Module 4. Budget Management Costs

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Gilbert Newton
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1 Module 4

2 Table of Contents Purpose of... 1 Program Legislation... 1 Program Regulations... 1 Cost Principles... 2 Reasonable... 2 Allocable... 2 Consistent Treatment... 2 Conform... 3 Allowable and Unallowable Costs... 3 Documentation of Time and Effort... 3 Miscellaneous Expenditures... 4 Prior Approval... 4 Pre-Award Costs... 4 Carryover... 5 Budget Transfers... 5 Institutional Guidelines... 6 Internal Record Keeping... 6 Assignment... 7 Assignment Checklist... 7 Discussion Instructions... 7 Discussion #6 Awards Banquet... 7 Discussion #7 Case Study Budget Discussion... 7 Mini-Quiz and Policy Review Instructions... 7 Table of Figures Figure 1: Governing Documents Overview Example... 2

3 Purpose of refers to such items as how the budget is controlled, how federal monies are expended, and how those expenditures are documented. Over the years that federal staffs have reviewed SSS projects, two fiscal areas have consistently been identified as challenges for projects: Charging unallowable expenditures to the grant; and Adequate documentation of time and effort. This module demonstrates how the SSS Legislation and Regulations, EDGAR, OMB Circulars as referenced in EDGAR, and your institution s approved grant application relate to the management of your project s fiscal operations by providing the tools necessary to: Understand the basic considerations that determine when costs are and are not allowable; Differentiate between allowable and unallowable costs; and Document the time and effort of staff on the project. As you read through the material consider the following: A project s approved budget has a line item of $2,000 for an awards banquet. As with the issues stated in the previous modules, you should be able to rely on the guidance offered by the governing documents to protect both your project and your entity. The following discussion will enable you to do that. Program Legislation Typically program costs are addressed in governing documents other than legislation; however, in SSS there is a direct and specific reference to costs. This reference refers to the provision for grant aid to participants. In December of 2000, Section 317 (a) 402D of the Higher Education Act of 1965 (20 U.S.C. 1070a-14) was amended to include the possibility of grant aid to SSS participants. As mentioned in the Program Authorities Review module, it is important to note that the legislation directly contradicts the regulations, which prohibit providing direct financial support to participants [646,31 (b)]. Since the regulations were revised prior to the adoption of the grant aid legislation, they will not reflect a project s ability to provide grant aid until they are rewritten. Recalling the hierarchy, the legislation takes precedent and should be relied upon when considering funds for this use. Program Regulations The Student Support Services Regulations 34 CFR 646 address costs in three sections: Subpart A, 646.6(a) which includes by reference EDGAR Part 74 (34 CFR is the EDGAR citation for Allowable Costs); Subpart D which covers allowable costs; and Subpart D which covers unallowable costs. 1

