DIRECT BENEFITS OF AN INDIRECT COST RATE CCIA FALL CONFERENCE 2012 OCTOBER 4, 2012 Ask about the number of colleges with Federal Indirect cost rates. Heather McGee Senior Manager, Audit Services Division Vicenti, Lloyd & Stutzman LLP Telephone: (626) 857-7300 x292 Email: hmcgee@vlsllp.com

INTRODUCTION Topics to be covered: General information on the nature of indirect costs and indirect cost rates Benefits of having a federally approved indirect cost rate Process of applying for an approved indirect cost rate Guidelines for preparing an indirect cost proposal

NATURE OF INDIRECT COSTS Costs that are incurred for common or joint objectives Cannot be readily identified with a particular project or activity Examples Costs of operating and maintaining facilities, equipment and grounds Depreciation or use allocation General and departmental administration Library expenses Definition of direct costs – a cost that can be identified specifically with a particular program or activity.

BENEFIT OF HAVING AN APPROVED INDIRECT COST RATE Ability to recover a portion of District’s administrative costs for grants and mandated cost programs Leveraging tool when negotiating a grant Provides an indication of the District’s indirect contribution to any grant or special program Assists in the budget process for a grant Overall you have a greater reimbursement with an approved rate. Survey of uses of the indirect cost rate: -Negotiation process of a new grant & establishing that rate (#1 reason) -Mandated cost audits -Matching requirements -Benchmarking

MANDATED COST REIMBURSEMENT State of California allows reimbursement for 16 different programs. Most common claims for Community Colleges are: Collective Bargaining Enrollment Fee Collection & Waivers Health Elimination Fee Mandate Reimbursement Process I & II District #1 had Collective Bargaining, Health Fee Elimination, Integrated Waste, Interest Income District #2 had Health Fee Elimination District #2 had Agency Fee, Collective Bargaining, Health Fee Elimination, Enrollment Fee & Mandated Reim Process 5) Absentee Ballots, 6) Agency Fees, 7) Cal Grant, 8) CalSTRS Service Credit, 9) Community College Construction, 10) Open Meetings, 11) Prevailing Wage Rate, 12) Reporting improper Gov’mt Activities, 13) Sex Offenders: Disclosures by Law Enforcement Officers, 14) Threats Against Peace Officers, 15) Tuition Fee Waivers, 16) Travel Expense Guidelines,

MANDATED COST REIMBURSEMENTS Types of Reimbursements allowed by the State Controller’s Office: Default rate 7% Indirect cost rate for state FAM-29C mandates calculation Federally approved rate Varies FAM-29C is intended to be consistent with A-21. It’s objective is to determine an equitable rate to allocate administrative cost for who performed the mandated cost activities. In 2010-11, AB 1610, the education trailer biller, provided $22.3M for mandate claims from PY. These funds were distributed to the CCDs on an equal per FTES basis $17.78 based on Actual FTES reported at the 2009-10 P2 to the extent funding provided to a district exceeds a district’s outstanding mandate claims. The Federally approved rate does vary. For my client’s the calculated rate has varied from 30% to 40%. The negotiated rate varies from 26% to 40%. I’ve seen a trend with DH&HS lately, they really don’t want to dig in and audit the calculations submitted… using the claim that CCD’s are so small, the department covers 12 states, so they are busy, they are understaffed, etc.

REIMBURSEMENT OF INDIRECT COSTS FOR FEDERAL GRANTS Training Grants Limit of 8% with or without approved rate Research and Development Grants Varies by grant but typically will allow reimbursement at the approved rate Your best bet is to have the rate in the grant agreement. Having a preapproved rate will help.

TYPES OF INDIRECT COST RATES Provisional Rate Final Rate Predetermined Rate Fixed Rate with Carry-forward Provision Provisional Rate – Temporary rate established for a given period of time to permit funding and reporting of indirect costs until final rate is determined. Later adjustments for difference between provisional & permanent rate. Final Rate – Permanent rate other institutions actual costs are know and amount of allowable indirect of allowable indirect cost applicable sponsored projects have been determine. No subject to adjustment. Predetermined rate – Permanente rate established for a specific future periods (fiscal year) based on an estimate of costs fro that future period. Used when there is reasonable assurance based on experience and a reliable estimate of costs, that predetermined rate will approximate actual costs. Fixed rate – Similar to predetermined rate except the difference between the estimated costs used to establish the fixed rate and actual costs of the fiscal year covered by the rate is “carried forward” as an adjustment to future years. Carry forward provision applied to the 2nd or 3rd year. Predetermined & Fixed Rates are recommended because they permit a more timely closing of completed projects and eliminate the necessity of retroactive adjustments.

SELECTING THE TYPE OF RATE THAT IS RIGHT FOR YOUR DISTRICT Factors to consider when choosing the type of rate Is the rate adjustable? Will a retroactive adjustment be necessary? Is the District able to close projects in a timely manner? Approving agency will determine what type rate you are given and how long it is good for.

