Cost Allocation December 6, 2017

About Me Where do I work? My current responsibilities My experience in cost allocation Why does cost allocation interest me?

What does this have to do with me? If you receive federal funding through your State Agency, Local Government, or Academic Institution this applies to you! Our audience – tell us about yourself Some research I did… State of Arizona Central Service Cost Allocation Plan University of Arizona

Where does the guidance come from? Cost Principles 2 CFR 200 Subpart E Combined several OMB Circulars to create UGG – uniform grant guidance Uniform administrative requirements, cost principles, and audit requirements for Federal awards to non-Federal entities Who does this apply to? Requirements are applicable to all costs related to Federal awards! One of those circulars is A-87 Cost Principles – this is now Subpart E in 2CFR200

What’s the meaning of this? Cost Objective Cost of running a program or federal award Direct Costs Identified specifically with a cost objective Indirect Costs For a common or joint purpose Benefitting more than one cost objective Composition of costs Total costs = Direct + Indirect

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Who’s in the Pool? Cost Pool Allocation Basis Allocation A grouping of similar costs that can be allocated using the same allocation basis Allocation Assigning a group of costs to one or more cost objective Allocation Basis An equitable method to allocate costs to cost objectives

Would you allow this? Allowable Costs Necessary and Reasonable Conform to limitations or exclusions of the federal award Consistent treatment In accordance with GAAP Not used as match Be adequately documented

Don’t be unReasonable! Reasonable Costs Does not exceed what would be incurred by a prudent person Ordinary expense of operations Would not violate federal, state or local law or terms & conditions of the federal award

What will it cost you? Allocable Costs Disallowable Costs A cost that is assignable to a cost objective in accordance with relative benefits received Disallowable Costs Un-allowed costs in accordance with federal statutes regulations or terms & conditions of the federal award

Parts is Parts Subpart E – Cost Principles Guidance on allowability of more than 50 items of cost A few examples Bad debts (debts which have been determined to be uncollectable), unallowable Fines, penalties, damages and other settlements are unallowable, except when incurred as a result of compliance with specific provisions of the Federal award, or with prior written approval of the Federal awarding agency.

Are you a rebel?

What’s the Plan? Central Service Cost Allocation Plan developing billing rates based on the allowable costs of services provided by a state, local government, or Indian tribe on a centralized basis to its departments and agencies. Public Assistance Cost Allocation Plan Major federally-financed programs typically administered by state public assistance agencies include: TANF, Medicaid, Food Stamps, Child Support Enforcement Indirect cost Rate Proposal All require certification

Certification Expenditures are proper and in accordance with the terms and conditions of the federal award Quarterly, annual, final fiscal reports: “By signing this report, I certify to the best of my knowledge and belief that the report is true, complete, and accurate, and the expenditures, disbursements and cash receipts are for the purposes and objectives set for the in the terms and conditions of the Federal award…” 360 degree reconciliation: support for calculations, general ledger, draws, federal revenue, federal accounts receivable, federal reports, Schedule of Expenditures of Federal Awards (SEFA) and financial statements

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Steps Involved in Calculating a Rate Under the Simplified Method Adjust indirect costs for the following: costs directly reimbursed through a federal award administrative salaries included in the pool that were funded as direct in a grant unallowable costs Equipment and other capital expenditures (unallowable as indirect costs) Adjust Direct Costs for the following: Flow-through funds Capital expenditures (Capital expenditures for improvements to land, buildings, or equipment which materially increase their value or useful life are unallowable as a direct cost except with the prior written approval of the Federal awarding agency)

Our Example Distribution of indirect costs of a state or local government department and the divisions/bureau of the department Indirect costs for each division/bureau level are indicated Method we reviewing if the ratio of indirect costs to direct salaries and wages (or other base) of each division of bureau is approximately the ratio of the each division If the indirect/direct rate varies significantly then the multiple rate method should be used

Notes to help us solve our example A Exclusions Flow-through funds Water Quality Management 1,800 B Unallowable Air Quality 37 Community Environmental Control 22 Water Quality Management 10 Solid Waste Disposal 106 Park and Forests 115 Total 290 C Direct and Indirect costs can be identified during procurement with chart of accounts

