Federal Grants Update and The Omni Circular: What is and what is to come March 2014

1. Federal Grants Update and The Omni Circular: What is and what is to comeMarch 2014 Steven Spillan, Esq. Brustein & Manasevit, PLLC sspillan@bruman.com www.bruman.com

2. Agenda • Congressional Update • The Omni Circular • Current Allowability Rules • Basic Cost Principles and Time and Effort Documentation • Grants Management Systems • Financial Management, Procurement and Property Standards • Additional Requirements and Changes • Audit Requirements

3. Federal Funding Update

4. Brief Refresher: Sequestration • Sequestration was triggered by the 2011 Budget Control Act (BCA) after failure of Congressional debt “supercommittee” to balance budget • Procedure generally follows 1985 Balanced Budget and Deficit Control Act, but specifics are subject to modification by Congress at any time • This sequester was modified in the American Taxpayer Relief Act of 2012, commonly known as the “fiscal cliff deal.” • That law changed the start date of sequester cuts and the amount of cuts for FY 2013

5. Sequestration Refresher • Began March 1, 2013 • In FY 2013, cuts were carried out as automatic, across-the-board reductions to actual spending levels for all non-exempt programs, projects, and activities • Cuts were approximately 5%, but varied because: • Cuts were relative to FY 2013 budget • Budget allocations at State and district level vary due to: • New Census/population data • “Hold harmless” and “Small State Minimum” requirements in laws • Second 2013 CR made additional 0.2% across-the-board spending cut

6. Sequestration Cuts

7. Sequestration Refresher • FY 2013 sequestration cuts were implemented with first allocation after March 1, i.e.: • For single-allocation programs, like Head Start, beginning with programs which receive annual funding on April 1 • For competitive grant programs, beginning with first competition using FY 2013 funds • For bifurcated funding programs like Title I of ESEA, the first allocation of FY 2013 budget year (October 2012) went out in full; sequester cuts were deducted from the second allocation (July 2013).

8. Sequestration in FY 2014 (as designed) • In FY 2014 through FY 2021, additional cuts were meant to be implemented through reductions to congressional “spending caps” • Internal limits that Congress sets on its own spending in each appropriations “account” • Congress must pass individualized spending bills in all 12 accounts that, as a whole, comply with two basic requirements of sequestration: • Make equal cuts to defense and non-defense spending caps • Meet BCA requirements for reductions to spending caps (additional $109 billion in new cuts annually)

9. Omnibus 2014 • Massive, $1.1 trillion FY 2014 spending based on agreed-to caps • Individual appropriations account bills drafted by Appropriations subcommittees, then combined • Delayed by disagreements over: • Funding for Affordable Care Act implementation • Abortion restrictions for DC • Funding for Early Education programs • Ultimately passed January 16th, 2014 • Brings funding for non-defense discretionary federal programs nearly – but not quite – back to pre-sequestration FY 2013 levels

10. Omnibus 2014 (in millions of dollars)

11. Omnibus 2014 • Winners • Head Start • Increase over FY 2012 (COLA), plus $500 for Early Head Start • Early Education • New $250 million for competitive Race to the Top Early Education program • School Nutrition • New $25 million in competitive school equipment grants

12. Omnibus 2014 • Losers • Department of Labor programs (except WIA) • Targeted programs (like Rural Education, Advanced Placement, Promise Neighborhoods) – no increase over sequestration • President’s Early Education program (Race to the Top instead) • President’s Race to the Top proposal (early education instead)

13. Omnibus 2014 – Policy Riders • Restates and reinforces Charter School Grant • Student achievement is the most important factor in renewing a charter • SIG Changes • New grants 5 years • Two new models • USDA Waivers • USDA must offer waivers to SFAs who have difficulty/cost issues implementing new snack rules • IDEA Maintenance of Effort • State – no permanent penalty • LEA – Congressional intent agrees with ED’s 2012 “Letter to Boundy

14. What’s Next for Federal Funding? • Projected budget caps for FY 2014/FY 2015 represent slight increases each year • Projected future increases in funding to account for inflation (1-2%) – but not more • BUT this all depends on Congressional action • Next fiscal debates: • Debt ceiling (this spring) • FY 2015 funding (this fall)

