APPENDIX 1

EXECUTIVE OFFICE OF THE PRESIDENT

OFFICE OF MANAGEMENT AND BUDGET

WASHINGTON, D.C. 20503

May 4, 1995

Circular No. A-87

Revised

TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS

FROM: Alice M. Rivlin Director

SUBJECT:Cost Principles for State, Local, and Indian Tribal

Governments

1\. Purpose. This Circular establishes principles and standards for

determining costs for Federal awards carried out through grants, cost

reimbursement contracts, and other agreements with State and local

governments and federally-recognized Indian tribal governments
(governmental

units).

2\. Authority. This Circular is issued under the authority of the Budget

and Accounting Act of 1921, as amended; the Budget and Accounting
Procedures

Act of 1950, as amended; the Chief Financial Officers Act of 1990;

Reorganization Plan No. 2 of 1970; and Executive Order No. 11541

(\"Prescribing the Duties of the Office of Management and Budget and the

Domestic Policy Council in the Executive Office of the President\").

3\. Background. An interagency task force was established in 1987 to
review

existing cost principles for Federal awards to State, local, and Indian

tribal governments. The task force studied Inspector General reports and

recommendations, solicited suggestions for changes to the Circular from

governmental units, and compared for consistency the provisions of other
OMB

cost principles circulars covering non-profit organizations and
universities.

A proposed revised Circular reflecting the results of those efforts was

issued on October 12, 1988, and August 19, 1993. Extensive comments on
the

proposed revisions, discussions with interest groups, and related

developments were considered in developing this revision.

4\. Rescissions. This Circular rescinds and supersedes Circular A-87,

issued January 15, 1981.

5\. Policy. This Circular establishes principles and standards to
provide

a uniform approach for determining costs and to promote effective
program

delivery, efficiency, and better relationships between governmental
units and

the Federal Government. The principles are for determining allowable
costs

only. They are not intended to identify the circumstances or to dictate
the

extent of Federal and governmental unit participation in the financing
of a

particular Federal award. Provision for profit or other increment above
cost

is outside the scope of this Circular.

6\. Definitions. Definitions of key terms used in this Circular are

contained in Attachment A, Section B.

7\. Required Action. Agencies responsible for administering programs
that

involve cost reimbursement contracts, grants, and other agreements with

governmental units shall issue codified regulations to implement the

provisions of this Circular and its Attachments by September 1, 1995.

8\. OMB Responsibilities. The Office of Management and Budget (OMB) will

review agency regulations and implementation of this Circular, and will

provide policy interpretations and assistance to insure effective and

efficient implementation. Any exceptions will be subject to approval by
OMB.

Exceptions will only be made in particular cases where adequate
justification

is presented.

9\. Information Contact. Further information concerning this Circular
may

be obtained by contacting the Office of Federal Financial Management,

Financial Standards and Reporting Branch, Office of Management and
Budget,

Washington, DC 20503, telephone 202-395-3993.

10\. Policy Review Date.. OMB Circular A-87 will have a policy review
three

years from the date of issuance.

11.Effective Date. This Circular is effective as follows:

-For costs charged indirectly or otherwise covered by the cost

allocation plans described in Attachments C, D and E, this revision

shall be applied to cost allocation plans and indirect cost

proposals submitted or prepared for a governmental unit\'s fiscal

year that begins on or after September 1, 1995.

-For other costs, this revision shall be applied to all awards or

amendments, including continuation or renewal awards, made on or

after September 1, 1995.