4 It is helpful to review the Cost Principles in order to understand the rationale by which project costs may be assessed. Cost Principles As previously discussed, EDGAR incorporates by reference the Cost Principles (OMB Circular A-21). The basic considerations for determining the costs applicable to a federal program such as SSS are described in these Cost Principles. Factors affecting the allowability of costs are stated in A-21, C.2, page 8; the explanation of the factors continues through page 12. The following is a synopsis of the tests used to determine expenditure allowability: Are the expenditures reasonable? Are they allocable to the funded grant? Are they given consistent treatment? Do they conform to any limitations or exclusions set forth in A-21 or in the sponsored agreement as to types or amounts of cost items? Reasonable: The first consideration stipulated for expenditures is that a cost may be considered reasonable if it reflects the action a prudent person would take. For example, if there is a line item in a project s budget for theater tickets for SSS participants, and 20 tickets at $18 per ticket are purchased for the local community production of Hamlet that probably is a reasonable cost. If, however, 20 tickets at $350 per ticket are purchased, expect to have the expenditure challenged. Allocable: Costs are allocable if the goods or services benefit the grant. If your program hires tutors to tutor SSS participants, those costs are probably allocable. However, if these tutors also tutor non-sss participants, but are paid for such tutoring from grant funds, an auditor will question that expenditure as the costs does not benefit the grant. Governing Documents Overview Example To see how the authorizing legislation, the program regulations, and EDGAR, including OMB Circular A-21 are linked, go to page 45 in A-21. Part J, section 17 titled Entertainment Costs states Cost of entertainment, including amusement social activities and any costs associated such as tickets to shows meals transportation are unallowable. However, the law, section 402D(b) identifies Permissible Services such as (item 5) Exposure to cultural events. Additionally, 34 CFR 646.4(e) of the SSS TRIO Regulations, states Projects may provide such services as (5) Exposure to cultural events and academic programs not usually available to disadvantaged students. This is a good example to illustrate the hierarchy of the governing documents; the legislation and specific TRIO Regulations take precedence over the OMB Circular. Consistent Treatment: Costs must be given consistent treatment within the institution. If staff at the institution is eligible for a package of salary and benefits, the staff of the grant must be treated consistent with institutional policies. If SSS staff is compensated at a higher scale, those expenditures may be disallowed. Figure 1: Governing Documents Overview Example 2

5 Conform: Costs must conform to any limitations in OMB Circular A-21 or in the SSS Program Regulations. A-21 lists selected items of cost in Part J on pages 3-4. An example of a limitation in A-21 would be J.2. Alcoholic beverages. A-21 (page 31) clearly states such an expenditure is unallowable. Other limitations can be found in the SSS regulations. 34 CFR Unallowable Costs (a) through (d) states that specific costs or categories of costs (recruitment, tuition, fees, etc.) are unallowable. Remember, as observed in the Governing Documents module, the SSS Regulations may allow a cost, even if A-21 disallows such a cost; see Figure 1. Since it is helpful to be familiar with certain OMB Circular citations, you might want to review the Quick Guide to OMB Circulars which has been included as an addendum to the Training Priority Overview module. Allowable and Unallowable Costs As discussed in the previous section, EDGAR via the OMB Cost Principles specifies four tests to determine the allowability of costs, and also addresses specific costs categories, such as fund raising. Program regulations in Subpart D, parts and , identify allowable and unallowable costs that pertain solely to SSS. The ED uses Subpart D, of the regulations as an opportunity to specifically allow a cost that is deemed important in fulfilling the purpose of the program. Some of the thinking behind including a cost in this section can be seen by referring to the ED Final Regulation Actions, which is included on your Electronic Template CD following the SSS Regulations. This document, under What are allowable costs? (Section ), concludes that the approved activities allow projects to pay for the cost of lodging and meals when necessary for approved educational and cultural activities sponsored by a project. The discussion that leads to this conclusion is helpful in understanding the rationale for allowing and disallowing costs. Even if a particular item is not specifically addressed in either of these lists, this understanding will help develop justifications for expending project funds. Note that a cost not listed as allowable does not necessarily mean that the cost is unallowable and vice versa. Documentation of Time and Effort As mentioned at the beginning of this module, adequate documentation of time and effort is often a challenge for SSS projects. The last time the Department complied the results from onsite reviews, 48.9% of the SSS projects reviewed did not maintain adequate time and effort documentation. Time and effort is referred to as payroll distribution, or as it is referenced in the OMB Circulars, compensation for personal services. Whatever terminology is used, time and effort is a discussion of how the grantee documents: That SSS staff have worked on grant activities; and How SSS staff were compensated for such work. 3

