1. Puget Sound Finance Officers Association Peter Moy, Principal Nathan Reese, Project Consultant Indirect Cost Allocation Plans May 9, 2012 7525 166 th Ave NE Suite D-215, Redmond, WA 98052  ( 425) 867-1802  www.fcsgroup.com

2. 2 Topics  The Basics –Cost Allocation Basics –Analytical Steps  BARS  A-87 Plans  Wrap-Up

3. 3 What is an Indirect Cost Allocation Plan? A method to calculate the cost of support activities and functions to serve operating programs Support Activities Legislative Administration/Management Finance / Accounting / Budget Human Resources Legal Records Management Facility Maintenance Information Technology Etc. Operating Programs Police Fire and EMS Development Services Public Works Water, Sewer, Stormwater, and Solid Waste Utilities Parks Library Etc.

4. 4 Why Implement an Indirect Cost Allocation Plan?  Reimburse the General Fund from other funds, external agencies, etc. for overhead and administrative support costs  Calculate cost-based user fees for public services, such as development review, parks, fire permits, licensing  Recover central services costs through federal program reimbursement, compliant with A-87 guidelines  State Auditor priority

5. 5 Cost Allocation Basics The Basics

6. 6 Key Principles Cost allocation is by definition an estimate Strive for a reasonable and equitable means to allocate costs “If you could directly charge for all of these costs efficiently, you would…”

7. 7 Key Principles (cont.)  Indirect costs are incurred for a common purpose benefiting more than one cost function, organizational unit, contract, or grant  Cannot directly assign indirect costs without making an effort disproportionate to the results achieved

8. 8 Key Questions  What is the purpose of the cost allocation plan?  What are the full costs of providing services to the public?  Do cost allocation measures –Reasonably link to the level of service and/or benefit received, or (at least) –Represent an acceptable means for apportioning cost burden?

9. 9 Key Questions  Does the plan make sense to those responsible for its implementation and upkeep?  Does the plan make sense to those directly impacted by its results? –Can the results be explained to internal stakeholders? To their constituents?  Is the process by which the plan is updated: –Feasible to complete thoroughly on a regular basis? –Acceptable to those who must plan around and defend its results?

10. 10Terminology Indirect Service An activity that supports the departments and organizations that provide public services directly to the public Indirect Cost Pool A distinct program area or function within a department that provides indirect services. Direct Service An activity that provides services directly to or for the public and is supported by indirect services.

11. 11 Cost Allocation Methodology One-Step Process  A quick, simple means to allocate costs  May not be as equitable for complex organizations Allocable Costs of INDIRECT SERVICE PROGRAMS 1 DIRECT SERVICE PROGRAMS All indirect costs are allocated only to direct service programs costs

12. 12 Cost Allocation Methodology (cont.) costs Allocable Costs of INDIRECT SERVICE PROGRAMS 1 costs DIRECT SERVICE PROGRAMS INDIRECT SERVICE PROGRAMS 2 share of indirect costs All indirect costs are allocated to all departments and programs, both direct and indirect Costs allocated to indirect programs in Step 1 are distributed to direct service programs Two -Step Process  Provides a more complete portrayal of the full costs of service  Requires a more sophisticated allocation analysis

13. 13 Level of Detail  Allocate detailed costs only to the extent they enhance the level of equity or reasonableness achieved  Start with totals by department  Identify program areas within departments as allocable cost centers  Move to line-item detail only as needed It’s more meaningful to allocate program costs, rather than individual line items.

14. 14 Assortment of Measures The number and variety of workload measures used is dependent on the complexity of the organization and the goals of the plan… …and should be based on data that can be obtained easily on a regular basis or is recorded already for some other purpose. FTEs Actual Expenditures Agenda Items Computer Workstations Actual Timekeeping Data Square Footage Utility Accounts Records Archived Work Orders Accounting Transactions

15. 15 Common Pitfalls  Incomplete or targeted allocations  Not keeping current with organizational changes, practices, service levels, and costs  Unnecessary complexity  Avoiding discussion

16. 16 Analytical Steps The Basics

17. 17 Basic Analytical Steps Examine Organization Identify all indirect and direct departments and program areas Examine Organization Identify all indirect and direct departments and program areas Utilize Budget & Financial Data Compile total costs related to indirect services and program areas Utilize Budget & Financial Data Compile total costs related to indirect services and program areas Determine Workload Measures Form basis for the allocation of each indirect service 1 2 3 Allocate Costs Allocate indirect costs based on proportions from workload measures Allocate Costs Allocate indirect costs based on proportions from workload measures Calculate Full Overhead Identify each direct service’s full share of indirect costs Calculate Full Overhead Identify each direct service’s full share of indirect costs Make Adjustments Adjust for non-allocable costs, assigned costs, and other revisions Make Adjustments Adjust for non-allocable costs, assigned costs, and other revisions 4 5 6