Attachments

OMB CIRCULAR NO. A-87

COST PRINCIPLES FOR

STATE, LOCAL AND INDIAN TRIBAL GOVERNMENTS

TABLE OF CONTENTS

Attachment A - General Principles for Determining Allowable Costs

Attachment B - Selected Items of Cost

Attachment C - State/Local-Wide Central Service Cost Allocation

Plans

Attachment D - Public Assistance Cost Allocation Plans

Attachment E - State and Local Indirect Cost Rate Proposals

Circular No. A-87

Attachment A

GENERAL PRINCIPLES FOR DETERMINING

ALLOWABLE COSTS

TABLE OF CONTENTS

A.Purpose and Scope

1.Objectives

2\. Policy guides

3.Application

B.Definitions

1.Approval or authorization of the awarding or cognizant Federal

agency

2.Award

3.Awarding agency

4.Central service cost allocation plan

5.Claim

6.Cognizant agency

7.Common rule

8.Contract

9.Cost

10\. Cost allocation plan

11\. Cost objective

12\. Federally-recognized Indian tribal government

13\. Governmental unit

14\. Grantee department or agency

15\. Indirect cost rate proposal

16\. Local government

17\. Public assistance cost allocation plan

18\. State

C. Basic Guidelines

1\. Factors affecting allowability of costs

2\. Reasonable costs

3\. Allocable costs

4\. Applicable credits

D.Composition of Cost

1.Total cost

2.Classification of costs

E.Direct Costs

1.General

2\. Application

3.Minor items

F.Indirect Costs

1.General

2.Cost allocation plans and indirect cost proposals

3.Limitation on indirect or administrative costs

G. Interagency Services

H. Retired Certifications

A. Purpose and Scope

1\. Objectives. This Attachment establishes principles for determining

the allowable costs incurred by State, local, and federally-recognized
Indian

tribal governments (governmental units) under grants, cost reimbursement

contracts, and other agreements with the Federal Government
(collectively

referred to in this Circular as \"Federal awards\"). The principles are
for

the purpose of cost determination and are not intended to identify the

circumstances or dictate the extent of Federal or governmental unit

participation in the financing of a particular program or project. The

principles are designed to provide that Federal awards bear their fair
share

of cost recognized under these principles except where restricted or

prohibited by law. Provision for profit or other increment above cost is

outside the scope of this Circular.

2\. Policy guides.

a\. The application of these principles is based on the fundamental

premises that:

1\. Governmental units are responsible for the efficient and

effective administration of Federal awards through the application of
sound

management practices.

2\. Governmental units assume responsibility for administering

Federal funds in a manner consistent with underlying agreements, program

objectives, and the terms and conditions of the Federal award.

3\. Each governmental unit, in recognition of its own unique

combination of staff, facilities, and experience, will have the primary

responsibility for employing whatever form of organization and
management

techniques may be necessary to assure proper and efficient
administration of

Federal awards.

b\. Federal agencies should work with States or localities which wish

to test alternative mechanisms for paying costs for administering
Federal

programs. The Office of Management and Budget (OMB) encourages Federal

agencies to test fee-for-service alternatives as a replacement for
current

cost-reimbursement payment methods in response to the National
Performance

Review\'s (NPR) recommendation. The NPR recommended the fee-for-service

approach to reduce the burden associated with maintaining systems

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for charging administrative costs to Federal programs and preparing and

approving cost allocation plans. This approach should also increase

incentives for administrative efficiencies and improve outcomes.

3\. Application.

a\. These principles will be applied by all Federal agencies in

determining costs incurred by governmental units under Federal awards

(including subawards) except those with (1) publicly-financed
educational

institutions subject to OMB Circular A-21, \"Cost Principles for
Educational

Institutions,\" and (2) programs administered by publicly-owned
hospitals and

other providers of medical care that are subject to requirements
promulgated

by the sponsoring Federal agencies. However, this Circular does apply to
all

central service and department/agency costs that are allocated or billed
to

those educational institutions, hospitals, and other providers of
medical

care or services by other State and local government departments and

agencies.

b\. All subawards are subject to those Federal cost principles

applicable to the particular organization concerned. Thus, If a subaward
is

to a governmental unit (other than a college, university or hospital),
this

Circular shall apply; if a subaward is to a commercial organization, the
cost

principles applicable to commercial organizations shall apply; if a
subaward

is to a college or university, Circular A-21 shall apply; if a subaward
is to

a hospital, the cost principles used by the Federal awarding agency for

awards to hospitals shall apply, subject to the provisions of subsection

A.3.a. of this Attachment; if a subaward is to some other non-profit

organization, Circular A-122, \"Cost Principles for Non-Profit
Organizations,

\" shall apply.

c\. These principles shall be used as a guide in the pricing of

fixed price arrangements where costs are used in determining the
appropriate

price.

d\. Where a Federal contract awarded to a governmental unit

incorporates a Cost Accounting Standards (CAS) clause, the requirements
of

that clause shall apply. In such cases, the governmental unit and the

cognizant Federal agency shall establish an appropriate advance
agreement on

how the governmental unit will comply with applicable CAS requirements
when

estimating, accumulating and reporting costs under CAS-covered
contracts.

