WELCOME TO T raining A ctivities for B usiness S taff

1. WELCOME TOTrainingActivities forBusinessStaff We are pleased to welcome you to the fifth session of the 2007-08 TABS program! TABS is designed to provide topic-specific knowledge about a variety of school business topics. You may build a resource binder from the handouts to assist you in keeping “tabs” on business practices… “Indirect Costs” Presented by Sonya Menyon(SDCOE) March 10, 2008 This TABS workshop is being Webcast and archived for future reference.

2. Overview of Workshop Indirect Costs • Introduction and review of the indirect cost process. • Review of the components of the indirect cost rate calculation. • Allowable use of the indirect cost rate to recover/charge indirect costs. • Entries needed to budget and charge the indirect costs transfer.

3. Introduction Indirect Costs • LEA costs can be categorized as Direct or Indirect. • Determination factor is the related activity of the cost versus type. • Related activity = instruction, school administration, pupil transportation, fiscal services • Type = salaries, benefits, books, supplies • Indirect costs are global in nature.

4. Introduction Indirect Costs • Indirect costs are general management costs that are agency-wide. • General Management costs = expenditures for administrative activities necessary for the general operation of the district. • Administrative activities include accounting, budgeting, payroll preparation, personnel management, purchasing, centralized data processing.

5. Indirect Cost Rate (ICR) Indirect Costs • Use of an indirect cost rate is the standardized method for distributing indirect costs to programs. • The process for arriving at the rate is based on CDE’s federally approved indirect cost plan. • The plan applies to K-12 school districts, Joint Powers of Authority (JPA’s), county offices of education and charter schools.

6. Indirect Cost Rate (ICR) Indirect Costs • CDE has been delegated the authority by the U.S. Department of Education (USDE) to calculate and approve indirect cost rates annually for LEA’s. • Last year, the CDE renegotiated an indirect cost plan with the USDE and changes were made to address specific issues. • Use the approved indirect cost rate instead of having to time account for each program.

7. ICR Calculation Indirect Costs • The rate is determined by dividing an LEA’s indirect costs by the majority of its other expenditures, or base costs. • Numerator = LEA’s Indirect Costs • Denominator = Base costs • Specific rules must be followed when categorizing expenditures as indirect or base costs. • The majority of the rules are built into the SACS function code.

8. ICR Calculation Indirect Costs Note: Certain costs (e.g. – debt service and facility construction) are excluded entirely from the calculation.

9. The ICR Calculation -NUMERATOR Indirect Costs • The numerator, a.k.a. the “indirect cost pool”. • Three components to the numerator: • Indirect costs • Certain plant services costs • The carry-forward adjustment • Costs in the “pool” come from the general fund and, beginning in 2007-08, the charter school special revenue and/or charter school enterprise fund (SACS 09/62).

10. Inclusion of CharterSchool Funds Indirect Costs • For COE’s and districts that include charter school data in Fund 09 or Fund 62 of their 2007-08 unaudited actuals submission, the charter school’s data will be included in the calculation of the district’s indirect cost rate. • Charter schools that report data separately under their own CDS code in SACS will receive its own separate indirect cost rate.

11. Inclusion of CharterSchool Funds Indirect Costs • Districts that include charter data in their submissions may want to reevaluate whether the charter school should be a part of your district’s reporting. • Accounting changes may need to be discussed with your independent auditor. • Charter schools using the Alternative form will continue to receive a statewide average indirect cost rate.

12. NUMERATOR – Indirect Costs Indirect Costs • Indirect Costs = agencywide expenditures for general management activities. • Necessary for the overall operation of the district. • Federal guidelines exclude most of the costs of the school board and superintendent from indirect costs and categorizes them as base costs.

13. NUMERATOR – Certain Plant Services Costs Indirect Costs • Plant services costs include heating, lighting and custodial services. • Only those plant services costs that are applicable to the general administrative offices are included in the indirect cost pool. • In order to determine the administrative portion of plant services costs, additional supplemental data is necessary.

