1. 1 The House Cut: Understanding Cost Allocation and User Fees Presentation to the Louisiana Government Finance Officers Association by Sherra Montz, Sr. Consultant, MGT of America Bret Schlyer, Sr. Consultant, MGT of America October 6, 2011

2. 2 Cost Allocation is a comprehensive distribution of agency-wide administrative costs to all departments that benefit or receive benefits. Costs of central service departments such as General Administration, Human Resources, Payroll, and Purchasing are distributed to all departments that benefit from their services by unique, fair, and equitable allocation bases. What is Cost Allocation?

3. 3 Definitions Plan A document which identifies the equitable distribution of central service administration and support costs to benefiting entities. Central Services Central costs which are incurred for a common or joint purpose benefiting more than one cost objective, and not readily assignable to entities specifically benefited, without effort disproportionate to results achieved.

4. 4 Why Do Cost Allocation? Revenue – General fund cost recovery – Matching federal funds – Offsetting federal audit findings Management Information – Full program cost identification – Resource utilization analysis Taxpayer Fairness – Elimination of subsidies where appropriate Federal & State Funded Programs Special Revenue Funds Capital Project Funds Enterprise Funds Internal Service Funds User Fees

5. 5 Types of Plans Prepared Federal 2 CFR 225 (OMB A-87) Plan – In accordance with Federal cost recovery principles – In accordance with GAAP – Cost recovery on Federal and State programs – Applicable to Government Agencies – Schools use A-21, Non Profits use A-122 GAAP (Full Cost) Plan – In accordance with GAAP – Cost recovery on non-Federal/State programs Enterprise funds Internal Service Funds User Fee charges

6. 6 Cost Allocation Plan Federal (A-87) Approval – CAP must be prepared annually – Only required to submit to State/Federal cognizant agency for approval if requested. – No official approval required – Must maintain CAP and supporting documentation for audit GAAP (Full Cost) Plan – Approval Not Required

7. 7 Allocable Central Services Mayor and Council City Manager Information Tech City Attorney Budget and Research Internal Audit Human Resources Finance Building Maintenance Community Relations Intergovernmental Relations Asset Management Non-Departmental Costs Building Use/Depreciation Equipment Use/Depreciation More…

8. 8 Basic A-87 Cost Allowability Guidelines Necessary and reasonable Allocable Authorized under state or local laws Not otherwise restricted by statute All activities charged uniformly Consistent treatment In accordance with GAAP Not included as a cost of another Federal award Net of all applicable credits Adequately documented

9. 9 Common A-87 Unallowable Costs Lobbying Advertising (except for hiring) and public relations Contingencies/reserves Investment management Idle facilities Self-assessed taxes Capital Outlays

10. 10 Unallowable Central Services in an OMB A-87 Plan General government - Mayor/Council – May be portions allowable City/Parish Clerk Revenue and Taxation - tax collection services Intergovernmental Relations Community Relations Public Information Office Departmental administrative cost centers*

11. 11 Plan Methods Simplified Method – Easy, but imprecise for most organizations – Assumes uniform central service support to all departments – Susceptible to audit exceptions by Federal cognizant agencies Multiple Allocation Base Method – Complex, but accurate (double step-down) – Reflects differences in central services provided to departments

12. 12 Plan Development Tasks Review and analyze City/Parish organization structure Identify central service departments Obtain and analyze detail financial data Reconcile detail financial data to CAFR

13. 13 Plan Development Tasks (Continued) Interview Central Service Department Staff – Identify activities performed – Identify department/entities served by each activity – Identify staff and operating for each activity – Identify an appropriate allocation base (statistic) for each activity Equitable Available

14. 14 Plan Development Tasks (Continued) Obtain allocation base data (statistics) Enter/Import data into CAP software – Central service expenditures – Activity allocation bases Process calculations Review for accuracy/reasonableness Develop summary schedules Complete Plan

15. 15 Reviewing a Cost Allocation Plan: Cost Plans should be a “Road Map” of Costs: Where they came from; how they are being distributed; results of distribution

16. 16 Reviewing a Cost Allocation Plan

17. 17 Reviewing a Cost Allocation Plan

18. 18 Reviewing a Cost Allocation Plan

19. 19 Reviewing a Cost Allocation Plan

20. 20 Reviewing a Cost Allocation Plan

21. 21 Who Prepares Cost Allocation Plans? Cost Allocation Plans (CAPs) are prepared by: Professional firms specializing in CAP preparation In-house employee of governmental entity Not at all Often requires special software

22. 22 Over/under identifying allocable central service costs Under identification is more common Plan structure doesn’t match organization structure Plan structure stagnates over time Methodology established years ago, not updated to match changes in organizational service delivery Information Technology & Purchasing Utilizing estimates in expenditure distributions or allocation statistics Charging Full Cost Allocation Plan results (instead of A-87) to a department with federal funds (they can’t pass them on) Missed opportunities in application of results Common CAP Pitfalls

