Restricted Indirect Cost Rate Procedure with Carry-Forward Adjustment
The following plan was approved by the U.S. Department of Education in July,
1996 and must be applied to indirect cost rates certified to be used in fiscal
year 1997-98 and thereafter.
INDIRECT COST ALLOCATION PLANS
A BASIS FOR ESTABLISHING RESTRICTED INDIRECT COST ALLOCATION RATES FOR
FEDERAL PROGRAMS FOR USE BY PENNSYLVANIA LOCAL EDUCATIONAL AGENCIES
Section 1 - General Information
Restricted Indirect Cost Allocation Plans for Pennsylvania Local
Educational Agencies
Introduction
Effective July 1, 1973 and in accordance with information received from the
United States Commission of Education (U.S. Secretary of Education) as well as
the Office of Grant Administration Policy (Office of Grants and Contracts
Services), Department of Health, Education and Welfare (U.S. Department of
Education), local educational agencies (LEAs) are required to have an approved
indirect cost rate in order to recover any indirect costs related to federal
grants and contracts. Federal Management Circular 74-4, published by the Office
of Federal Management Policy, set forth principles for determining and
distributing costs of federal grants and contracts. The circular also formed the
basis for development of Indirect Cost Allocation Plans (ICAPs) and rates.
The plans described in this memorandum are based upon the cost principles
set forth in OMB Circular A-87, Revised. This Circular supersedes Federal
Management Circular 74-4 as revised. No substantive changes were made in OMB
Circular A-87.
A copy of OMB Circular A-87, Revised may be obtained by contacting:
Office of Federal Financial Management
Financial Standards and Reporting
Branch
Office of Management and Budget
Washington, DC 20503 (202)
395-3993
Or through the following Internet Address: www.whitehouse.gov/omb
U.S. Government Bulletin OASC-10, which is entitled, "A Guide for State and
Local Government Agencies: Cost Principles and Procedures for Establishing Cost
Allocation Plans and Indirect Cost Proposals for Grants and Contracts with the
Federal Government", may be of interest to LEA personnel desiring additional
information on the concept of indirect costs. The principles adhered to in OMB
Circular A-87 are reprinted in OASC-10. A copy of Bulletin OASC-10 can be
obtained from the Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402 for a nominal charge.
The primary reason for the issuance of Federal Management Circular 74-4 was
to provide for uniform government-wide principles for determination and
reimbursement of indirect costs through the mechanism of an indirect cost rate.
Frequently, program officers had to follow very cumbersome methods in order to
compute and substantiate indirect costs. Therefore, Circular 74-4 was issued to
alleviate these cumbersome and costly procedures.
There are certain limitations on recovery of indirect costs:
Federal law may limit the amount of indirect costs which may be recovered.
For example, the maximum indirect cost allowable by law for a particular program
may be less than the amount of indirect costs calculated by using a rate
approved under this state's plan.
Recovery of indirect costs is subject to availability of funds and
individual program guidelines. If a combination of direct and indirect costs
exceeds funds available, then the LEA will not be able to recover the total cost
of the project or program.
Indirect costs may be recovered only to the extent that direct costs were
incurred. In order to determine the reimbursable amount for indirect costs, the
indirect cost rate is applied to the amount of direct costs expended, NOT to the
total grant award.
Restricted Indirect Cost Allocation Plans
The Labor, Education and Community Service (LECS) Comptroller's Office, in
cooperation with the Office of Education, Office of Grant Administration Policy,
(USDE, Office of Grants and Contracts Services), will approve a Restricted
Indirect Cost Allocation Plan for use with federally funded programs.
A restricted indirect cost rate is used with federal programs which
"supplement but do not supplant" local effort. Such amounts are intended to be
in addition to, AND IN NO WAY REPLACE, local funds. Most of the federal programs
conducted by LEAs are with "restricted" grants.
Restricted grants ("supplement but do not supplant" language) include
indirect cost for only general and administrative types of costs as defined in
the "General Standards" section of this plan. Note that even though Circular
A-87, Revised, now allows Occupancy and Space Maintenance Costs as part of
General Management Costs, it does not require the use of these costs.
Pennsylvania has elected NOT to include Occupancy and Space Maintenance Costs as
general management costs since the Comptroller's Office does not have the
resources necessary to verify these costs.