The agreement shall indicate that OMB Circular A-87 requirements will be

applied to other Federal awards. In all cases, only one set of records
needs

to be maintained by the governmental unit.

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B. Definitions

1\. \"Approval or authorization of the awarding or cognizant Federal

agency\" means documentation evidencing consent prior to incurring a
specific

cost. If such costs are specifically identified in a Federal award
document,

approval of the document constitutes approval of the costs. If the costs
are

covered by a State/local-wide cost allocation plan or an indirect cost

proposal, approval of the plan constitutes the approval.

2\. \"Award\" means grants, cost reimbursement contracts and other

agreements between a State, local and Indian tribal government and the

Federal Government.

3\. \"Awarding agency\" means (a) with respect to a grant, cooperative

agreement, or cost reimbursement contract, the Federal agency, and (b)
with

respect to a subaward, the party that awarded the subaward.

4\. \"Central service cost allocation plan\" means the documentation

identifying, accumulating, and al locating or developing billing rates
based

on the allowable costs of services provided by a governmental unit on a

centralized basis to its departments and agencies. The costs of these

services may be allocated or billed to users.

5\. \"Claim\" means a written demand or written assertion by the

governmental unit or grantor seeking, as a matter of right, the payment
of

money in a sum certain, the adjustment or interpretation of award terms,
or

other relief arising under or relating to the award. A voucher, invoice
or

other routine request for payment that is not a dispute when submitted
is not

a claim. Appeals, such as those filed by a governmental unit in response
to

questioned audit costs, are not considered claims until a final
management

decision is made by the Federal awarding agency.

6\. \"Cognizant agency\" means the Federal agency responsible for

reviewing, negotiating, and approving cost allocation plans or indirect
cost

proposals developed under this Circular on behalf of all Federal
agencies.

OMB publishes a listing of cognizant agencies.

7\. \"Common Rule\" means the \"Uniform Administrative Requirements for

Grants and Cooperative Agreements to State and Local Governments; Final
Rule\"

originally issued at 53 FR 8034-8103 (March 11, 1988). Other common
rules

will be referred to by their specific titles.

8\. \"Contract\" means a mutually binding legal relationship obligating

the seller to furnish the supplies or services (including construction)
and

the buyer to pay for them. It includes all types of commitments that

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obligate the government to an expenditure of appropriated funds and
that,

except as otherwise authorized, are in writing. In addition to bilateral

instruments, contracts include (but are not limited to): awards and
notices

of awards; job orders or task orders issued under basic ordering
agreements;

letter contracts; orders, such as purchase orders, under which the
contract

becomes effective by written acceptance or performance; and, bilateral

contract modifications. Contracts do not include grants and cooperative

agreements covered by 31 U.S.C. 6301 et seq.

9\. \"Cost\" means an amount as determined on a cash, accrual, or other

basis acceptable to the Federal awarding or cognizant agency. It does
not

include transfers to a general or similar fund.

10\. \"Cost allocation plan\" means central service cost allocation
plan,

public assistance cost allocation plan, and indirect cost rate proposal.

Each of these terms are further defined in this section.

11\. \"Cost objective\" means a function, organizational subdivision,

contract, grant, or other activity for which cost data are needed and
for

which costs are incurred.

12\. \"Federally-recognized Indian tribal government\" means the
governing

body or a governmental agency of any Indian tribe, band, nation, or
other

organized group or community (including any native village as defined in

Section 3 of the Alaska Native Claims Settlement Act, 85 Stat. 688)
certified

by the Secretary of the Interior as eligible for the special programs
and

services provided through the Bureau of Indian Affairs.