15. Reauthorizations

16. Likelihood of 2014 Reauthorizations • Is there a number less than zero? • Partisan Divide • 2014 Midterm Elections • FY 2015 Spending

17. The Omni Circular

18. The OMNI Circular: What is covered? • A-102: Administrative Rules State and Local Govts • Part 80 – EDGAR • A-110: Administrative Rules IHEs and Nonprofits • Part 74 – EDGAR • A-87: Cost Principals – State and Local Govts • A-21: Cost Principals – IHEs • A-122: Cost Principals – Nonprofit Orgs • A-133: Audit Rules

19. Reasons for the Change? • Simplicity • Consistency • Obama Executive Order on Regulatory Review • Increase Efficiency • Strengthen Oversight

20. Who crafted the changes? • “COFAR” • Council on Financial Assistance Reform, and Key Stakeholders • www.cfo.gov/cofar

21. Who is covered? • All “nonfederal entities” expending federal awards

22. Key Dates: • Feb 1, 2013 Notice of Proposed Rulemaking • Dec 19, 2013 Final Rule Released • Dec 26, 2013 Federal Register Published Rule • April 2014 New OMB ComplianceSupplement • June 26, 2014 ED Draft EDGAR Changes • Dec 26, 2014 Final EDGAR Published

23. Inconsistency Between Program Statute and Circular • If federal program statute or regulation differs from Omni Circular, then statute / regulation governs.

24. Date of Applicability of Revised Rules • OMB stated on 12/20/13: All Drawdowns, after December 26, 2014 ? ? ?

25. Most Significant Changes • Shift from focus on Compliance to focus on PERFORMANCE!!! • Auditors (A-133 + Federal OIG) and Monitors (Federal and State Pass Through) must look more to “outcomes” than to “process” • The Omni Circular adds significant flexibility to way grantees / subgrantees can adopt their own processes

26. Most Significant Changes (Cont.) • The Omni Circular has a MAJOR emphasis on “strengthening accountability” by improving policies that protect against waste, fraud and abuse

27. NEW: Required certifications 200.415 • NEW: Official authorized to legally bind the non-federal entity must certify on annual and final fiscal reports or vouchers requesting payment: • “By signing this report, I certify to the best of my knowledge and belief that the report is true, complete and accurate and the expenditures, disbursements and cash receipts are for the purposes and objectives set forth in the terms and conditions of the federal award. I am aware that any false, fictitious, or fraudulent information or the omission of any material fact, may subject me to criminal civil or administrative penalties for fraud, false statements, false claims, or otherwise.”

28. NEW: Mandatory Disclosures 200.113 • Non federal entity must disclose in writing in timely manner to federal agency or pass-through all violations of federal criminal law involving fraud, bribery or gratuity violations potentially affecting federal award

29. Current Allowability Rules and “Omni” Changes

30. How to determine if a cost is allowable • Is the proposed cost allowable under the relevant program? • Is the proposed cost consistent with program specific fiscal rules? • Is the proposed cost consistent with EDGAR? • Is the proposed cost consistent with federal cost principles? (now be incorporated into EDGAR) • Is the proposed cost consistent with special conditions imposed on the grant?

31. Program Allowability Is the proposed cost allowable under the relevant program? • In general, program restrict costs in 2 ways: • Costs must meet specific program purposes; • The program includes eligibility restrictions. • Entities must ensure all program costs meet program allowability rules and regulations 31

32. Program Fiscal Rules Examples: • Contracts v. Subgrants • Supplement Not Supplant • Maintenance of Effort • Excess Costs • Maintenance of State Financial Support • Comparability

33. Nature of Funding 200.330 • A Pass-through entity must make a case-by-case determination whether each agreement casts the party as a subrecipient or contractor

34. Subgrant vs. Contract • Subreipients 200.330(a) • Determines who is eligible to participate in a federal program • Has its performance measured against whether the objectives of the federal program are met • Is responsible for programmatic decision making • Is responsible for complying with federal program requirements • Uses the federal funds to carry out a program as compared to providing goods or services for a program

35. Subgrant vs. Contract (cont.) • Contractor 200.330(b) • Provides the goods and services within normal business operations • Provides similar goods or services to many different purchasers • Operates in a competitive environment • Provides goods or services that are ancillary to the operation of the federal program • Is not subject to compliance requirements of the federal program

36. Supplement not Supplant • Federal funds must be used to supplement and in no case supplant (federal), state, and local resources “What would have happened in the absence of the federal funds??”

