State Agency Monitoring of Sponsors’ Use of Administrative Funds

1. State Agency Monitoring of Sponsors’ Use of Administrative Funds Cacfpnpa conference April 14, 2010 Marisa kirk-epstein, national office Keith churchill, southwest region MagedHanafi, midwest region

2. Opening Exercise • In the groups at your table, discuss the four examples on the handouts we passed out. • You will have about 5 minutes to discuss all of the questions.

3. Why Are We Here? • Why are we devoting a whole session to this topic? Haven’t things improved? • CCAP- showed improvements for family day care home (FDCH) sponsors from Kiddie Care 1, but we still need to do more. • Kiddie Care 2 – OIG is now also looking at sponsors of unaffiliated centers, which often have problems similar to FDCH sponsors.

4. Introduction to State Agency Monitoring of Sponsors’ Use of Administrative Funds 3 Most Common Problems: • Unapproved Costs • Unallowable Costs- includes “reasonable”, “necessary” and “allocable” • Less-Than-Arms Length Transactions The 3 main times for State Agencies to identify and correct these problems: • Sponsor application and budget approvals • Sponsor reviews • The corrective action process

5. Prevention of Unapproved Costs, Unallowable Costs, and Unauthorized LTALTs • Prevention is key for addressing these 3 problems. • The best way to prevent these problems: Require complete, detailed budget submissions • Future FNS training on 796-2 will focus on budget approval

6. Unapproved Costs • Unapproved Costs- Require, but do not receive, prior approval or specific prior written approval. • Prior Approval- Costs that must be specifically identified by item and amount and then approved by the State Agency, due to the nature or amount of the cost. • Specific Prior Written Approval- Costs that are not allowed unless the State agency has previously provided written approval of the cost and amount. These are costs that are not routinely incurred in CACFP operation.

7. Unapproved Costs, Continued • Costs should not be grouped in budgets in ways that can hide costs requiring prior or specific prior written approval. • Costs requiring these types of approval can be found in: OMB circulars, FNS Instruction 796-2, and the Federal Acquisition Requirement.

8. “Prior Approval” Versus“Specific Prior Written Approval” • Example #1: A State Agency identifies during the sponsor review that the sponsor has spent CACFP money for one staff member to travel to a conference on CACFP and for another staff member to travel to a conference on children’s nutrition/health that will have some sessions on CACFP.

9. Prior Approval” Versus“Specific Prior Written Approval”, Continued Example #1 Answers: • Travel to the CACFP conference requires prior approval. • Travel to the children’s health conference requires specific prior written approval. • If the sponsor has not received either of these, they are both unapproved costs. This example highlights that budgets must include all specifically identified costs to detect unapproved costs.

10. Making Unapproved Cost Determinations • FNS Instruction 796-2 (Rev. 3): • Contains important information on unapproved costs and when prior approval vs. specific prior written approval is necessary. • 18 Published 796-2 brochures make understanding this easier. Can be found at: http://www.fns.usda.gov/cnd/care/Management/796-2.htm • Future training on 796-2 will emphasize budget approval.

11. Making Unapproved Cost Determinations, Continued • FNS Instruction 796-2 (Rev. 3): • Distinguishes allowable, unallowable, and sometimes allowable only with prior approval costs. E.g. • Advertising costs to recruit staff- allowable • Advertising to increase CACFP participation- allowable with prior approval • Advertising to solicit funds for the sponsorship- unallowable

12. Unapproved Costs: CCAP Problems • Sponsors did not identify and request approval for costs that required this. • State Agencies did not receive detailed enough budgets to identify unapproved costs. • Improper identification of unapproved costs during reviews resulting in reimbursements for these unapproved costs.

13. Unapproved Costs: State Agency Challenges • State Agencies still: • Approve budgets that do not separate “Prior Approval” or “Specific Prior Written Approval” expenses by item and amount. • Approve budgets with insufficient detail and disclosure required for approval. • Do not have policies/procedures to help budget reviewers make consistent decisions.

14. Unapproved Costs: Two Areas of Concern • Audits- Unapproved costs must always be disallowed in order to be consistent with audits. Auditors will always require repayment of unapproved costs. • Budget Amendments- May not be used retroactively to make an unapproved cost allowable. • Example #1 Answer: Conference travel costs are unallowable no-matter-what if they were not disclosed or approved before funds were spent on them.

