges to a Federal award, a cost allocation plan will be required.

11. A-87 Basic Guidelines 4. Applicable credits • Applicable credits refer to those receipts or reduction of expenditure-type transactions that offset or reduce expense items allocable to Federal awards as direct or indirect costs. Examples of such transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments of overpayments or erroneous charges. To the extent that such credits accruing to or received by the governmental unit relate to allowable costs, they shall be credited to the Federal award either as a cost reduction or cash refund, as appropriate.

12. A-87 Composition of Cost • Total Cost = • Allowable Direct Cost + • Allocable portion of allowable indirect costs – • Applicable Credits

13. Direct Costs • Compensation specifically to the performance of the award (fully loaded labor rate) • Cost of materials acquired, consumed or expended for the purpose of the award • Equipment and other approved capital expenditures • Travel expenses to carry out the award

14. Indirect Costs • Incurred for a common or joint purpose benefiting more than one cost objective and • Not readily assignable to the cost objectives specifically benefited, without effort disproportionate to the results achieved.

15. Unallowable Costs • Alcoholic beverages (3) • Bad debts (5) • Contingency provisions (9) - except for self-insurance reserves, pension plan reserves, retirement heath benefit reserves. • Legal expenses for claims against federal government (10) • Donations rendered (12a) • Entertainment (14) • Equipment and other Capital Expend (15) – but depreciation and use allowance is allowed (11) • Fines & penalties (16)

16. Unallowable Costs • Fund Raising & investment council (17) • General Government expense (19) –not defined but has been construed to mean general costs required to carry out overall responsibilities of state or local government, examples are governor’s office and/or state and local legislative bodies. • Idle facilities (21) – normally not allowable, but can be for a reasonable period of time – 1 year. • Lobbying (24 & 28.d) – including the costs of memberships in lobbying organizations.

17. Review to ensure properly treated • Depreciation and usage allowance • Value of asset was properly established • Cost of land eliminated from computation • Portion of assets that are federally financed are eliminated • Use either usage allowance or depreciation not both for single class of asset • If depreciation is used, ensure depreciable lives are reasonable. • Ensure idle facilities are handled properly

18. Review to ensure properly treated • Rental Costs • Refer to Appendix B, section 37 for limitations on the amount of rental costs that may be charged to Federal Awards. • State or local central service costs • Supported by a cost allocation plan

19. Central ServiceCost Allocation Plans • Provide certain services • Motor Pools • Computer Centers • Procurement • Accounting • HR • Process to identify and assign • Supporting documentation

20. Cost Allocation Plans • Allocated Central Services • Normally distributed on a number of different bases dependent upon the element of cost being distributed. • Ensure the bases chosen are appropriate for allocating each central service. • Any method of distribution which will produce an equitable distribution can be used. • Data included in bases should be current and accurate.

21. Cost Allocation Plans • Allocated Central Services • Brief description of service • Unit rendering the service • Operating divisions receiving the service • Items of expense in the cost of the service • Method used to distribute the cost • Summary schedule showing the allocation

22. Cost Allocation Plans • Billed Central Services • Billed to benefiting programs on an individual fee-for-service or similar basis. • Ensure current billing rate schedule is current and accurate, with unallowable costs excluded. • All users are billed the same rate for the same services. • Determine if past profit/loss is properly treated. • All users charged on same basis. • Review charge-out basis to ensure equitable distribution of costs for service.

23. Cost Allocation Plans • Billed Services – (examples) • Internal Service Funds • Self Insurance Funds • Fringe Benefits (labor allocation)

24. Indirect Cost Rate Proposals • Ensure all costs are properly identified • All activities must be included – regardless of funding source • All costs are identified correctly as direct or indirect costs. • Eliminate capital expenditures and unallowable costs Total Indirect Costs – Capital Expenditures – Unallowable Costs = Indirect Direct Cost BaseCost Rate

25. Indirect Cost Rate Proposals • Rate Types – Simple, Multiple Rate, Special Rate method • Multiple Rate method is the most common • Used when indirect costs benefit major function to varying degrees • Classify indirect costs into cost pools to permit allocation on the basis of benefits provided. • Appropriate base must be selected for each cost pool for distribution of the indirect costs. Can be made by direct assignment or an allocation base. • Each cost pool is distributed to direct costs • Cost rate is then calculated by relating total indirect costs allocated to each division/program to that unit’s direct cost base.

26. Additional Information Sources • ASMB C-10: A Guide for State, Local and Indian Tribal Governments • OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations • 2CFR Part 225, Cost Principles for State, Local, and Indian Tribal Governments • Internet Websites: • DCA Website – http://rates.psc.gov/ (Division of Cost Allocation) • OMB Circulars – http://www.whitehouse.gov/omb/grants/grants_circulars.html

27. Rich Brock Cost & Quantitative Analysis Unit Financial Services Branch Oregon Department of Transportation 503-986-3927 Richard.M.Brock@odot.state.or.us