Maximize Federal Financial Participation in Indirect Costs

The state should maximize federal financial participation in indirect cost reimbursements.

The federal government assists states with direct and indirect costs associated with federal prog rams. A set percentage amount is usually determined for each state for direct program costs; the amount provided for indirect costs depends upon certain selected variables within approved federal policies. In Breaking the Mold , the Texas Performance Review found that Texas has not taken complete advantage of the flexibility afforded in federal policy to maximize indirect cost charges to the federal government.

To claim federal financial participation (FFP) for indirect costs, the states have two federally approved indirect cost allocation plans. The Statewide Indirect Cost Allocation Plans (SWICAP) allocate costs from statewide central service agencies, such a s the legal representation function of the Office of the Attorney General, to other state agencies that benefit from those services. The Departmental Indirect Cost Allocation Plans allocate SWICAP and the central administrative costs of state agencies to the programs, such as Medicaid, that they administer.

The U.S. Office of Management and Budget (OMB) prescribes several standards for the preparation of indirect costs allocation plans. Costs allocated as central services must represent actual expenditures and be net of all applicable credits. Indirect costs must not be included elsewhere as a direct cost.

In addition to these government-wide standards, states are also bound by requirements set forth by the federal funding agency, provided they are not in conflict with the government-wide standards. The major federal agency providing funding to the State of Texas is the U.S. Department of Health and Human Services. This agency has more detailed cost principles that apply to cost allocation plans and indirect cost rates and functions.

Although Texas has an approved SWICAP and approved indirect cost allocation plans for each major state agency, these plans have been p repared primarily with the intent of complying with federal requirements, not with the intent of maximizing additional FFP in intergovernmental programs administered by the state. Substantial flexibility exists within applicable federal policy to maximize FFP.

Some of the flexibility afforded states include considering an expenditure either a direct or indirect cost, defining indirect cost pools as the state sees fit and preparing plans based on prior expenditures or future budgeted amounts. States can als o change the sequence by which indirect costs are allocated to other central service agencies and select the most appropriate statistics to allocate indirect costs.

The experience of other states that have hired specialized outside expertise to assist in maximizing indirect costs, in addition to their regular contractor, has been an additional 10 percent increase in FFP in indirect costs.

A. The Legislature should include a provision in the General Appropriations Act requiring the Departm ent of Human Services to immediately contract on a no-risk, contingency basis with a consulting firm experienced in Title IV-E revenue enhancements to assist the state to increase its receipt of federal reimbursements in the Title IV-E program. Revenue resulting from the contract should be appropriated to DHS. The contractor should be paid from these appropriated funds.

Since the contract would be engaged on a no-risk contingency basis, administrative costs would accrue only out of the additional savings. There would be no up-front costs to the state.

B. To achieve these savings, the Legislature should reduce the general revenue appropriation to the Department of Human Services by the amount indicated and increase federal funds by the same amount.

This recommendation would generate additional federal dollars to the state with no new expenditures of general revenue. Consequently, it would allow the state to serve more people without generating new costs for taxpayers.

Fiscal Impact
Based on the experience of other states, Texas could realize at least 5 percent, and perhaps more, in FFP on its indirect costs. Texas statewide indirect costs in fiscal 1992 were $85.6 million; 5 percent of this total would be $4.3 million.

Administrative costs would involve contingency fees of up to 20 percent of the additional revenue collected over a period of two years, or $859,000.

Deducting administrative costs would leave a net of at least $6.9 million for the biennium and $17.2 million for the five-year period. These funds would accrue to the General Revenue Fund.

Gain to the Net Gain to the
Fiscal General Revenue Administrative General Revenue Change in
Year Fund 001 Costs* Fund 001 FTEs

1994 $4,295,000 $859,000 $3,436,000 0
1995 4,295,000 859,000 3,436,000 0
1996 4,295,000 859,000 3,436,000 0
1997 4,295,000 859,000 3,436,000 0
1998 4,295,000 859,000 3,436,000 0

* These costs include contingency fees of up to 20 percent of the additional revenue collected over a period of two years.