6 The cost principles (Circular A-21) address the issue in J.10 Compensation for personal services, pages You will note in J.10.b(d) that OMB acknowledges there is no single best method for documenting the distribution of charges. That is why they take six pages to describe alternatives. Some time and effort documentation is fairly simple. For a tutor hired on an hourly basis, documentation of when the tutor met with SSS students submitted through the college payroll process is all that is needed. However, not every personnel expenditure is so easily traced. If a college hires a supervisory tutor to coordinate the SSS tutorial activities and the college tutorial program, the recordkeeping and documentation in order to establish the allocability for the payments becomes more complex Federal staff finds that institutions with a number of federal grants, such as a major research university, often have systems established that meet the OMB compensation for personal services requirements. Yet in many cases, SSS projects are awarded to institutions that do not have a history of participating in federal programs and thus do not have established systems that meet OMB requirements. In a case such as this, the project director should ensure that compensation for personal services for all persons paid from grant funds meets the criteria in J.10. For additional information on time and effort, access Time and Effort located under Staffing in the Project Administration Policies and Procedures Template located on your Electronic Template CD. It offers time and effort suggestions and examples. Miscellaneous Expenditures EDGAR also establishes other requirements for expenditures, such as Equipment; Procurement standards; and When obligations are made. 34 CFR: Familiarize yourself with key EDGAR citations. Our Quick Guide to EDGAR is a good staring place and is in the Program Authorities Review module as Addendum 1. Prior Approval Discussion will now focus on those sections of EDGAR that authorize grantees to make budgetary changes and describe when prior approval from the Department for budgetary changes is necessary. These authorities are referenced in EDGAR under Section Revision of budget and program plans. Within this citation there are three areas that primarily affect TRIO projects: pre-award costs, carryover, and budget transfers. Pre-Award Costs: Pre-award costs are costs incurred prior to the start of the budget period to which they will be charged. Travel is a classic area where SSS grantees have used this authority. Assume a grant starts September 1 and the program counselor needs to attend a training held on 4

7 September In order to get a good price, the airline ticket needs to be purchased by August 8. Under EDGAR, 34 CFR 74.25(e)(1), costs can be incurred up to 90 days before September 1 without prior approval. Keep in mind that a project s pre-award costs are actually being expended from institutional funds rather than federal funds because federal funds are not available for drawdown until the budget period actually begins. For this reason, pre-award costs are incurred at the institution s own risk. This authority applies to both new and continuing grants. If the project has a multi-year award, the grantee generally knows the project will be funded for the next budget period. For a new project, the institution has to have a reasonable expectation that they will actually be getting the award. Once the project s budget period actually begins, the institution can then reimburse itself for any pre-award costs incurred on behalf of the project. If for some reason the grant is not awarded, the institution is liable for those expenses, not the federal government. Even though expenditures can be authorized, the institution must establish a fiscal mechanism to handle such pre-award costs. Any costs that need to be incurred more than 90 days before the start of a budget period do require prior approval from the program specialist. Carryover: Funds for any allowable cost within the approved project s scope can be carried over without prior approval, under EDGAR 34 CFR 74.25(e)(3). Finishing uncompleted activities is one example of allowable uses for carryover funds. If a project has a field trip planned to take transfer students to visit several colleges and universities and the trip needs to be rescheduled into the new budget period, those funds can be carried over to the next budget period to finish the uncompleted activity. Carryover funds may also be used for new activities that are within the project scope. For instance, it is stated in the grant proposal that access to tutoring for the SSS participants during the academic year would come from a local agency that provided tutoring in the community. However, the economy went bad, the local agency s funds were cut, and, in the second year of the grant, the agency is no longer offering tutoring. Tutoring is a critical service for certain participants, but it is a new expense. Since it is still within the approved scope, it is an allowable activity. For some policy suggestions and critical questions regarding carryover, go to the Accounting System section of the Budget Management Policy and Procedures Template located on your Electronic Template CD. Budget Transfers: EDGAR 34 CFR 74.25(f) provides flexibility to transfer funds. Prior approval is not required for most budget transfer. If, for example, there is a vacant staff position for two months or so, there will be several thousand dollars in unobligated funds by the end of the budget period. Those funds may be transferred to another budget category, such as tutoring, without prior approval. 5

