Understanding the Federal Indirect Rate Calculation

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Understanding the Federal Indirect Rate
Calculation

• Federal Restricted Indirect Cost Rates for School
  Districts
• Pam Peppers
• Supervisor of School District/ESD Financial
  Reporting
• [phone]
• pam.peppers_at_k12.wa.us

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Federal Indirect Cost Rates

• What is an indirect cost rate?
• How do districts determine which rate to use?
• What does fixed with carry-forward mean?
• What is a distorting item?
• What is an indirect expenditure?
• What is a space and occupancy plan?
• How is the indirect rate calculated?
• The districts grant application is requiring the
  5 year agreement OSPI receives from DOE. Where
  can I find the 5 year agreement?
• Things to consider for the indirect pool and
  base.
• Why was the indirect rate on the FY 05-06 F-196
  different than the rate calculated on the FY
  03-04 F-196?

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What Is An Indirect Cost Rate?

• An indirect cost rate is the maximum percent of
  dollars the district can expend from state and
  federal grants for administrative costs. Certain
  grants may have a more restrictive administrative
  cap. Indirect cost rates (limits) ensure that
  state and federal moneys are expended for
  intended uses and for allowable costs, including
  expenditures directly traceable to the program
  (direct expenditures) plus a limited allowance
  for overhead or indirect expenditures.
• Two rates are calculated for each district and
  are unique to each district
• A fixed with carry-forward indirect cost rate
  is calculated for each district for all of its
  restricted federal grants.
• A fixed with carry-forward indirect cost rate
  is calculated for all of its unrestricted federal
  grants.

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How Do Districts Determine Which Rate To Use?

• Typically, restricted rates must be used for all
  federal awards where supplement but not
  supplant is in the authorizing language. Almost
  all U.S. Department of Education federal programs
  fall into this category. The restricted rate is
  the lower of the two rates.
• Unrestricted rates may be used for those federal
  grants that do not have a supplant provision.
  The unrestricted rate uses the same calculation
  as the restricted rate except expenditures for
  maintenance and grounds are included, resulting
  in a higher rate.
• If there is a question as to which rate you
  should use, consult the district grant writer or
  contact OSPI if the grant flows through our
  agency.

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What Does Fixed With Carry-Forward Mean?

• A fixed with carry-forward provision is a rate
  computed and fixed for a specified future school
  year based on an estimate of that school years
  level of operations. However, when the actual
  costs of that school year become known, the
  difference between the estimated costs and the
  actual costs is carried forward as an
  adjustment to a subsequent school year for which
  a rate is established.
• For example
• The 04-05 F-196 is used to calculate a rate of
  3.6 for the 06-07 school year (2-year lag).
• If the actual rate calculated at the end of the
  06-07 school year is 5.7, then the adjusted rate
  of 5.7 will be used for the 08-09 school year.

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What Is A Distorting Item?

• For purposes of the indirect cost process,
  distorting items are activities that do not occur
  regularly each year or are one-time in nature
  (rather than ongoing). These activities
  distort the regular and normal expenditures of
  the district. Districts will need to determine
  and document expenditures they consider
  significant and distorting.
• Distorting items reduce the direct expenditure
  base (the denominator) which increases the
  indirect rate.

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Distorting Items

• Flow-through grants, contingencies, election
  expenses, renovations and alterations, and fines
  and penalties charged in Program 97 are specific
  types of distorting items.
• Flow-through grants are awards received by a
  school district and passed through to another
  district. The students in the district receiving
  the award do not benefit by the flow-through
  award. If the grant amount is 100,000, and the
  district passes 25,000 to another district, the
  amount of flow-through is 25,000.
• Although the federal language includes
  contingencies as a distorting item, they are
  generally not applicable to school districts.
• Election expenses charged to Program 97 are
  considered distorting if they are significant.

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Distorting Items (cont.)

• Renovations and alterations may be considered
  distorting if the expenditures are unusual,
  unexpected, and significant. For example, this
  winters windstorm tore portions of the roof off
  2 of the districts schools, causing not only roof
  damage but flooding as well. If the repair costs
  are significant this may be considered a
  distorting item. Remember that any general fund
  expenditures coded to Object 9 (Capital Outlay)
  are always excluded from the indirect calculation
  so some of the costs may be excluded. Typically,
  these types of repairs are expended in the
  Capital Projects Fund and are not included in the
  federal rate calculation.
• Fines and penalties assessed against the district
  by LI, OSHA, WISHA, or IRS late fees for filing
  late payroll taxes may be considered distorting
  if significant.

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What Is An Indirect Expenditure?

• Indirect costs (expenditures) are agency wide,
  general management costs (i.e., activities for
  the direction and control of the agency as a
  whole). General management costs consist of
  administrative activities necessary for the
  general operation of the agency, such as
  accounting, budgeting, payroll preparation,
  personnel services, purchasing, and centralized
  data processing.
• In theory, costs like heat, light, accounting,
  payroll, and personnel might be charged directly
  to specific programs if little meters could
  record minutes in a cross-cutting manner.
  However, this is not practical therefore,
  indirect cost rates are used to distribute those
  indirect expenditures.

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Indirect Expenditures

• Audit costs charged to Program 97, Activity 11,
  but not charged directly to another program, may
  be included in the indirect expenditure pool.
• Legal costs are generally not includable in the
  indirect expenditure pool.
• Costs for the Superintendent or Assistant
  Superintendent charged completely to Activity 12,
  but allocable to Activity 13 or 14 and 72-75 are
  considered indirect expenditures and are included
  in the calculation on the F-196. This pertains
  to small schools whose superintendents wear
  multiple hats and have many responsibilities in
  addition to being the superintendent.
• Other manual entry items included in the indirect
  expenditure pool are
• Public relations costs, charged to Program 97,
  Activity 15.
• Termination leave for federally supported staff
  not charged to Program 97.
• Pupil Management Safety costs recorded in
  Program 97, Activity 25, if the district has a
  cost allocation plan.
• Information Services recorded in Program 97,
  Activity 72.
• Space and occupancy costs.

