Develop a Mechanism to Oversee and Coordinate Agencies Indirect Cost Recovery Plan Preparation

The state should develop a mechanism to oversee and direct state agencies and higher education s preparation of indirect cost recovery plans.

Cost allocation has become important recently to government agencies as they attempt to maximize general fund revenues not only from grant programs, but also from special revenue funds, services for which user fees are charged and other areas.

In Breaking the Mold, published in July 1991, the Texas Performance Review (TPR) recommended changes to state statutes related to recovering indirect costs, which were enacted by the 71st Legislature, First Called Session in SB 3, Article 17. However, further changes are needed to refine the system and deal with some issues that have arisen since the sta tutory change.

For example, Article 17 of SB 3 requires state agencies and institutions of higher education that receive federal funds or charge fees for any services to prepare an annual indirect cost recovery plan. A separate schedule indicating the fed erally reimbursable indirect costs is required if the state agency receives federal funds. To help state agencies and institutions of higher education comply with these provisions, the Governor s office contracted with a private consultant to develop a manual for the state s use on preparing these types of plans and to conduct four-hour training sessions.

It is unknown, however, if this training was effective since the statute is silent on who should receive or review these plans. No oversight agency is re sponsible for ensuring that the plans are prepared, much less verifying the information or consider the applicability of the indirect cost recovery information in establishing agency budgets for the 1994-95 biennium. Additionally, many state agencies and i nstitutions of higher education have asked if the statute applies to their situation. However, since no agency is authorized to oversee the preparation or implementation of the plans, there is no source of guidance on such questions.

The statute does, however, authorize the Office of State and Federal Relations (OSFR) to act on that part of the agency s indirect cost recovery plan related to federal and earned federal funds. OSFR is charged with preparing an annual report to the Legislature on instances in which the state or an agency has not pursued opportunities to receive or earn federal funds and the reason for the failure. OSFR is also charged with making recommendations, developed in consultation with the Legislative Budget Board (LBB), the Governor s Office of Budget and Planning and the Comptroller s office on actions necessary to enhance the recovery of indirect costs, or otherwise improve the state s management of federal funds or earned federal funds. 1 Thus, requiring agencies to file the report may provide the necessary stimulus for the executive and legislative leadership to act on the information.

TPR also found that inconsistencies exist over what can be considered an allowable cost. The federal government s rules on allowable costs are pu blished in Office of Management and Budget (OMB) Circular A-87 for state agencies and Circular A-21 for institutions of higher education. These rules and those required under SB 3 are inconsistent.

Circular A-87 allowable costs include those necessary for the efficient conduct of a program, reasonable and not otherwise restricted by statute or regulation. 2 Costs that are not allowable under Circular A-87 include bad debts, contingencies, legislative, chief executive and general government expenses, to name a few. 3 The rules governing what constitutes allowable costs for higher education are different. Circular A-21 states, a cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received or other equitable relationship. 4

The goal of SB 3 was to account for all support costs of government, including legislative, general government and chief executive expenses and to allocate those costs to state agencies so that in setting fees and other charges, those costs would be included and recovered. The different definitions, however, could potentially endanger the receipt of some federal reimbursements since the federal definition, in the case of Ci rcular A-87, is much more narrow than the state s. It is unclear if this is true of the differences between SB 3 and Circular A-21.

The Legislative Appropriations Request Instructions for the 1994-95 biennium have further contributed to agencies confusion over the state s policy on indirect cost recovery. The instructions require agencies when preparing their legislative appropriations requests to allocate indirect costs to each strategy on the basis that is most appropriate for the individual agency. 5 Given the variances in definitions and application of cost recovery and allocation methodologies, agencies have questioned what is the most appropriate method and for which policies they are to be held accountable.

It seems to follow that the legislation should be amended to require an oversight authority to establish a consistent policy over the calculation, application and allocation of indirect costs. It also follows that the plan required by SB 3 could be incorporated into the state s strategic planning and budgeting process to ensure consistent treatment.

A. The Legislature should require the Governor s Office of Budget and Planning to oversee the preparation of the indirect cost recovery plans, providing direction to state agencies and institutions of higher education on content, form and any other pertinent elements of the plans.

The Governor s office should work with the LBB, the Comptroller s office and OSFR to devise consistent and comprehensive policies to define indirect costs for the state strategic plan and budget cycles.

B. The Legislature should amend Article 6252-5f of Texas Revised Civil Statutes Annotated to require state agencies and institutions that are required to prepare an annual indirect cost recovery plan to fi le the plan with the Governor s Office of Budget and Planning, the Legislative Budget Board (LBB), the Comptroller s office and the Office of State and Federal Relations (OSFR). The filing time should coincide with the development of the state strategic plan and could be incorporated into that planning cycle.

C. The Legislature should amend Article 6252-5f of Texas Revised Civil Statutes Annotated to require OSFR to review state agencies with federally reimbursable indirect costs which are less than the am ount included in the Statewide Cost Allocation Plan (SWCAP).

Since higher education institutions were exempted from the reimbursement requirement, the Legislature should require OSFR to compare the institutions plans with what was allocated in the SWCAP to ensure federal reimbursements are maximized.

OSFR, based on its review, should be authorized to help state agencies and institutions of higher education identify ways to increase their federal reimbursements.

The current statute allows state agen cies to reimburse the General Revenue Fund the lesser of the amount received from the federal government or the amount allocated in the SWCAP. This practice should be allowed to continue. However, in cases where agencies reimburse the state at a lower leve l than that allocated in the SWCAP, OSFR could determine why the reimbursements were less and help the agencies devise better methods to increase federal reimbursements.

State agencies and institutions of higher education will benefit from t he reduced burden of preparing several different plans related to cost recovery. Both state government and taxpayers also will benefit from more efficient use of tax dollars and federal funds which will help the state avoid imposing new or higher taxes.

Fiscal Impact
This recommendation will produce no immediate measurable gain to the state; however, over time, there should be a gain as agencies and institutions of higher education set fees to recover the full costs of a program and the state continues to identify ways to improve federal revenue reimbursements to the state.

1 Article 8, Senate Bill 3 as Enrolled, 71st Legislature, Second Called Session, Austin, Texas, 1991, p. 29.
2 David M. Griffith & Associates, LTD., Cost Allocation Plan Workshop for State Agencies, Irving, Texas, 1992, p. 7.
3 Ibid., p. 8.
4 David M. Griffith & Associates, LTD., OMB Circular No. A-21, Cost Principles for Educational Institutions Revised, Northbrook, Illinois, 1991, p. 4.
5 Legislative Budget Board and Governor s Office of Budget and Planning, Detailed Instructions for Preparing and Submitting Requests for Legislative Appropriations for the Biennium Beginning September 1, 1993, Executive, Administrative, Human Service and Selected Public Education Agencies (Austin, Texas, June 1992), p. 35.