37. 3 Presumptions of Supplanting: Auditors presume supplanting occurs if federal funds were used to provide services . . . • Required to be made available under other federal, state, or local laws • Provided with non-federal funds in prior year • Provided services to Title I schools and the same services were provided to non-Title I schools.

38. Presumption Rebutted!(sometimes) • If SEA or LEA demonstrates it would not have provided services if the federal funds were not available. • NO non-federal resources available this year!

39. EDGAR and The Federal Cost Principles Is the proposed cost consistent with EDGAR (which will now include all federal cost principals)? • A-21 Educational Institutions • A-87 State, Local & Indian Tribal Governments • A-122 Non-Profit Organizations • 48 CFR pt. 31 For-Profit Organizations Omni Circular

40. Cost Principles: “Factors Affecting Allowability of Costs” 200.403 All Costs Must Be: • Necessary, Reasonable and Allocable • Conform with federal law & grant terms • Consistent with state and local policies • Consistently treated • In accordance with GAAP • Not included as match • Net of applicable credits (moved to 200.406) • Adequately documented

41. “Factors Affecting Allowability of Costs” 200.403 Necessary and Reasonable 200.404 • Must be necessary for the performance or administration of the grant • Must follow sound business practices: • Arms length bargaining (hint: procurement processes) • Follow federal, state and local laws • Follow terms of the grant award • Fair market prices • Act with prudence under the circumstances • No significant deviation from established prices

42. “Factors Affecting Allowability of Costs” 200.403 (cont.) Necessary and Reasonable (cont.) • Practical aspects of “necessary” • Do I really need this? • Is this the minimum amount I need to spend to meet my need? • Practical aspects of “reasonable” • Is the expense targeted to valid programmatic/administrative considerations? • Do I have the capacity to use what I am purchasing? • Did I pay a fair rate? Can I prove it? • If I were asked to defend this purchase, would I be comfortable?

43. Allocable Costs 200.405 • Can only charge in proportion to the value received by the program • If a cost benefits 2 or more projects, the cost should be allocated to projects based on the proportional benefit. • Example: LEA purchases a computer to use 50% in the Title I program and 50% in a state program – can only charge half the cost to Title I • If cost benefits can not be determined because of the interrelationship of the work involved, the costs may be allocated or transferred to benefitted projects on any reasonable documented basis.

44. “Factors Affecting Allowability of Costs” 200.403 (cont.) • Conform with federal law & grant terms • Example: Match Requirements • Be Consistent with policies and procedures that apply uniformly to both federal and non-federal entity • Incorporates prior rule that costs must be legal under state and local law

45. Be Accorded Consistent Treatment Must follow uniform policies that apply equally to federal and non-federal activities Cannot assign cost as direct cost if indirect under state programs In accordance with GAAP Not included as cost-sharing or match “Factors Affecting Allowability of Costs” 200.403 (cont.)

46. “Factors Affecting Allowability of Costs” 200.403 (cont.) Adequately documented • Amount of funds under grant • How the funds are used • Total cost of the project • Share of costs provided by other sources • Records that show compliance • Records that show performance • Other records to facilitate an effective audit

47. Applicable Credits 200.406 • Must be credited to the federal award either as a cost reduction of cash refund • Examples: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, adjustments of overpayments

48. New: Prior Written Approval 200.407 • In order to avoid subsequent disallowance: • Non-Federal entity may seek prior written approval of cognizant agency (for indirect cost rate) or Federal awarding agency in advance of the incurrence of special or unusual costs

49. NEW: Direct v. Indirect Costs 200.413 • Salaries of administrative and clerical staff should be treated as “indirect” unless all of following are met: • Such services are integral to the activity • Individuals can be specifically identified with the activity • Such costs are explicitly included in the budget • Costs not also recovered as indirect

50. Budget Modifications 200.308 • May require prior approval • Program changes • Change in scope or object • Change in key personnel • No cost extension • Contract with 3rd party to administer program 50