23. 23 MGT has found that a majority of the CAPs prepared in-house or by consultants that have not conducted departmental interviews on a regular basis have unidentified allocable costs, and plan structures that don’t match the actual organization Lower recoveries Increased audit risk Example City, Massachusetts – In-house full cost plan designed in late-1990’s. In 2000, employee benefits were moved out of individual department budgets, and into their own fund. Methodology was never updated to capture the benefits Over $1 million dollars of un-reimbursed costs as a result Common CAP Pitfalls

24. 24 Creating Indirect Cost Rates Indirect Cost Rate Proposal The document required by OMB A-87 to be prepared by a governmental unit or subdivision thereof to substantiate its request for the establishment of an indirect cost rate. Indirect Cost Rate A device for determining in a reasonable manner the proportion of indirect costs each program should bear. It is the ratio (expressed as a percentage) of the indirect costs to a direct cost base.

25. 25 Indirect Cost Rates Approval – Rates must be prepared annually – Only required to submit to State/Federal cognizant agency for approval if requested. – No official approval required – Must maintain supporting documentation for audit

26. 26 Indirect Cost Rates Components needed to calculate an indirect cost rate – Indirect costs From cost allocation plan – Rate base Salaries & Wages Total Direct Modified Costs – Divide the rate base by the indirect costs to determine indirect rate (percentage)

27. 27 Indirect Cost Rates Application of Rates – Rate is a maximum – Not required to charge all federal programs – Not required to charge same rate but can not exceed approved or maximum rate – Typically must be included in award budget to be reimbursed – Changes based on City/Parish fiscal year, not Federal fiscal year – Applied and claimed as direct costs are incurred and reported

28. 28 Applications & Extensions of Full Cost Allocation Plans Full Cost Plans are not restricted by A-87, reflect total operating costs – Can be based on budgeted costs – Can utilize estimates – More accurate reflection of total cost of operation Management Information – Full program cost identification – Unit cost information to compare with market for outsourcing decisions (must also evaluate fixed vs variable costs) – Resource utilization analysis Recovery of costs from Enterprise/Utility funds Use in costs calculated for User Fees

29. 29 User Fees

30. 30 User Fees Defined User fees are charges for the cost of goods or services provided directly to the user rather than the general taxpayer. – When local governments impose taxes, there is typically no direct relationship between the amount paid for government services and the benefit received by an individual taxpayer. – With a user fee there is a reasonable connection between the activity or service and the benefit received by the individual paying a fee. – Local governments impose user or regulatory fees to pay for the cost of providing a service or regulating an activity.

31. 31 Reasons for User Fees Tax Relief – Relieves pressure on tax based revenues, particularly in the General Fund. Equity – Matches cost recovery with service users (pay for what you get) Efficiency – Encourages more prudent use of the service

32. 32 Reasons for User Fees Services provided for a specific individual or group should not be paid from general taxes Services provided to non-residents should not be paid from general taxes Beneficiaries of a service should pay for the service

33. 33 Comparison of Taxes and User Fees

34. 34 Components of User Fees Direct Costs – Salaries, Benefits, direct Operating Expenses Indirect Costs – Departmental Overhead – City/Parish-wide Overhead Other Costs – Cross over support costs – Multiple departments directly involved in single service

35. 35 Calculating Full Cost 1. Direct costs A. Salaries and Benefits  Who provides the activity or service?  How long does it take?  How many are provided? B. Services and Supplies  Directly identified or  Allocated proportionately

36. 36 Calculating Full Cost 2. Indirect costs A. City/Parish-wide  Full Cost Allocation Plan B. Department admin C. Crossover support

37. 37 Example – Use Permit 1A+1B+2A+2B+2C = Full Costs Direct – Salaries & Benefits$ 17,500 Direct – Services & Supplies$ 5,000 Admin & Indirect$ 10,000 Full Cost – Annual$ 32,500 (100 per yr) Full Cost – Per Unit $ 325

38. 38 Labor Rate Service Hours Available hours (100%)2080 Less non service hours (20%) – Paid Holiday(80) – Personal Leave/Vacation(176) – Training(40) – Administrative(120) Service Hours (80%)1664 Using service hours instead of available hours makes sure your rates reflect your cost, not the employees rate of pay

39. 39 Application of Full Cost Productive Hourly Rate Determine How Much Time is Spent of Each Activity?

40. 40 User Fee Pricing Decisions

41. 41 The Acid Test - Implementation There is no Free Lunch. Services that are subsidized means less funding for other services The Sin is not in Knowingly Subsidizing a Service: The Sin is Unknowingly Subsidizing a Service Designed Subsidization can be an Effective Tool in Community Enhancement Work with Stakeholders for Conceptual Understanding

42. 42 Questions Contact Information – Sherra Montz – smontz@mgtamer.comsmontz@mgtamer.com – Phone: (504) 482-7280 – Bret Schlyer – bschlyer@mgtamer.combschlyer@mgtamer.com – Phone: (316) 214-3163 Conclusion