13\. \"Governmental unit\" means the entire State, local, or federally-

recognized Indian tribal government, including any component thereof.

Components of governmental units may function independently of the

governmental unit in accordance with the term of the award.

14\. \"Grantee department or agency\" means the component of a State,

local, or federally-recognized Indian tribal government which is
responsible

for the performance or administration of all or some part of a Federal
award.

15\. \"Indirect cost rate proposal\" means the documentation prepared by

a governmental unit or component thereof to substantiate its request for
the

establishment of an indirect cost rate as described in Attachment E of
this

Circular.

16\. \"Local government\" means a county, municipality, city, town,

township, local public authority, school district, special district,

intrastate district, council of governments (whether or

5

not incorporated as a, non-profit corporation under State law), any
other

regional or interstate government entity, or any agency or
instrumentality of

a local government.

17\. \"Public assistance cost allocation plan\" means a narrative

description of the procedures that will be used in identifying,
measuring and

allocating all administrative costs to all of the programs administered
or

supervised by State public assistance agencies as described in
Attachment D

of this Circular.

18\. \"State\" means any of the several States of the United States, the

District of Columbia, the Commonwealth of Puerto Rico, any territory or

possession of the United States, or any agency or instrumentality of a
State

exclusive of local governments.

C.Basic-Guidelines

1\. Factors affecting allowability of costs. To be allowable under

Federal awards, costs must meet the following general criteria:

a\. Be necessary and reasonable for proper and efficient

performance and administration of Federal awards.

b\. Be allocable to Federal awards under the provisions of this

Circular.

c\. Be authorized or not prohibited under State or local laws or

regulations.

d\. Conform to any limitations or exclusions set forth in these

principles, Federal laws, terms and conditions of the Federal award, or
other

governing regulations as to types or amounts of cost items.

e\. Be consistent with policies, regulations, and procedures that

apply uniformly to both Federal awards and other activities of the

governmental unit.

f\. Be accorded consistent treatment. A cost may not be assigned

to a Federal award as a direct cost if any other cost incurred for the
same

purpose in like circumstances has been allocated to the Federal award a-
an

indirect cost.

g\. Except as otherwise provided for in this Circular, be

determined in accordance with generally accepted accounting principles.

h\. Not be included as a cost or used to meet cost sharing or

matching requirements of any other Federal award in

6

either the current or a prior period, except as specifically provided by

Federal law or regulation.

i.Be the net of all applicable credits.

j.Be adequately documented.

2\. Reasonable costs. A cost is reasonable if, in its nature and

amount, it does not exceed that which would be incurred by a prudent
person

under the circumstances prevailing at the time the decision was made to
incur

the cost. The question of reasonableness is particularly important when

governmental units or components are predominately federally-funded. In

determining reasonableness of a given cost, consideration shall be given
to:

a\. Whether the cost is of a type generally recognized as ordinary

and necessary for the operation of the governmental unit or the
performance

of the Federal award.

b\. The restraints or requirements imposed by such factors as:

sound business practices; arms length bargaining; Federal, State and
other

laws and regulations; and, terms and conditions of the Federal award.

c.Market prices for comparable goods or services.

d\. Whether the individuals concerned acted with prudence in the

circumstances considering their responsibilities to the governmental
unit,

its employees, the public at large, and the Federal Government.

e\. Significant deviations from the established practices of the

governmental unit which may unjustifiably increase the Federal award\'s
cost.

3\. Allocable costs.

a\. 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.

b\. All activities which benefit from the governmental unit\'s

indirect cost, including unallowable activities and services donated to
the

governmental unit by third parties, will receive an appropriate
allocation of

indirect costs.

c\. Any cost allocable to a particular Federal award or cost

objective under the principles provided for in this Circular may not be

charged to other Federal awards to overcome fund deficiencies, to avoid

restrictions imposed by law or terms of the Federal awards, or for other

7

reasons. However, this prohibition would not preclude governmental units

from shifting costs that are allowable under two or more awards in
accordance

with existing program agreements.

d\. Where an accumulation of indirect costs will ultimately result

in charges to a Federal award, a cost allocation plan will be required
as

described in Attachments C, D, and E.