14. Plant Services Costs -Supplemental Data Indirect Costs • Beginning in 2007-08, a “percent of administrative salaries and benefits” rather than classroom units (CUs) will be used to determine the indirect portion of maintenance and operations and facilities rents and leases costs. • Percent of administrative salaries and benefits: • Administrative salaries & benefits (functions 7200 & 7700) charged to the general fund and charter funds (09 & 62) divided by “all other” salaries & benefits equal the “percent of administrative salaries and benefits” ratio. (See spreadsheet handout next page)

15. Plant Services Costs -Supplemental Data Indirect Costs • Percent of administrative salaries and benefits: • The administrative salaries and benefits percentage is then multiplied by Plant Maintenance & Operations costs; and also by the Facilities Rents and Leases costs, to arrive at the amounts attributable to the indirect cost pool. • See the Indirect Cost Rate Worksheet for the applicable function and object codes in the numerator.

16. Supplemental Data – Employment Separation Costs Indirect Costs • Costs relating to employees’ separation from service may have restrictions on how they can be charged. (See CSAM Procedure 655) • Normal separation costs (e.g. accumulated unused leave, severance pay) are unallowable as direct costs to federal programs, and some state programs. • If unallowable as a direct cost, they are allowable as an indirect cost.

17. Supplemental Data – Employment Separation Costs Indirect Costs • Normal separation costs that are unallowable as direct costs to a restricted program are charged to the same goal, function and object as the employee’s regular salary; but charged to the unrestricted resource. • The SACS Form ICR has been updated to allow LEA’s the choice to manually identify and enter these costs into the indirect cost rate worksheet at year-end.

18. Supplemental Data – Employment Separation Costs Indirect Costs • Abnormal or mass separation costs (e.g. retirement incentives or contract buyouts) are unallowable either as direct costs or indirect costs to federal programs, and some state programs. • Unallowable abnormal or mass separation costs are charged to the same goal, function and object as the employee’s regular salary, but are charged to the unrestricted resource.

19. Supplemental Data – Employment Separation Costs Indirect Costs • If a district has incurred abnormal or mass separation costs for employees and charged them to the indirect cost pool (function 7200, or function 7700), the district must manually identify these costs in the indirect cost rate worksheet at fiscal year-end to be excluded from the indirect cost pool.

20. New Guidance – Legal Costs Indirect Costs • Guidance from USDE now allows certain legal costs to be charged to the function that necessitates or benefits from the legal activity. • Legal costs necessitated by a specific program (i.e. – special education) may be charged to function 2100. • Legal costs related to specific business-office, purchasing or personnel matters may be charged to function 7200. (and included in the indirect cost pool) • Legal costs related to facilities acquisition and construction may be charged to function 8500. • Legal costs related to agency-wide policies or specifically representing the board or superintendent are still charged to function 7100.

21. New Guidance -External Financial Audit Indirect Costs • OMB Circular A-87 allows costs incurred for audits required by OMB Circular A-133, Single Audit Act to be charged indirectly to federal programs. This is for audits performed when districts expend >$500K in federal funds. • New Function code 7190, External Financial Audit – Single Audit, for districts that expend >$500K (costs included in the indirect cost pool). • New Function code 7191, External Financial Audit – Other, for districts that expend <$500K. (remains a part of the base costs).

22. New Guidance -Staff Relations & Negotiations Indirect Costs • System-wide staff relations activities and the responsibilities for contractual negotiations with both instructional and non-instructional personnel (collective bargaining) can generally be charged indirectly to federal programs. • New optional Function code 7120, Staff Relations and Negotiations, is available for districts to charge their collective bargaining costs. (When used with an unrestricted resource, these costs are included in the indirect cost pool.)

23. Other ICR Changes Indirect Costs • General Administrative costs (Function 7200) funded with a restricted resource is moved from the indirect cost pool to the base costs. • Non-agency Goals (7110 and 7150) is moved from the indirect cost pool to the base costs. Costs charged to these goals usually have a general administration function. • Enterprise costs (function 6000) will be added to the ICR calculation for all funds that are included in the calculation. (added to base costs)

24. NUMERATOR – Carry-Forward Adjustment Indirect Costs • This adjustment is made after the period has ended. • It reconciles the difference between the indirect cost rate approved for a given year and the actual percentage (amount) of indirect costs incurred in that year. • It eliminates the need for districts to file amended federal reports when the actual indirect costs vary from the estimated indirect costs.

25. The ICR Calculation -DENOMINATOR Indirect Costs • The denominator, a.k.a. “base costs”. • Consists of all remaining general fund costs except those that are excluded entirely from the calculation. • Examples of base costs (e.g., instructional salaries and benefits, program supplies, contracts for instructional and support services, most board and superintendent services, and the majority of plant maintenance and operations and facilities rents and leases.)