18. 18 1. Examine Organization  Identify indirect service departments and programs  Identify direct service departments that receive support Evaluate Your Specific Organization All entities are structured differently, and indirect services will be provided by different departments from city to city, county to county, district to district. Admin Board of Commissioners AssessorPublic WorksProsecutorSheriffTreasurerCoronerAuditorCourts MaintenanceOther Human Resources Financial Services Other Purchasing Etc…Development Information Services Example:

19. 19 1. Examine Organization (cont.)

20. 20 2. Utilize Financial Data  Compile the costs of indirect program areas  Exclude any direct service costs  Decide if departmental costs need to be broken into programs

21. 21 2. Calculate Cost Pools  Indirect service program areas may not necessarily be recognized budget divisions  A simple allocation of a departments’ budget should be completed to identify costs for each program area Elections Licensing Accounting Payroll Accounts Payable Budget Auditor Budgeted Department Budgeted Divisions Program Areas

22. 22 3. Determine Workload Measures  Determine bases for allocating costs in a way that reasonably measures a department’s use of indirect support  Calculate percentages from each selected data set

23. 23 3. Determine Workload Measures Examples

24. 24 4. Make Adjustments to Cost Information  Adjust for any costs that can be directly assigned to specific departments or functions  Decide how to account for one-time expenditures (e.g., include, exclude, amortize)  Add additional outlays that may not necessarily correlate to the specific organizational unit but are reasonable inclusions to the cost of service  Make any exclusions needed to comply with OMB Circular A-87 rules for federal reimbursement of indirect costs

25. 25 5. Allocate Overhead Costs Finance receives $43,028 of itself. Step 1: Apply workload measures to proportionately allocate indirect costs to all departments Used in Allocation Step 2…

26. 26 5. Allocate Overhead Costs (cont.) Step 2: Allocate remaining indirect costs to direct service departments Allocate Finance’s share of indirect services based on how direct service departments use the entire Finance department

27. 27 6. Calculate Full Overhead Add all components of the indirect cost allocation to determine each direct service department’s share

28. 28 Reconciliation Financial Services Budget $800,000 Less: Costs allocated to other indirect services Plus: Costs allocated from other $ 68,651 indirect services Financial Services Allocated Overhead $ 821,805

29. 29 BARS - Overhead Cost Allocations for Local Governments

30. Guiding Principles  RCW 43.09.210: When one fund charges another, the fund being charged may only pay for the actual costs of the services that it receives (except for the General Fund). –The General Fund can subsidize other funds, because a large portion of its revenues (e.g. sales and property tax) are unrestricted. –If you have an overhead cost allocation plan that equitably shares overhead costs, then you are well on your way to demonstrating compliance with this statute. This plan should document: The cost of each overhead cost center, Level of service provided to benefitting funds/department and how it was determined, and The amount charged to each fund/department. 30

31. Guiding Principles (cont.)  Other RCWs indicate that the value of services provided by general government staff may be charged to utilities.  An overhead cost allocation plan should guide and document the cost allocation process. 31

32. General Government Costs  Local governments should not charge general government costs that benefit the public at large to the utilities or other funds with restricted revenues.  What are general government costs?  Some examples of general government costs that should not be part of a cost allocation plan include: 32 –Police –Parks and recreation –Community and economic development –Worker apprenticeship programs –Economic development

33. Elected Officials  The costs of elected officials (e.g. mayor, council, etc.) can be charged to utilities, but there is some risk that this could change in the future. –Because councils/boards of commissioners benefit both the public at large and the operations they oversee, there is no easy, clear-cut answer. –There are conflicting court decisions at the local level as to whether these costs can be charged, and no statewide court decision. –According to A-87 regulations the costs of elected officials must be excluded from overhead cost allocation plans. However, the regulations only apply to reimbursement of overhead costs related to federal grants –Receiving federal money does not automatically mean your cost allocation plan needs to follow A-87 regulations. However, an A-87 plan is needed to recover overhead costs related to grants.  If you choose to include the costs of your council/commissioners, use agenda items to allocate costs. 33