4\. Applicable credits.

a\. Applicable credits refer to those receipts or reduction of

expenditure-type transactions that offset or reduce expense items
allocable

to Federal awards as direct or indirect costs. Examples of such
transactions

are: purchase discounts, rebates or allowances, recoveries or
indemnities on

losses, insurance refunds or rebates, and adjustments of overpayments or

erroneous charges. To the extent that such credits accruing to or
received

by the governmental unit relate to allowable costs, they shall be
credited to

the Federal award either as a cost reduction or cash refund, as
appropriate.

b\. In some instances, the amounts received from the Federal

Government to finance activities or service operations of the
governmental

unit should be treated as applicable credits. Specifically, the concept
of

netting such credit items (including any amounts used to meet cost
sharing or

matching requirements) should be recognized in determining the rates or

amounts to be charged to Federal awards. (See Attachment B, item 15,

\"Depreciation and use allowances,\" for areas of potential application
in the

matter of Federal financing of activities.)

D. Composition of Cost

1\. Total cost. The total cost of Federal awards is comprised of the

allowable direct cost of the program, plus its allocable portion of
allowable

indirect costs, less applicable credits.

2\. Classification of costs. There is no universal rule for

classifying certain costs as either direct or indirect under every
accounting

system. A cost may be direct with respect to some specific service or

function, but indirect with respect to the Federal award or other final
cost

objective. Therefore, it is essential that each item of cost be treated

consistently in like circumstances either as a direct or an indirect
cost.

Guidelines for determining direct and indirect costs charged to Federal

awards are provided in the sections that follow.

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E. Direct Costs

1\. General. Direct costs are those that can be identified

specifically with a particular final cost objective.

2\. Application. Typical direct costs chargeable to Federal awards

are:

a\. Compensation of employees for the time devoted and identified

specifically to the performance of those awards.

b\. Cost of materials acquired, consumed, or expended specifically

for the purpose of those awards.

c.Equipment and other approved capital expenditures.

d\. Travel expenses incurred specifically to carry out the award.

3\. Minor items. Any direct cost of a minor amount may be treated as

an indirect cost for reasons of practicality where such accounting
treatment

for that item of cost is consistently applied to all cost objectives.

F.Indirect Costs

1\. General. Indirect costs are those: (a) incurred for a common or

joint purpose benefiting more than one cost objective, and (b) not
readily

assignable to the cost objectives specifically benefitted, without
effort

disproportionate to the results achieved- The term \"indirect costs,\"
as used

herein, applies to costs of this type originating in the grantee
department,

as well as those incurred by other departments in supplying goods,
services,

and facilities. To facilitate equitable distribution of indirect
expenses to

the cost objectives served, it may be necessary to establish a number of

pools of indirect costs within a governmental unit department or in
other

agencies providing services to a governmental unit department. Indirect
cost

pools should be distributed to benefitted cost objectives on bases that
will

produce an equitable result in consideration of relative benefits
derived.

2\. Cost allocation plans and indirect cost proposals. Requirements for

development and submission of cost allocation plans and indirect cost
rate

proposals are contained in Attachments C, D, and E.

3.Limitation on indirect or administrative costs.

a\. In addition to restrictions contained in this Circular, there

may be laws that further limit the amount of administrative or indirect
cost

allowed.

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b\. Amounts not recoverable as indirect costs or administrative

costs under one Federal award may not be shifted to another Federal
award,

unless specifically authorized by Federal legislation or regulation.

G. Interagency Services. The cost of services provided by one agency to

another within the governmental unit may include allowable direct costs
of

the service plus a pro rate share of indirect costs. A standard indirect

cost allowance equal to ten percent of the direct salary and wage cost
of

providing the service (excluding overtime, shift premiums, and fringe

benefits) may be used in lieu of determining the actual indirect costs
of the

service. These services do not include centralized services included in

central service cost allocation plans as described in Attachment C.