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What Is A Space And Occupancy Plan?

• Space and occupancy maintenance costs associated
  with organization wide service functions, such as
  accounting, payroll, or personnel, may be
  included as general management costs if a space
  allocation or use study supports the allocation.
  
• As an example, if the district has done an
  analysis of the total square footage for the
  central administration building, and the business
  office occupies 25 of that total square footage,
  25 of allowable expenditures may be included in
  the indirect pool. Therefore, 25 of the
  expenditures for the central administration
  building costs for supervision, grounds,
  operation of buildings, maintenance, utilities,
  security, and insurance may be included in the
  indirect pool (numerator).

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How Is The Indirect Rate Calculated?

• The simple answer is the numerator (indirect
  expenditures) divided by the denominator (direct
  expenditures) equals the district indirect rate.
• The calculation on the F-196 Schedule for
  Determining School District Federal Restricted
  Indirect Cost Rates Including Fixed With
  Carry-Forward Calculation is a standardized
  methodology which determines the Indirect
  Expenditure Pool (column 6) and the Direct
  Expenditure Base (column 7). Those figures are
  used in the Fixed with Carry-Forward
  calculation to determine the indirect rate to be
  used in the subsequent 2-year period.

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Where Can I Find a Copy of the Five Year DOE
Agreement?

• Once the Department of Education accepts the
  methodology our state has proposed, OSPI receives
  an agreement from DOE. This agreement is kept on
  file with School Apportionment and Financial
  Services (SAFS). We have recently posted the 5
  year agreement, which ended August 31, 2006, to
  www.k12.wa.us/safs/FinancialResources.asp. As
  soon as DOE accepts our current proposal we will
  post the new agreement to this website.

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Things To Consider For The Indirect Pool And Base

• Manual input item 3641 will still be used for
  Public Relations costs. Districts will determine
  what portion of the costs recorded in Program 97,
  Activity 15, are for liaison with news media and
  government relations officers, such as notices of
  Federal concern, financial matters, school
  calendar, newsletters, etc., and enter that
  dollar amount in item 3641. If no entry is made
  in this item number the total expenditures in
  Program 97, Activity 15, will be included in the
  direct base (denominator).
• New in 06-07Pupil Management and Safety
  expenditures in Program 97, Activity 25, will be
  manually input in item 3691 for the Restricted
  Indirect Rate, only if the district has done a
  cost allocation plan. Guidance will be provided
  at a later date, per DOE instructions. These
  expenditures will continue to be included in the
  Unrestricted Indirect Pool.

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Things To Consider For The Indirect Pool And Base

• New in 06-07Costs recorded in Program 97,
  Activity 72,for districtwide Information Systems
  expenditures will be entered in manual input item
  3701. Exclude costs for student records such as
  printing report cards or transcripts. If no entry
  is made in this item number the total
  expenditures in Program 97, Activity 72, will be
  included in the direct base (denominator).
• Motor Pool expenditures in Program 97, Activity
  75, must only be for cars or vans used to
  transport staff to conferences or meetings.
  Expenditures associated with specific programs,
  extracurricular, or ASB, should be directly
  charged to those programs.

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Things To Consider For The Indirect Pool And Base
(cont.)

• Remember that Superintendent costs, and those
  costs associated with the Superintendents
  secretary, are not allowed in the restricted
  indirect pool. The only exception is if the
  Superintendent and/or the secretary are coded
  100 to Activity 12 but have responsibilities in
  the business office, human resources, print
  center, information systems, motor pool, or
  warehouse. The expenditures allocable to these
  other activities are considered indirect and can
  be entered in manual input item 3481. Remember
  to exclude Capital Outlay (Object 9).
• Check to make sure there arent any negative
  dollars in the printing or motor pool activities.
  This reduces the indirect rate. The example in
  this presentation has a negative 48,753 in Motor
  Pool, which reduced the indirect pool (not a good
  thing!).

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Why Was Our Districts Rate Different on the FY
05-06 F-196?

• The rates calculated for some districts on the FY
  03-04 F-196 (to be used in 05-06) were not
  calculated correctly. In order for OSPI to be in
  compliance, we were required to manually correct
  the rates in our VAX system. This caused some
  rates from the FY 03-04 database to be different
  than they were on the actual 03-04 F-196.
  Districts with an increase of greater than 1
  were notified and allowed to change their rate in
  the grant system if they chose to. Districts
  whose rates decreased due to the recalculation
  were allowed to use the higher rate in 05-06.
  However, to ensure that future rates were
  accurate, the VAX system was manually corrected
  to reflect the lower rate.
• This situation may also occur on the FY 06-07
  F-196. The rates calculated on the 04-05 F-196
  may not have been calculated correctly.
• If your district noticed a different 03-04 rate
  on the 05-06 F-196, or notice a different 04-05
  rate on the 06-07 F-196, please contact me for
  more information.

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Questions and Discussion

• Changes in guidance
• We are still working with DOE on the five year
  plan for Washington State. The DOE
  requirements may create some changes in the
  F-196 calculation.
• OSPI will provide more information on indirects
  during the F-196 Annual Financial Statements
  training. This will include any changes due to
  DOE requirements.
• Other Questions or Discussion?