15. Identifying Unapproved Costs • Require more specific budget submissions and improve budget review policies/procedures/processes to allow for easier identification of unapproved costs during reviews. • Require sponsors to maintain records and develop expense tracking systems. •  Require sponsors to conduct year-end reconciliations of budget expenses with actual costs.

16. Unallowable Costs • Allowable costs – • Costs that occur during routine operation of CACFP and which FNS will reimburse for. • Must be disclosed to and approved by the State Agency. • Approval of expenses does not guarantee allowability. • Unallowable costs – • Costs that cannot be charged to the Program. • Sponsors must account for these costs separately and show that non-CACFP funds are paying for them.

17. Determining Allowable Costs • Costs can be “allowable but not allowed” • The three primary criteria allowable costs must meet to be “allowed”: • Necessary- Cost must be recognized as ordinary and required for operation of the program. • Reasonable- Type and amount of cost must reflect what a sensible person would incur in that situation. • Allocable- Shared costs must be allocated so that only the portion benefitted CACFP uses Program funds.

18. Determining Allowable Costs: Necessary • Necessary- Cost must be recognized as ordinary and required for operation of the program. • Example: • Staff training costs vs. travel for every staff member to a national conference.

19. Determining Allowable Costs: Necessary, Continued • Example #2: A sponsor used CACFP funds to pay for a warehouse space with a full-size basketball court with additional volleyball and soccer set up for tournament play or indoor practice, pool table, foosball, and ping pong. Providing a place for the sponsor’s daycare centers to come on field trips to “learn about nutrition and have a fun time away from their center” was identified as “the main activity” at the above referenced warehouse. • Answer: This is not a necessary cost, because the facility is not crucial to CACFP provision, even though it may be necessary for providing quality childcare.

20. Determining Allowable Costs: Reasonable • Reasonable- Type and amount of cost must reflect what a prudent person would incur in that situation. • Factors to determine “reasonable” costs: • Sound business practices were used; • Involved arms-length bargaining; • Applicable laws and regulations were followed; • Individuals acted with prudence; and • Deviations from general practices did not increase costs.

21. Determining Allowable Costs: Reasonable, Continued • Example #3: In one sponsoring organization, three employees possess the same job title of program monitor, but two are paid $30,000/year and one person is paid $50,000/year. The person receiving $50,000 has a masters degree, and the sponsor has used this reason as the justification for paying this employee more money. • Answer: It may not be reasonable if justification for the different salaries was not provided. The sponsor must show that possession of a master’s degree directly increases the person’s work responsibility to CACFP.

22. Understanding “Reasonable” and “Necessary” • Commonly asked questions: • What is the difference between necessary and reasonable? -Necessary is determined by the nature of the activity while reasonable is determined by the amount of the cost. • How do I decide a cost is necessary? - If it is ordinary, required to operate the program, and required to fulfill regulatory requirements of the program. • How do I decide a necessary cost is reasonable? - Use the “prudent person” standard to evaluate need, the sponsor’s financial condition, and marketplace conditions.

23. Determining Allowable Costs: Allocable • Allocable- Shared costs must be allocated so that only the portion benefiting CACFP uses Program funds.

24. Sole Purpose Sponsors • Sole purpose sponsors: Their main purpose is to operate CACFP, so they have no other funding source besides CACFP funds. • Sole Purpose sponsors often conduct other activities besides CACFP. • State agencies must still ensure that these sponsors are not using CACFP funds for non-CACFP activities

25. The Difficulty of Determining “Allowable but not Allowed” Costs • Some costs are always unallowable. These include: • Alcohol • Bad debts • Entertainment • Contingency funds • Lobbying • “Allowable but not Allowed” costs do not meet the three primary criteria of necessary, reasonable and allocable, and are more difficult to identify. These require State Agency judgment.

26. Unallowable Costs: CCAP • Inadequate and improper labor cost charges and documentation; • Disproportionately allocating building space costs to CACFP; • Questionable costs; and • Inflated administrative reimbursements.