LEAs should consult the guidelines established for the various federal
programs to determine if a restricted rate is used with a particular program.
The Indirect Cost Allocation Plan for LEAs establishes a fixed with
carry-forward adjustment rate applicable to the forthcoming fiscal year. Despite
the fact that financial data from a prior fiscal year is used to establish the
fixed with carry-forward adjustment rate, no future rate adjustments can be made
based on actual costs. The LEA may elect to claim indirect costs at a rate less
than, but not higher than the certified rate.
The LECS Comptroller's Office has been delegated authority by the Federal Government to review indirect cost data and to approve and certify the indirect cost rates for LEAs in the state. The LECS Comptroller's Office will issue
approved Restricted Indirect Cost Rates in the spring of each year after the
verification and approval of the LEAs Annual Financial Report (AFR). LEAs must
complete the Restricted Indirect Cost Rate Schedule in the AFR in order to have
a rate calculated. An indirect cost rate must be approved by the LECS
Comptroller's Office in order for an LEA to claim indirect costs on federal
grants.
The base for allocation (the denominator in the fractional computation of
the indirect cost rate) must include TOTAL expenditures as defined in 34 CFR
76.567. Accordingly, the denominator will include expenditures of the General
Fund and the Enterprise Fund for all LEAs and expenditures of the Special
Revenue Fund for Intermediate Units only. Special Revenue Fund expenditures for
school districts consist of Capital Reserve Fund activities that are permitted
to be excluded when calculating a restricted indirect cost rate and therefore
will not be placed in the base for allocation for those entities.
Consistent treatment of expenditure classification must be applied when
developing or using an indirect cost rate. An expenditure treated as "indirect"
in the rate calculation must be treated as "indirect" on program budgets.
An approved restricted indirect cost rate is valid for one fiscal
year.
When applying an indirect cost rate to "carry over" expenditures associated with federal programs, the LEA should utilize the indirect cost rate that was approved for use with the original project.
Public Relations - The current Chart of Accounts does not provide for the
collection of expenditures for the purpose of "promoting" the school entity.
Schools do not typically recruit students, since they are assigned based on
geographic location. However, with the advent of the Charter School movement,
our office will investigate the need to collect public relations related
expenditures.
Fringe Benefits - Office of Management Circular A-87, Attachment B -
Selected Items of Cost, Paragraph 11 - Compensation for Personnel Services, d -
Fringe Benefits. Effective with school year 2001, the Commonwealth of
Pennsylvania's LEAs are required to report on a modified accrual basis in
accordance with Generally Accepted Governmental Accounting Principles.
Definition of Terms
DIRECT COSTS - Costs which can be identified specifically with a particular
program or function. These costs may be charged directly to a grant.
BASE FOR ALLOCATION - The total of the direct costs and the unallowable
costs that generate or benefit from allowable indirect costs. This figure is
the denominator used in the fractional computation of an indirect cost
rate.
EXCLUDED COSTS - Costs which are not included in the indirect cost
computation. Examples of excluded costs are: capital outlay (equipment), debt
service, services purchased from intermediate units for special classes,
intermediate unit payments by withholding, intermediate unit direct payments,
and fund transfers.
ELIMINATIONS - Excluded and unallowed costs which are removed from total
expenditures.
INDIRECT COSTS - Costs incurred for a common or joint purpose benefiting
more than one cost objective and not readily assignable to the cost objectives
specifically benefited without effort disproportionate to the results achieved.
Indirect costs consist of General Management Costs as defined in CFR 76.565 and
include the costs of performing a service function such as payroll, accounting
or personnel management. General expenses necessary to carry out the overall
responsibility of the LEA are NOT allowable indirect costs.
INDIRECT COST POOL - The total allowable indirect costs. This figure is
the numerator used in the fractional computation of an indirect cost rate.
UNALLOWED COSTS - Costs that cannot be charged to federal programs as a
direct cost or included as part of the indirect cost pool when calculating an
indirect cost rate. Examples of unallowed costs include: bad debts;
contingencies; contributions and donations to outside organizations;
entertainment; fines and penalties; interest and other financial costs; and
governance.
