1. COST RECOVERY FEE SETTING
March 7, 2017: Part I – Overview – Back to the Basics
March 16, 2017: Part II – Setting the rates - Governmental Funds, Proprietary Funds
Presenter: Controller-Treasurer Department - Cost Management Unit

2. Part I – Overview – Back to the Basics

3. Brief of COUNTY’s POLICY
Actual charges for services shall be determined by the agency/department providing the services.
Cost recovery reimbursements shall be determined by agencies/departments providing the services.
The rates are to be reviewed by the Controller- Treasurer Department
Board of Supervisors’ approval

4. BACK to the BASICS

5. Objective: Effective Cost system [process]
Identify goals of internal service pricing;
Develop allocation strategy; 
Define level of costing detail; 
Determine cost of service; 
Decide basis of allocation; and
Consider potential concerns.
Sources: GFOA – Internal Pricing best practices
Benefits of the costing system must be weighted against the cost and complexity of system design choices

6. Goals Demand for a service. Develop full-costing model
Unique services or products
Customize service levels for different customers
Develop full-costing model
The rate model used to calculate fees for the customers of the enterprise and general governmental that would enable better informed budgeting and planning.
Balancing the billable rates or cost reimbursement level that would not provide incentive to over-use the services or limiting the use of services.
Competitive rate structure
Outreach and communication : the value of the service provided.
the value received from the services, and
the best service delivery model (centralized, decentralized, outsourced, etc.)

7. Allocation strategy
What would be the best way in recovering the cost for services?
Demand for “market” services including those where the user departments play the role of consumer.
The charges for market services in a competition for services or governing demand could deviate from full cost recovery.
Demand for “unique or mandate regulatory or policy ” services
Charging users for unique or regulatory or policy services would be benefit from full costing model and full cost recovery.

8. Cost of services Direct costs. Interest costs from internal loans.
Services used from other support services.
Fund balance?

9. Basis of allocation Cause-and-effect relationship. Benefit received.
Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects.
A cost object is any activity or item for which to be separated for measure of certain costs.
Cause-and-effect relationship.
Benefit received.
Fairness.
Legal constraints or mandate.

10. Concerns
Diminished trust between providers and customers. A charge system could create a suspicion among users about how charges are developed and/or administered, especially if the basis of the charges is not adequately communicated to the users.
Subverting processes or not using shared services. If users perceive charges to be too high or unfair, they may respond by developing their own service capabilities.
Unease over the charge system. Even if users do not subvert the system, a costing system that is viewed negatively by users could generate a great deal of efforts in debate and discussion that could be better spent on others.
Costs exceed the benefits of the system. Whether the complexity of cost system and cost is worth it should be seriously considered in light of the goals for the system and system design choices. 
Unmet expectations. Managers can become frustrated with the system if they do not understand what it can and cannot accomplish.

12. What are applicable laws and statutes regarding charges and fees?
Are formal policies in place articulating pricing factors or rationale for any subsidies?
What is the full cost of providing the service (both direct and indirect)?
Are rates periodically reviewed and updated?
Are long-term forecasts and plans consistent with the decision-making in the rate setting process?
How will the public be involved in the fee-setting process, and how will the public be informed of the result?

13. Consider applicable laws and statutes before the implementation of specific fees and charges.

14. Identify the factors to be taken into account when setting fees:
(affordability, fees history, inflation, service delivery alternatives)
Intend to recover the full cost of providing goods and services.
Intend to recover less than 100% of full cost – Require an explanation of the rationale for this deviation.
Outline the considerations that might influence the decisions
[the need to regulate demand, the desire to subsidize a services, competition with private businesses, economic development, elasticity of demand for the particular service, and visibility of the service to the community].

15. Review and update charges and fees periodically
FOR impact of inflation, other cost increases, adequacy of cost recovery, use of services, and the competitiveness of current rates.
Help smooth charges and fees over several years rather than having uneven impacts.
Benchmarking individual fees and charges with those charged by comparable or neighboring jurisdictions

17. Part II – Setting the rates

18. GOVERNMENTAL FUNDS
General Fund – accounts for all financial resources of the state not required to be accounted for in some other fund.
Special Revenue Funds - accounts for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are restricted or committed to expenditures for specified purposes other than debt service or capital projects.
Debt Service Funds - accounts for the accumulation of resources that are restricted, committed or assigned for, and the payment of, general long-term debt principal and interest.
Capital Projects Funds - accounts for financial resources that are restricted, committed, or assigned to expenditures for the acquisition and construction of major capital facilities.
Permanent Funds - accounts for resources that are restricted to the extent that only earnings, and not principal, may be used for the benefit of the government or its constituents.