26. The ICR Calculation -DENOMINATOR Indirect Costs • Base costs also include similar expenditures from: • Five special revenue funds - charter school (09), adult education (11), cafeteria (13), child development (12) and foundation (19); • The foundation permanent fund (57); • Two enterprise funds - charter school (62) and cafeteria (61).

27. The ICR Calculation -DENOMINATOR Indirect Costs • EXCLUDED COSTS: Costs excluded from the base include subagreements for services (except for the first $25,000), debt service, facility construction, and capitalized equipment. Funds excluded from the base include deferred maintenance, capital facilities, proprietary funds other than cafeteria, and fiduciary funds.

28. Subagreements for Services Indirect Costs • Subagreements (including subawards) occur when a part or all of an instructional or support activity for which the district is responsible is conducted by a third party. • Federal costs principles require subagreements be excluded from the indirect cost rate calculation and from eligible program costs on which indirect costs are charged. • Subagreements must now be tracked separately from other agreements.

29. Subagreements for ServicesNew Object 5100 Indirect Costs • New Object code 5100, Subagreements for Services, has been created to account for subagreement expenditures. • Costs in Object 5100 will be excluded from the indirect cost calculation. • Costs in Object 5100 will also be excluded from the costs on which indirect costs are charged. • (See page 915-10, Section B. Base Costs, denominator)

30. Subagreements for Services Indirect Costs • Up to $25,000 of each subagreement may be included in the indirect cost calculation, and included in the costs on which indirect costs are charged. • Object 5800, Professional/Consulting Services and Operating Expenses, is used to accomplish this provision by charging up to $25,000 per subagreement. • This is allowed because federal guidelines recognizes that a certain level of administrative service is required.

31. Calculating the Rate Indirect Costs • The SACS software automatically calculates the district’s indirect cost rate using the unaudited actuals data. • The information in the software is pulled from the districts general ledger data (revenues and expenditures) and supplemental data provided on the Indirect Cost Rate worksheet (Form ICR). • The calculation also includes the fixed-with-carry-forward adjustment from the second prior year.

32. Using the Indirect Cost Rate Indirect Costs • Indirect cost rates may be used for budgeting, allocating and recovering indirect costs for federal, state and local categorical programs. • Certain programs have limitations on charging indirect costs. Funding applications or award letters should be consulted to determine whether the program limits or prohibits the charging of indirect costs.

33. Budgeting Indirect Costs Indirect Costs • Indirect costs estimates may be used for budgeting purposes, but charging indirect costs must be done using the actual program expenditures. • If a program has a set award amount, it is important to budget indirect costs that fit within the award amount rather than adding them to the award amount.

34. Budgeting Indirect Costs Indirect Costs

35. Charging Indirect Costs Indirect Costs • Charge indirect costs by multiplying the indirect cost rate by the total direct costs, less any excluded costs. • Expenditures in objects 5100, 6000 and 7000 are excluded when calculating or charging indirect costs. • Districts have the option of charging less than the approved rate when recovering indirect costs.

36. Administrative Cost Caps Indirect Costs • When charging indirect costs, districts must be aware of any program administrative cost caps, if applicable. • Review whether an administrative cap encompasses both direct administrative costs and indirect costs. • Example: Program administrative cap of 15%; direct administrative costs of 11% already expended; the maximum indirect costs that can be charged is 4%.

37. Other Considerations Indirect Costs • For multiple year awards, the indirect cost rate used must be the rate that is approved for each fiscal year. • The indirect cost rate is appropriate for use with only those operating funds and costs that are part of the calculation. • Costs in funds and objects that are excluded from the calculation of the rate should not have indirect costs charged against them. (See the Indirect Cost Rate Worksheet starting on page 915-11)

38. Journal Entry to ChargeIndirect Costs Indirect Costs Journal entry used for charges within the General Fund Journal entry used for Interfund charges

39. Questions Indirect Costs

40. Thank You for Attending! Upcoming TABS Sessions JUNE 13, 2008 THE CYCLE OF A CONSTRUCTION CONTRACT YOUR OPINION MATTERS TO US—PLEASE TAKE A MOMENT TO COMPLETE THE EVALUATION FORM