General Standards for Selected Items of Cost
1000 Instruction:
Expenditures in this function are normally considered direct costs and are
included in the base for allocation. The exceptions are:
Object 320 (except 329) - Professional Educational Services
Object
322 - Professional Educational Services - IUs
Object 323 - Professional
Educational Services - Other Ed Agencies
Object 560 - Tuition
Object
700 - Property
1200 Special Programs - Elementary/Secondary:
Object 594 - Intermediate Units Payment by Withholding for Special
Classes.
1300 Vocational Education:
These accounts should be reported as eliminations.
Object 322 - Professional Educational Services - IUs
Object 323 - Professional Educational Services - Other Ed Agencies
2100 Support Services - Pupil Personnel:
All expenditures in this subfunction except Object 700, Property, are
normally considered direct costs and are included in the base for
allocation.
2200 Support Services - Instructional Staff:
All expenditures in this subfunction except Object 700, Property, are
normally considered direct costs and are included in the base for
allocation.
2300 Support Services - Administration:
Expenditures in this subfunction except Object 700 (Property), and Object
820 (Claims and Judgments Against the LEA), are normally considered costs of
general government and hence are unallowable as indirect costs. However,
because the expenditures in this subfunction generate or benefit from allowable
indirect cost, they must be included in the base for allocation.
Some expenditures in this subfunction may be included in the indirect cost
pool if they relate to certain allowable situations. Allowable situations are as follows:
(1) If 2310 contained salaries of an individual acting in the dual capacity
of business manager/board secretary, that portion of the salary, employee
benefits and associated expenses related to the position of business manager,
but recorded in 2310 instead of 2500, would be included in the indirect cost
pool.
(2) Expenditures for the general audit of the LEA are considered allowable
indirect costs and should be included in the indirect cost
pool.
Federal regulations specifically exclude compensation for the chief
executive officer of any component of the grantee and the operation of the
immediate offices of those officers from the indirect cost pool. This includes any deputy chief executive officer and their immediate support staff regardless of whether they oversee activities that would normally be considered General
Management Costs or not. Accordingly, NO PORTION of the salaries or benefits of the chief executive officer (Superintendent, Executive Director, etc.) or their immediate staff may be included in the indirect cost pool. Expenditures in subfunction 2350 required for the administration of the federal grant, may be charged as direct costs.
2400 Support Services - Pupil Health:
All expenditures in this subfunction except Object 700, Property, are
normally considered direct costs and are included in the base for
allocation.
2500 Support Services - Business:
Expenditures in this subfunction are included in the indirect cost pool. Exceptions to this rule, which are not indirect costs, and should be included in the base for allocation are:
(1) Object 400, except object 432, which is an allowable indirect
cost.
(2) Object 800, except object 810, which is an allowable indirect
cost.
(3) Object 700 is an elimination.
(4) Any federal expenditure in 2500.
2600 Operation and Maintenance of Plant Services:
In the calculation of a restricted rate, all expenditures in this
subfunction except Object 700 (Property) are unallowable indirect costs and they
are included in the base for allocation.
2700 Student Transportation Services:
Expenditures in this subfunction except Object 700 (Property) are normally
considered direct costs and are included in the base for allocation.
2800 Central:
Expenditures in this subfunction except Object 700, Property, are normally
considered direct costs and are included in the base for allocation.
Certain expenditures in this subfunction may be included in the indirect
cost pool, if they relate to allowable situations. The allowable situations are as follows:
(1) Expenditures in this subfunction related to staff services (personnel)
in 2830 are considered allowable indirect costs and are included in the indirect
cost pool.
(2) Expenditures for data processing services charged to account 2840 may
be included in the indirect cost pool if the services are actually performed for
activities that are considered allowable indirect costs.
2900 Other Support Services:
Expenditures in this subfunction are normally considered direct costs and
are included in the base for allocation. Exceptions
Object 595 - Intermediate Unit Payments by Withholding
Object 596 - Intermediate Unit Direct Payments
Object 700 - Property
2990 Pass-Thru Funds
Object 899 - Pass-Thru Funds
These exceptions are considered excluded costs.
3000 Operation of Noninstructional Services
In the calculation of a restricted rate, all expenditures in these
subfunctions except Object 700 (Property) are allowable direct costs and they
are included in the base for allocation.