19. Basis ‘components’ for setting the charge or fee
Full cost incorporates direct and indirect costs (including operations and maintenance), overhead, and charges for the use of capital facilities.
A low level of detail might be sufficient for a costing system with limited goals, such as developing enterprise rate models or obtaining reimbursement for indirect costs under a grant.
A high level of detail would lead to a more accurate costing system since the activities represented by specific categories or the level of programs or value of a service.

20. The concept is critical when determining the cost of a specific product or activity for the reasons that
direct costs are always used to compile the cost of something
indirect costs may not be assigned to such a cost of something

21. GENERALLY [concept]
Typical allocation process in a multi-functions within a department or multi- department within an agency:
Assign cost to specific department or function.
Assign operating department costs (including the allocations from central service departments) to services.

23. Indirect Cost
Indirect costs are costs used by multiple activities, and which cannot therefore be assigned to specific cost objects.
Overhead incurred during a reporting period and accumulated in an overhead cost pool
Cost or expenses incurred for a joint or common benefit and cannot be directly or specifically identified with the benefiting cost objectives or activities.
Indirect costs must be allocated proportionally to the benefiting cost objectives or activities.
Allocation of cost from Central services departments

24. Indirect Cost Salaries & Burden rate • Equipment Rental • Utilities
• Building Maintenance
• Membership
• Administrative Staff
• Reprographic Services
• Office Supplies
• IT Services
• Training and Travel
• Professional services [not pass-through]
• Equipment including software[non-depreciation]
Improper Charge of Indirect Costs‐ without the approval or reviewed by the designated approver or reviewer for:
Federal and State
Local Government Assistance
Local Oversight Program
County Rates and Fees
Reference: 2 CFR part 225

25. Direct Cost
A cost that can be directly related to performing a specific service or function
Identifiable expenses that are directly or specifically for a particular program or a function or a cost objective
Program structure or
Operation / Activities or
Grant

26. Direct Cost Bases Total Direct salaries and wages
Total Direct salaries and wages and burden rate [fringe benefit]
Total Direct labor cost based on hourly labor rates*
Modified Total Direct Cost
Cost of unallowable activities which benefit from the indirect cost pool should be included in the cost base
Which base would be applicable for the program or function???

27. Indirect Cost vs. Direct Cost
Governmental
Proprietary
Note
Labor burden rate
Contract
License
Software
Training
Rent
Insurance
Depreciation
Meals
Membership

28. Classification of Costs
No Universal rule
Treat each item of cost consistently in like circumstances either as a direct or indirect cost
Reference: 2 CFR part 225

29. Fund Balance

30. Indirect Cost Rate Type
Provisional / Final
Fixed with carryforward
Predetermined
A de Minimis

31. INDIRECT COST RATE PLAN (Proposal)

32. Indirect Cost Rate Proposal (ICRP)
Documentation prepared by non-Federal entity to substantiate its request for the establishment of an indirect cost rate - CFR§200.57
Documents that identify cost in a logical and systematic manner for both allowable direct and indirect costs to benefiting activities.
The approved reimbursement rate or rates negotiated between the federal government and an entity which reflects the indirect costs incurred by the entity in the conduct of Federal programs.

33. The Proposal \
Detailed schedules on the composition and allocation of all allocated, billed or indirect cost centers.
Comprehensive Annual Financial Report (CAFR) OR any other financial records supporting the amounts included in the proposal.
A detailed and understandable reconciliation of the costs included in the proposal accounting records and/or the CAFR.
An explanation of any significant increases in individual cost centers or rate components. (e.g. a proposed central service or significant indirect cost rate component that is more than 10°/a higher than the level negotiated for the prior year)

34. COST
Generally:
Previous year’s actual data: if there is little change to the program structure and related costs.
Budget data + actual fund balance: if the program structure (and related costs) has expended or changed considerably or newly created organization
Historical data: for the new program.

35. Allowable Cost
Be necessary and reasonable ( Ordinary, sound business and established practices and policy, arms-length transactions)
Be allocable
Be treated consistently (Like costs in like circumstances are treated in the same manner)
No double dipping
Be adequately documented and authorized
Reduced by any applicable credits
Conform to the cost principles and award
Conform to General Accepted Accounting Principles
Be consistent with policies, regulations, and procedures that apply equally to state and federal and non-state or non-federal activities.