H. Required Certifications. Each cost allocation plan or indirect cost

rate proposal required by Attachments C and E must comply with the
following:

1\. No proposal to establish a cost allocation plan or an indirect cost

rate, whether submitted to a Federal cognizant agency or maintained on
file

by the governmental unit, shall be acceptable unless such costs have
been

certified by the governmental unit using the Certificate of Cost
Allocation

Plan or Certificate of Indirect Costs as set forth in Attachments C and
E.

The certificate must be signed on behalf of the governmental unit by an

individual at a level no lower than chief financial officer of the

governmental unit that submits the proposal or component covered by the

proposal.

2\. No cost allocation plan or indirect cost rate shall be approved by

the Federal Government unless the plan or rate proposal has been
certified.

Where it is necessary to establish a cost allocation plan or an indirect
cost

rate and the governmental unit has not submitted a certified proposal
for

establishing such a plan or rate in accordance with the requirements,
the

Federal Government may either disallow all indirect costs or
unilaterally

establish such a plan or rate. Such a plan or rate may be based upon
audited

historical data or such other data that have been furnished to the
cognizant

Federal agency and for which it can be demonstrated that all unallowable

costs have been excluded. When a cost allocation plan or indirect cost
rate

is unilaterally established by the Federal Government because of failure
of

the governmental unit to submit a certified proposal, the plan or rate

established will be set to ensure that potentially unallowable costs
will not

be reimbursed.

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Circular No. A-87

Attachment B

SELECTED ITEMS OF COST

TABLE OF CONTENTS

1.Accounting

2.Advertising and public relations costs

3.Advisory councils

4.Alcoholic beverages

5.Audit services

6.Automatic electronic data processing

7.Bad debts

8.Bonding costs

9.Budgeting

10.Communications

11.Compensation for personnel services

a.General

b.Reasonableness

c.Unallowable costs

d.Fringe benefits

e.Pension plan costs

f.Post-retirement health benefits

g.Severance Pay

h.Support of salaries and wages

i.Donated Services

12.Contingencies

13.Contributions and donations

14.Defense and prosecution of criminal and civil proceedings, and claims

15.Depreciation and use allowances

16.Disbursing service

17.Employee morale, health, and welfare costs

18.Entertainment

19.Equipment and other capital expenditures

20.Fines and penalties

21.Fund raising and investment management costs

22.Gains and losses on disposition of depreciable property and other

capital assets and substantial relocation of Federal programs.

23.General government expenses

24.Idle facilities and idle capacity

25.Insurance and indemnification

26.Interest

27.Lobbying

28.Maintenance, operations, and repairs

29.Materials and supplies

30.Memberships, subscriptions, and professional activities

31.Motor pools

32.Pre-award costs

33.Professional service costs

34\. Proposal costs

35\. Publication and printing costs

36\. Rearrangements and alterations

37\. Reconversion costs

38\. Rental costs

39\. Taxes

40\. Training

41\. Travel costs

42\. Under-recovery of costs under Federal agreements

Sections 1 through 42 provide principles to be applied in establishing

the allowability or unallowability of certain items of cost. These

principles apply whether a cost is treated as direct or indirect. A cost
is

allowable for Federal reimbursement only to the extent of benefits
received

by Federal awards and its conformance with the general policies and

principles stated in Attachment A to this Circular. Failure to mention a

particular item of cost in these sections is not intended to imply that
it is

either allowable or unallowable; rather, determination of allowability
in

each case should be based on the treatment or standards provided for
similar

or related items of cost.

1\. Accounting. The cost of establishing and maintaining accounting and

other information systems is allowable.