PROPOSAL DOCUMENTS Certificate of Supplemental American Recovery and Reinvestment Act (ARRA) Indirect Costs Indirect Cost Proposal (ICP) Checklist Indirect Cost Proposal https://rates.psc.gov/fms/dca/ARRA%20IDC.pdf http://www.dhs.state.il.us/OneNetLibrary/27896/documents/Contracts/FY12/IndirectCostProposalChecklist.pdf https://rates.psc.gov/fms/dca/shortform1.pdf 1st document is a statement certifying that the indirect cost proposal has been reviewed by a institutional representative and that the cost allocation & allowability have been made based on OMB-21. 2nd document contains 11 questions related to the indirect cost proposal

SUPPORTING DOCUMENTATION Independently audited financial statements District’s financial statements (CCFS-311) Reconciliation of any differences between expenditures reported per audit and per CCFS-311 Fringe benefit information This is the documentations that will be included in the documents submitted. Your financial statements are presented in GASB 34/35 format which combines all funds in one column. The only way to tie the CCFS-311 into the financial statements is by net assets. Total Net Assets ties between the Statement of Net Assets in the financial statement and the reconciliation page. Total Net Assets for both General Funds (Restricted & Unrestricted) tie to the reconciliation page in the financial statements and page 6 of the CCFS-311. The indirect cost spreadsheets are prepared using the CCFS-311 Functional Expense for both General Funds (Restricted & Unrestricted) which begins on 27 and ends on page 31. Fringe benefits - There’s a slide later than give more information.

WHERE TO SUBMIT PROPOSALS Cognizant agency for reviewing and approving indirect cost rates: Department of Health & Human Services Department of Defense DH&HS is the most common agency used for CCDs. Also, they are the only Agency willing to negotiate for other Departments. Unless you have a significant Department of Defense contract, the Dept. of Defense will not negotiate. I only work with the Dept. of Defense for one client and when I talked to them they were trying to figure out how they could get out of negotiating it. Keep in mind it’s a negotiated process, so take the call from the Negotiator ready to wheel and deal.

DUE DATES AND COVERAGE OF PROPOSALS First-time application Immediately after notification of award No later than 3 months after effective date Previously established rate Within 6 months after the close of each fiscal year Failure to submit timely proposals Time extensions are available You don’t want to fail to submit your proposal timely, but if you do… be sure to communicate with the department.

GUIDELINES FOR PREPARING INDIRECT COST PROPOSALS OMB Circular A-21 Cost Principles for Educational Institutions Methods of calculating indirect cost rates Simplified Method: Federal funding* less than $10 million in Federal expenditures. Long Form Method: Federal funding $10 million or greater in Federal expenditures. *Determination excludes Student Financial Aid funding OMB A-21 defines the appropriate cost principles for determining cost applicable to grants. There are 54 selected items of costs that are either allowable or unallowable.

SIMPLIFIED METHOD Segregate total salaries and wages from other current expenditures (both restricted and unrestricted general fund) Analyze current expenditures Allowable vs. nonallowable Make necessary reclassifications and adjustments Segregate institution’s allowable indirect costs from its direct costs Establish a direct salary and wage base Compute indirect cost rate Challenge with segregating the salaries & wages is the CCFS-311 reports in Salaries & Benefits. It’s a lot easier to do if you have a query. Allowable vs nonallowable… take your auditor hats off. Nonallowable doesn’t mean noncompliance or unallowable, it means it can’t be included in the indirect cost calculation. Examples of unallowable are FWS expenses; equipment & capital expenditures; catalogs & schedules; commencement & convocation costs; dues & memberships; advertising & promotional items; interest expense; bad debt; HR legal expense, housing allowances, mileage allowances. The RJEs & AJEs for this calculation is fun. In some cases you reclass expenses from one direct activity to another direct activity only to eliminate it in the next schedule. As far as they classification, just follow the DH&HS example.

INDIRECT PROPOSAL FORMAT – SIMPLIFIED METHOD Classification of expenditures Reclassifications Adjustments Calculation of rate

FRINGE BENEFITS Information submitted with indirect cost proposal Listing of fringe benefits Copy of fringe benefit policy Description of method(s) used to budget and charge fringe benefits to sponsored agreements Funding practices for a “defined benefit” pension plan Institutions computation of a fringe benefit rate

TREATMENT OF FIXED ASSETS Exclusion of capital outlay expenditures Depreciation or use allocation allowance Capital outlay expenditures are considered an unallowable costs. With GASB 34/35, all District’s are reporting fixed assets in the FS, but typically they are not reported in the Unrestricted or Restricted General Funds. For the indirect cost purposes, a use allowable can be calculated: For buildings - using Report 17 for square footage information, historical costs and applying use allowance of 2%. For equipment – historical costs x 1%.

RESOURCE DOCUMENTS OMB Circular A-21: Cost Principles for Education Institutions Indirect Cost Determination, Guidance for State and Local Government Agencies, U.S. Department of Education OMB Circular A-87, Selected Items of Cost A Guide for Colleges and Universities, Cost Principles and Procedures for Establishing Indirect Cost and Other Rates for Grants and Contracts with the Department of Health and Human Services (Appendix E contains a sample calculation using the Simplified Method) Mandated Cost Manual for Schools, State Controller’s Office Things not to do: Use unapproved indirect cost rate calculation for grants or mandate cost claims Calculate the indirect cost rate and not submit it timely