27. Unallowable Costs: State Agency Challenges • Not implementing requirements to ensure costs are “reasonable” and “necessary”. • Maintaining insufficient documentation to determine budgets expenses are allowable and properly allocated.

28. 15% Administrative Fund Cap Problem • Center sponsors are not automatically entitled to 15% of reimbursements for their administrative expenses. • State agencies are only checking if sponsors are using 15% or less of reimbursements for administrative costs. • State agencies must still ensure there is a necessary and reasonable reason for sponsors needing the amount requested and being used.

29. Identifying Unallowable Costs • It is important to identify unallowable costs in the review because situations change between the budget approval and budget review, and approved costs might now be unallowable. • All costs must be questioned, even those that were approved. This means verifying actual vs. budget by line item. • State policies and procedures must be in place to ensure consistent reviews across sponsors. • Verify non-program sources of funds for unallowable costs to ensure CACFP funds are not being used for these.

30. Less-Than-Arms-Length Transactions (LTALTs) • Less-Than-Arms-Length Transactions are: • Conducted between related parties, potentially compromising integrity; and • One party can control or influence actions of the other. • Most LTALTs are “related party transactions” where there is a relationship between the people involved. • All LTALTs require: • Prior disclosure to the State and justification for why it is needed. Disclosure should identify title of expense and amount, as well as the exact connection to each budget line; and • Specific prior written approval.

31. LTALTs, Continued • Example #4: A sponsor has hired the CEO’s brother as the janitor for their office. • Answer: The sponsor needed to provide justification to the State agency and obtain specific prior written approval in order for the cost of hiring the CEO’s brother as a janitor to be allowable.

32. Less-Than-Arms-Length Transactions: Current Problems • Sponsors must disclose all of the following: • Related party transactions; • Less-than-arms-length transactions; • Ownership interests in goods and supplies; and • Any other information the State needs to determine allowability. • Failing to disclose these types of transactions may result in administrative or legal penalties against the sponsor. • Problems found in CCAP and what State Agencies are not currently doing: • Less-than-arms-length transactions in the areas of loans, leases, and purchasing goods and services.

33. Loans and Financing Arrangements • These are always a red flag for less-than-arms transactions, so always ask follow-up questions with these costs. • SA should ask to see all loan or financing documents to decide the purpose and if its allowable. • Program funds usually cannot be used to secure loans made by the institution to or from related parties. • CACFP funds can never be used to secure loans for nonprogram purposes. • SA should obtain FNSRO approval when required.

34. Leases for Space and Facilities • Examples of Less-than-arms leases include those between: • Institution and director/trustee/officer of the institution. • Institution and family member of the director/trustee/officer. • Divisions of an organization. • Organizations under common control. • In cases of an employee leasing personal home or office space to the institution, the following considerations must be made: • IRS rules for conducting business in a home must be followed. • Altering a private home for business use is not allowed if it increases the value of the property.

35. Goods and Services • There are strict limits on LTAL purchases of goods/services: • Legal and Professional services may never be obtained from sponsor employees; • The sponsor must fully disclose and justify the LTALT to the State agency; and • Specific Prior Written Approval must be obtained.

36. Identifying LTALTs • State agencies should inspect all contracts, purchase orders, loan/lease agreements, and other transaction documents. • Ask specific questions about these documents to determine how and from whom these products or services were obtained. • When undisclosed LTALTs are identified during reviews, sponsors must be told about the rules for these transactions as well as the consequences for not following these rules.

37. Correction of Unapproved Costs, Unallowable Costs, and Unauthorized LTALTs • Recover the money • Declare the sponsor seriously deficient if the same problems recur with frequency or in the next review. • Determine if the sponsor needs additional training on policies/procedures. • Work with the sponsor to identify and prevent the problem that resulted in using CACFP funds inappropriately. • Recover the money.

38. Addressing State Concerns and Where to Go From Here • FNSRO feedback indicates that State agencies: • Find making decisions around sponsors’ use of administrative funds to be difficult and uncomfortable; and • Want more Federal guidance and policy. • Support with making decisions: • Apply FNS Instruction 796-2 principles; and • Have discussions with your FNSRO to get feedback.

39. Questions and Discussion • What type of support do State Agencies need from FNS? • What areas need more guidance? • Questions about the opening exercise examples? • Other questions?