2\. Advertising and public relations costs.

a\. The term \"advertising costs\" means the costs of advertising media

and corollary administrative costs. Advertising media include magazines,

newspapers, radio and television programs, direct mail, exhibits, and
the

like.

b\. The term \"public relations\" includes community relations and means

those activities dedicated to maintaining the image of the governmental
unit

or maintaining or promoting understanding and favorable relations with
the

community or public at large or any segment of the public.

c\. Advertising costs are allowable only when incurred for the

recruitment of personnel, the procurement of goods and services, the
disposal

of surplus materials, and any other specific purposes necessary to meet
the

requirements of the Federal award. Advertising costs associated with the

disposal of surplus materials are not allowable where all disposal costs
are

reimbursed based on a standard rate as specified in the grants
management

common rule.

d\. Public relations costs are allowable when:

\(1\) Specifically required by the Federal award and then only as a

direct cost;

2

\(2\) Incurred to communicate with the public and press pertaining

to specific activities or accomplishments that result from performance
of the

Federal award and then only as a direct cost; or

\(3\) Necessary to conduct general liaison with news media and

government public relations officers, to the extent that such activities
are

limited to communication and liaison necessary to keep the public
informed on

matters of public concern, such a- notices of Federal contract/grant
awards,

financial matters, etc.

e\. Unallowable advertising and public relations costs include the

following:

\(1\) All advertising and public relations costs other than as

specified in subsections c. and d.;

\(2\) Except as otherwise permitted by these cost principles, costs

of conventions, meetings, or other events related to other activities of
the

governmental unit including:

\(a\) Costs of displays, demonstrations, and exhibits;

\(b\) Costs of meeting rooms, hospitality suites, and other

special facilities used in conjunction with shows and other special
events;

and

\(c\) Salaries and wages of employees engaged in setting up and

displaying exhibits, making demonstrations, and providing briefings;

\(3\) Costs of promotional items and memorabilia, including models,

gifts, and souvenirs; and

\(4\) Costs of advertising and public relations designed solely to

promote the governmental unit.

3\. Advisory councils. Costs incurred by advisory councils or committees

are allowable as a direct cost where authorized by the Federal awarding

agency or as an indirect cost where allocable to Federal awards.

4\. Alcoholic beverages. Costs of alcoholic beverages are unallowable.

5\. Audit services. The costs of audits are allowable provided that the

audits were performed in accordance with the Single Audit Act, as
implemented

by Circular A-128, \"Audits of State and Local Governments.\" Generally,
the

percentage of costs charged to Federal awards for a single audit shall
not

exceed the percentage derived by dividing Federal funds expended by
total

3

funds expended by the recipient or subrecipient (including program
matching

funds) during the fiscal year. The percentage may be exceeded only if

appropriate documentation demonstrates higher actual costs.

Other audit costs are allowable if specifically approved by the awarding

or cognizant agency as a direct cost to an award or included as an
indirect

cost in a cost allocation plan or rate.

6\. Automatic electronic data processing. The cost of data processing

services is allowable (but see section 19, Equipment and other capital

expenditures).

7\. Bad debts. Any losses arising from uncollectible accounts and other

claims, and related costs, are unallowable unless provided for in
Federal

program award regulations.

8\. Bonding costs. Costs of bonding employees and officials are
allowable

to the extent that such bonding is in accordance with sound business

practice.

9\. Budgeting. Costs incurred for the development, preparation,

presentation, and execution of budgets are allowable.

10\. Communications. Costs of telephone, mail, messenger, and similar

communication services are allowable.

11\. Compensation for personnel services.

a\. General. Compensation for personnel services includes all

remuneration, paid currently or accrued, for services rendered during
the

period of performance under Federal awards, including but not
necessarily

limited to wages, salaries, and fringe benefits. The costs of such

compensation are allowable to the extent that they satisfy the specific

requirements of this Circular, and that the total compensation for
individual

employees:

\(1\) Is reasonable for the services rendered and conforms to the

established policy of the governmental unit consistently applied to both

Federal and non-Federal activities;

\(2\) Follows an appointment made in accordance with a governmental

unit\'s laws and rules and meets merit system or other requirements
required

by Federal law, where applicable; and

\(3\) Is determined and supported as provided in subsection h.

b\. Reasonableness. Compensation for employees engaged in work on

Federal awards will be considered reasonable to the extent that it is

consistent with that paid for similar work in other activities of the

4

governmental unit. In cases where the kinds of employees required for

Federal awards are not found in the other activities of the governmental

unit, compensation will be considered reasonable to the extent that it
is

comparable to that paid for similar work in the labor market in which
the

employing government competes for the kind of employees involved.