8 There are two exceptions in SSS to this budget transfer authority: professional development travel and training allowances. The ED has established in 34 CFR (g) a limitation of four percent of the project s total salaries (not including fringe) going toward professional development travel. Therefore, prior approval is needed to transfer additional funds into the professional development travel category. Transferring funds out of funds allotted for training allowance, which is direct payment to trainees, to another budget category is also unallowable without prior approval per 34. CFR 74.25(c)(7). This restriction applies to funds allocated for Grant Aid. There is also a caveat in EDGAR 34 CFR 74.25(f) stating The Secretary does not permit a transfer that would cause any Federal appropriation or part thereof, to be used for purposes other than those consistent with the original intent of the appropriation. This statement brings the grantee back to the Cost Principles allocability test. Institutional Guidelines: The above discussion focuses on the federal requirements important to budget management. Keep in mind that the institution may also have policies and rules that apply to the grant. As well, if the grantee is a state college or university, the state may also have established requirements that grants are subject to. Part of a project s obligation is to be familiar with those local requirements. One example of such a requirement is addressed in A-21, J.18 Equipment and other capital expenditures, on pages In part a.(1), OMB defines equipment and includes the statement equals or exceeds the lesser of the capitalization level established by the organization for financial statement purposes, or $5,000. Many states and institutions have established a level less than $5,000 for capital outlay. The project s equipment expenditures, as defined by that lesser capitalization level, must follow all the EDGAR, including the OMB Circulars, requirements. Internal Record Keeping Recall from the IG presentation that institutions were found lacking in internal controls. One other aspect of budget management that is not required by any law or regulation, but is a good management practice is maintaining a soft ledger. The college or university has fiscal systems, such as payroll, purchasing, etc. that link with the SSS grant budget. Most institutions establish a grant account for a federal grant and all expenditures against that grant are recorded in the account. The institution should then distribute regular budget reports, usually monthly, to the director. However, past reviews show that there are programs where the director is not on the budget report distribution list; the report is sent to a vice president, dean, or department head who does not provide the report to the director. If a project is in such a situation, the ED would question whether the institution has given the project director sufficient authority to administer the project effectively as required in the SSS regulations, 34 CFR (c)(2). It is recommended that project directors establish two policies relating to grant expenditures. First, keep a record at the project level of all project expenditures. These are often referred to as cuff or soft ledger records. There is quality accounting software that should enable the project to 6

9 establish and maintain a system to track all expenditures. Second, reconcile the regular budget reports the institution distributes with the project s budget records. Over the years, both the ED staff and peers reviewing grants have found that a significant number of the unallowable charges identified were in projects which did not have an internal recordkeeping process or did not reconcile the budget reports. To help determine a soft ledger policy there are three critical questions under the Accounting System section of the Budget Management Policies and Procedures Template located on your Electronic Template CD. An example of a soft ledger is also included in the Discussion Support Documents under Additional Resources in Blackboard. Please take a moment to print and review it as it can be used in the discussions for this module. Assignment Assignment Checklist: Discussions SSS Mini Quiz Policy Review Discussion Instructions: Please participate in a discussion for each of the following discussion topics. If you are new to TRIO and are uncomfortable with posting a response to a particular item due to unfamiliarity with the topic please post a question instead. Refer to your Syllabus for additional instructions for posting discussion responses. Please also take a moment to read and respond to other posts, as your fellow training participants and moderators may have perspectives, solutions and/or questions you had not considered. Discussion #6 Awards Banquet: A project s approved budget has a line item of $2,000 for an awards banquet. Is this an allowable cost? Provide your rationale, including any citations. Discussion #7 Case Study Budget Discussion: Review the SSS Case Study Budget which is located in the Discussion topic or by accessing Discussion Support Documents in Additional Resources. What concerns might arise? What needs to be addressed and what governing documents apply? Mini-Quiz and Policy Review Instructions: Complete the SSS Mini-Quiz and Policy Review. Refer to your Syllabus for accessing and completion instructions. Please note that completing the Policy Review is required in order to receive a certificate of completion. 7

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