Sample Indirect Cost Rate Proposal – Simple Method Total Exclusions Unallowable Indirect Costs Direct Salaries & Wages Direct All Other Costs Division/Bureau Air Quality 450 3,200 147 Community Environmental Control 700 3,000 127 Water Quality Management 2,400 3,500 117 Solid Waste Disposal 1,150 6,800 306 Park and Forests 850 4,200 188 Subtotal 5,550 20,700 885

Sample Indirect Cost Rate Proposal – Simple Method (some answers) Total E Exclusions A Unallowable B Indirect Costs D Direct Salaries & Wages Direct All Other Costs Division/Bureau Air Quality 450 37 413 3,200 147 Community Environmental Control 700 22 678 3,000 127 Water Quality Management 2,400 1,800 10 590 3,500 117 Solid Waste Disposal 1,150 106 1,044 6,800 306 Park and Forests 850 115 735 4,200 188 Subtotal 5,550 290 3,460 20,700 885

Calculate the Overall Indirect Rate Add departmental indirect costs and cost incurred by other governmental agencies Calculate indirect rate as a %age of direct salaries and wages

Calculate the Overall Indirect Rate Total Exclusions & Unallowable Indirect Costs Salaries & Wages All Other Costs 6,268 2,090 4,178 20,700 885 Indirect Cost Rate 20%

What if you want to use multiple rates? You can use a different rate on each division OR you can choose to lower the rate of one division Show calculation for each division and explain the rate submission This is a negotiation d) Indirect Ratio Indirect Costs Salaries & Wages Ratio Division/Bureau Air Quality 413 3,200 13% Community Environmental Control 678 3,000 23% Water Quality Management 590 3,500 17% Solid Waste Disposal 1044 6,800 15% Park and Forests 735 4,200 18% 3460 20,700

Steps in Calculating Rates Under the Multiple Rate Method – Different Allocation Basis We will use the same state or local government from the first example Classify departmental indirect costs into functional cost pools Select appropriate basis for allocation of indirect costs Distribute each cost pool to the benefitting division

Some notes on our Multiple Rate Example Departmental Indirect Costs Allocation Base Total Indirect Cost Office of the Director Number of Employees 122 Financial Management Number of transactions 155 Administrative Services Expenditures 87 Subtotal 364

Office of the Director Allocation Division/Bureau Number of Employees Percentage Off of Director Air Quality 60 10% 13 Community Environmental Control 95 16% 20 Water Quality Management 200 34% 42 Solid Waste Disposal 125 21% 26 Park and Forests 105 18% 22 Total 585 100% 122

Financial Management Allocation Division/Bureau Number of transactions Percentage Fin Mgt Air Quality 700 6% 9 Community Environmental Control 800 7% 11 Water Quality Management 7,200 62% 95 Solid Waste Disposal 1,200 10% 16 Park and Forests 1,800 15% 24 Total 11,700 100% 155

ASD Allocation Division/Bureau Expenditures Percentage ASD Air Quality 3,347 16% 13 Community Environmental Control 3,127 14% Water Quality Management 3,617 17% 15 Solid Waste Disposal 7,106 33% 29 Park and Forests 4,388 20% 18 21,585 100% 87

Public Assistance Cost Allocation Plan (PACAP) Public Assistance programs: Medicaid, Temporary Assistance for Needy Families (TANF), Supplemental Nutritional Assistance Program (SNAP), Child Support Enforcement Assistance and Childcare Assistance Narrative description of cost pools, allocation basis and major programs Describe how you are going to complete the allocation and what tools you will use Allocation may require software for random moment sampling (RMS) or time and effort

Some details about PACAPs Most public assistance programs require quarterly federal reporting Cost pool data is gather monthly and so are stats for allocation basis What are feds looking for in review? You are applying stats to costs of the same time frame Justification for changing an allocation basis If you make a change in plan include a cost impact – before and after to each federal program

How do you submit your indirect cost proposal for approval? Through PSC – Program Support Center Hosted by the US Department of Health & Human Services (HHS) Indirect Cost Negotiations Largest multi-function shared service provider to the federal government

Donna Sandoval, CGFM New Mexico Department of Information Technology ASD Director/CFO Donna.Sandoval@state.nm.us