Understanding the Federal Indirect Rate Calculation

1. Understanding the Federal Indirect Rate Calculation Federal Restricted Indirect Cost Rates for School Districts Pam Peppers Supervisor of School District/ESD Financial Reporting (360) 725-6304 pam.peppers@k12.wa.us

2. 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 district’s 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?

3. 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.

4. 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.

5. 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 year’s 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.

6. 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.

7. 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.

8. Distorting Items (cont.) • Renovations and alterations may be considered distorting if the expenditures are unusual, unexpected, and significant. For example, this winter’s 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 L&I, OSHA, WISHA, or IRS late fees for filing late payroll taxes may be considered distorting if significant.

9. 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. What Is An Indirect Expenditure?

10. 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.

11. 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).

12. 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.

17. 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.

18. 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 06-07—Pupil 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.

19. Things To Consider For The Indirect Pool And Base • New in 06-07—Costs 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.

20. Things To Consider For The Indirect Pool And Base (cont.) • Remember that Superintendent costs, and those costs associated with the Superintendent’s 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 aren’t 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!).

21. Why Was Our District’s 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.

22. 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?