34. Sound Practices and Requirements  A good overhead cost allocation plan will include: –Allocation factors that are appropriate and are based on current and accurate information. –An allocation of costs to every fund/department receiving services, regardless of whether they can or will pay for those services. –Actual costs, or if budgeted costs are used then budgets are updated to actual costs at least annually. –For each overhead cost center, documentation describing (1) the services provided, (2) any excluded costs, and (3) the data used to allocate those costs. –Documentation showing how overhead charges to funds/departments were calculated.  Remember to charge departments/funds only after overhead services are provided.  If questionable/general government costs are included in the plan, they should only be charged to departments in the General Fund. 34

35. Recommended Allocation Factors Type of CostAllocation Factors Maintenance and Janitorial Square feet Electric and other externally provided utilities Square feet AccountingActual expenses or # of transactions BudgetActual expenses, budgeted expenses, or # of staff (FTEs) PayrollFTEs or payroll warrants Human resourcesFTEs IT services# of computers, servers, databases, or ports Legal – indirect costsActual expenses or hours worked InsuranceFTEs, claims or loss history, square feet, property values insured, and risk factor Accounts payable# of transactions (including vouchers or invoices) Purchasing# of transactions (procurements) 35  For other overhead costs not included on the list, choose allocation factors that result in allocations that are fair, equitable, and reflect the value of services received by benefitting departments/funds.  A combination of several allocation factors is also acceptable.

36. Recent Applicable Performance Audits from the State Auditor’s Office  Local Government Allocation Overhead Costs (11/2011)  Seattle City Light (03/2010) 36

37. 37 Federal Reimbursement (A-87) Plans

38. 38 What is an A-87 Plan?  Definition of allowable indirect costs  Application of results  True-up process  Documentation requirements  Approval OMB Circular A-87 It’s an analysis and document that provides a basis for recovering costs from federal (and state) grants…

39. 39 General A-87 Concepts (cont.) Allocations strive for reason and equity  Distribute indirect costs on bases that will produce an equitable result in consideration of the relative benefits received  Allocate an appropriate share of indirect costs to all activities which benefit from a governmental unit’s indirect cost OMB Circular A-87

40. 40 General A-87 Concepts (cont.)  Treat indirect costs consistently –Do not assign costs to one grant as a direct cost while allocating similar costs as an indirect cost for another grant  Do not charge any cost allocable to a particular grant or cost objective to other grants to: –Overcome fund deficiencies, and/or –Avoid restrictions imposed by law and terms of federal grants OMB Circular A-87

41. 41 A-87 Unallowable Costs  Advertising and public relations designed solely to promote the governmental unit  Costs of promotional items and memorabilia, including gifts, souvenirs  Alcoholic beverages  Bad debts  Contingencies  Contributions and donations  Entertainment  Investment counseling and staff  Legislative costs (e.g., Board or Council)*  Chief Executive costs (e.g. City Manager or County Administrator, etc.)*  Lobbying * Unless specific timekeeping documentation is available to substantiate costs on the specific program OMB Circular A-87

42. 42 Make Adjustments to Cost Information  Adjust for any costs that can be directly assigned to specific departments or functions  Decide how to account for one-time expenditures (e.g., include, exclude, amortize) –Must exclude capital outlay for A-87 and replacement charges  Add additional outlays that may not necessarily correlate to the budget but are reasonable or allowed inclusions to the cost of service –A-87 Building use component (2%) –A-87 Equipment use component (6.67%) OMB Circular A-87

43. 43 A-87 Documentation Requirements  Expenses included in the cost of service  Description of the allocation method used to distribute costs  A summary schedule showing the allocation of each service to the benefiting agencies  Description of internal service funds and other billed services  Organizational chart  Description of services  Identification of who provides and who receives the services OMB Circular A-87

44. 44 Wrap Up: Application and Cost Recovery Issues

45. 45 Application of Indirect Cost Allocation Most common need for developing or updating a plan:  Reimburse the General Fund for costs associated with providing services to other funds Primary Use:  Charging special revenue, internal service, and enterprise funds (“interfund charge for service”) and federal/state grant-funded programs for services provided Other areas of application becoming more common:  Setting user fees based on the “full cost of service”  Establishing an appropriate cost basis for interagency agreements

46. 46 Tips for Internal Success collaborationcommunicationconsistency  Involve your peers in other departments and try to incorporate their feedback  Keep the door open for future communication about cost allocation  Things change: Don’t let your hard work sit on the shelf in future years….update!

47. 47 Questions and Discussion