36. Unallowable or excluded cost
Costs excluded because they would distort the allocation base.
Examples: Capital (equipment), debt service, cost already been reimbursed by a revenue sources.
Costs that cannot be charged to State or federal programs (grants/cost reimbursements) either as a direct cost or included as part of the indirect cost pool when calculating an indirect cost rate.
Examples: bad debt, contingencies, contributions and donations, entertainment (including meals) fines and penalties, interest, other financial costs, and governance.

37. Credits
Amounts that reduce or offset allocable direct or indirect costs.
Applicable credits include purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments for overpayments or erroneous charges.
Credits must be allocated to the federal award as applicable as a cost reduction or cash refund.  

38. Indirect Cost Rate
A rate derived from the allocation of a pool of overhead costs in an equitable and efficient way to Programs, Projects, Divisions or other direct activity that benefitted from the indirect/overhead costs

39. ALLOCATION BASE
The allocation base should be a cause, or driver, of the cost being allocated. An allocation base is appropriate and reasonable is when changes in the allocation base roughly correspond to changes in the actual cost.
Demand for “unique or mandate regulatory or policy ” services

40. Examples of Internal Services Cost Allocation Bases
Allocation Basis
Payroll processing
Number of employees, number of checks
Budgeting
Labor hours, size of budget
Insurance
Number of employees, experience
Legal services
Direct labor hours
Office space / rent
Square feet of space occupied
Procurement services
Number of P.O.s, dollar volumes, direct labor
Vehicle costs
Miles driven, hours used
Information technology                                
Number of devices, server time, number of calls to help desk, direct labor hours

41. Allocation of Indirect Cost
Traditional costing applies indirect costs to products based on a predetermined overhead rate
Activity Based Costing (ABC) assigns costs to the activities required to deliver a service and can be more accurate than traditional costing methods.

42. Indirect cost rate: Single or Multiple
Depending of the Objective that
would distribute the cost to the benefitted cost objectives on base that will produce an equitable result in consideration of ‘relative’ benefits received.
2 CFR Part 225, Appx A, F

43. Indirect Cost Allocation
Simple Allocation
Expenditures
SAP inf.
Direct function or program
Total Direct Cost
InDirect Cost
Non-allowable
Grant
Others
Salaries and Wages
1,500,000
150,000
1,200,000
1,350,000
Fringe benefit
330,000
33,000
264,000
297,000
Total Labor
1,830,000
183,000
1,464,000
1,647,000
Depereciation - Office Equipment
50,000 -
Equipment rental
100,000
60,000
25,000
85,000
15,000
Telecom - Computer
Facility - Space
Facility - Maintenance
30,000
Meals
1,500
500
1,000
Executive Car allowance
6,000
Countywide Cost Allocation
2,132,500
243,500
1,489,000
1,732,500
393,000
7,000
Cost reimbursement - Admin
(6,000)
2,126,500
387,000
Indirect Cost Allocation
54,392
332,608
Indirect Cost Rate
22%

44. SETTING THE RATES

45. TYPE Functionality-based rate Activity-based rate
Actual
Reduction
Activity-based rate
Competitive base rate

46. RATE Cost: Driven by Policy - Rules Divide by !!!!!!!!!!!!!!!!!!
DIRECT
INDIRECT
FUND BALANCE
Driven by Policy - Rules
Divide by !!!!!!!!!!!!!!!!!!
Subtract by !!!!!!!!!!!!!!!!!!!!!!!!

47. CONSIDERATIONS

48. Indirect costs include shared administrative expenses where a department or agency incurs costs for support that it provides to other departments/agencies
an indirect cost allocation plan OR an overhead percentage rate for recouping indirect costs

49. Utilize long-term forecasting in ensuring that charges and fees anticipate future costs in providing the service.
If the charges will recover costs associated with other long-term plans, such as a multi-year capital plan, a longer-term service fee plan should be consistent, recognizing the plan may be amended to reflect changing conditions in the future.

50. Provide information on charges and fees to the public.
There should be opportunities for citizen feedback, particularly when new rates are introduced or when existing rates are changed. Government's policy regarding full cost recovery, subsidies, and information about the amounts of charges and fees (current and proposed). Anticipated impact of the new fee on providing the service in future years