3100 Food Services:
Expenditures in this subfunction are normally considered direct costs and
are included in the base for allocation. Exceptions in this subfunction are for Objects 571 (Food Service Management - Food Costs), 630 (Food), and 700
(Property). These exceptions are considered excluded costs.
4000 Facilities Acquisition, Construction and Improvement Services:
All expenditures in this function are considered excluded costs and are not
included in the indirect cost rate calculation.
5100 Other Expenditures and Financing uses:
All expenditures in this subfunction are considered unallowed indirect
costs and are eliminated from the indirect cost rate calculation.
5200 Fund Transfers:
(5220, 5230, 5240, 5250, 5260, 5270, 5280)
All expenditures in this subfunction are considered excluded costs and are
not included in the indirect cost rate calculation.
Section II
Instructions for Completing the Restricted Indirect Cost and Eliminations
Schedule as Found in the Annual Financial Report
General
The Restricted Indirect Cost and Eliminations Schedule must be completed in
the AFR for an LEA to have a restricted indirect cost rate calculated to be used
with federal programs.
Actual expenditures from the second fiscal year preceding the fiscal year
for which the application is applicable are used to calculate the indirect cost
rate. For example: The actual expenditures for the fiscal year 2001-02 as reported in the AFR submitted to the LECS Comptroller's Office during the fiscal year 2002-03 would be used to calculate the restricted indirect cost rate applicable to federal programs operated in fiscal year 2003-04. For School Districts and Area Vocational-Technical Schools the AFR is form PDE-2057. For Intermediate Units the AFR is form PDE-2056.
Restricted Indirect Cost and Eliminations Schedule
The restricted indirect cost and eliminations schedule is designed to
collect elements of the indirect cost calculation that are not already available
in the Annual Financial Report.
For each of the functions listed on this schedule (2300, 2500, and 2800),
report the total amount of ALLOWABLE indirect costs, if any, and provide a brief
explanation of those costs. DO NOT simply record the total expenditures for the function as listed in the detailed section of the AFR.
For each of the function-object combinations listed, report the total
amount of expenditures recorded in the general ledger. These expenditures are at a more detailed level than is available in the rest of the AFR and they are needed to complete the restricted indirect cost rate calculation.
Appendices
Appendix 1: Refer to the Restricted Indirect Cost and Eliminations Schedule
page from the AFR.
Appendix 2: Refer to the Restricted Indirect Cost Certification with
Carry-Forward Adjustment form that is mailed to all LEAs in the spring of the
year. Appendix 1 and Appendix 2 are not posted to Penn*Link. This form includes the Carry-Forward Adjustment computation.
Appendix 3 - Review Procedures
The following outlines the procedures that will be used by the LECS
Comptroller's Office to review and approve indirect cost rate
applications.
(A) LEAs must complete the Restricted Indirect Cost and Eliminations Schedule in the AFR in accordance with the instructions and guidelines developed by the LECS Comptroller's Office in order to have a rate certified for use with federal programs.
(B) The LECS Comptroller's Office will provide the review, approval and information function for a LEAs restricted indirect cost rate. The LECS Comptroller's Office will:
(1) Initiate, maintain and monitor files related to indirect cost rate
applications for each LEA in the Commonwealth. Such records will contain:
a) an indirect cost rate application; and/or
b) related correspondence
(2) Review each Restricted Indirect Cost and Eliminations Schedule
to determine that:
a) the indirect expenditures reported are eligible as allowable
costs, and
b) the schedule is in compliance with directives and procedures set
forth by the LECS Comptroller's Office.
(3) Approve a restricted indirect cost rate:
a) A certified copy of the approved restricted indirect cost rate
will be sent to the LEA. A copy of the certified rate should be maintained in the LEAs files.
b) In the event that the calculation for an LEAs restricted
indirect cost rate exceeds 8 percent, the Comptroller's Office will cap the
approved rate at 8 percent.
(4) Provide support by:
a) Informing LEAs of changes in basic policy regarding the
computation of indirect cost rates and associated information and
procedures.
b) As required, conducting workshops and/or supplying technical
assistance in problems related to indirect cost rate
applications.
This correspondence details the restricted indirect cost allocation plan
for Pennsylvania as approved by the United States Department of Education.