Compensation surveys providing data representative of the labor market

involved will be an acceptable basis for evaluating reasonableness.

c\. Unallowable costs. Costs which are unallowable under other

sections of these principles shall not be allowable under this section
solely

on the basis that they constitute personnel compensation.

d.Fringe benefits.

\(1\) Fringe benefits are allowances and services provided by

employers to their employees as compensation in addition to regular
salaries

and wages. Fringe benefits include, but are not limited to, the costs of

leave, employee insurance, pensions, and unemployment benefit plans.
Except

as provided elsewhere in these principles, the costs of fringe benefits
are

allowable to the extent that the benefits are reasonable and are
required by

law, governmental unit-employee agreement, or an established policy of
the

governmental unit.

\(2\) The cost of fringe benefits in the form of regular

compensation paid to employees during periods of authorized absences
from the

job, such as for annual leave, sick leave, holidays, court leave,
military

leave, and other similar benefits, are allowable if: (a) they are
provided

under established written leave policies.; (b) the costs are equitably

allocated to all related activities, including Federal awards; and, (c)
the

accounting basis (cash or accrual) selected for costing each type of
leave is

consistently followed by the governmental unit.

\(3\) When a governmental unit uses the cash basis of accounting,

the cost of leave is recognized in the period that the leave is taken
and

paid for. Payments for unused leave when an employee retires or
terminates

employment are allowable in the year of payment provided they are
allocated

as a general administrative expense to all activities of the
governmental

unit or component.

\(4\) The accrual basis may be only used for those types of leave

for which a liability as defined by Generally Accepted Accounting
Principles

(GAAP) exists when the leave is earned. When a governmental unit uses
the

accrual basis of accounting, in accordance with GAAP, allowable leave
costs

are the lesser of the amount accrued or funded.

5

\(5\) The cost of fringe benefits in the form of employer

contributions or expenses for social security; employee life, health,

unemployment, and worker\'s compensation insurance (except as indicated
in

section 25, Insurance and indemnification); pension plan costs (see

subsection e.); and other similar benefits are allowable, provided such

benefits are granted under established written policies. Such benefits,

whether treated as indirect costs or as direct costs, shall be allocated
to

Federal awards and all other activities in a manner consistent with the

pattern of benefits attributable to the individuals or group(s) of
employees

whose salaries and wages are chargeable to such Federal awards and other

activities.

e\. Pension plan costs may be computed using a pay-as-you-go method or

an acceptable actuarial cost method in accordance with established
written

policies of the governmental unit.

\(1\) For pension plans financed on a pay-as-you-go method,

allowable costs will be limited to those representing actual payments to

retirees or their beneficiaries.

\(2\) Pension costs calculated using an actuarial cost-based method

recognized by GAAP are allowable for a given fiscal year if they are
funded

for that year within six months after the end of that year. Costs funded

after the six month period (or a later period agreed to by the cognizant

agency) are allowable in the year funded. The cognizant agency may agree
to

an extension of the six month period if an appropriate adjustment is
made to

compensate for the timing of the charges to the Federal Government and

related Federal reimbursement and the governmental unit\'s contribution
to the

pension fund. Adjustments may be made by cash refund or other equitable

procedures to compensate the Federal Government for the time value of
Federal

reimbursements in excess of contributions to the pension fund.

\(3\) Amounts funded by the governmental unit in excess of the

actuarially determined amount for a fiscal year may be used as the

governmental unit\'s contribution in future periods.

\(4\) When a governmental unit converts to an acceptable actuarial

cost method, as defined by GAAP, and funds pension costs in accordance
with

this method, the unfunded liability at the time of conversion shall be

allowable if amortized over a period of years in accordance with GAAP.

\(5\) The Federal Government shall receive an equitable share of any

previously allowed pension costs (including earnings thereon) which
revert or

inure to the governmental unit in the form of a refund, withdrawal, or
other

credit.

6

f\. Post-retirement health benefits. Post-retirement health benefits

(PRHB) refers to costs of health insurance or health services not
included in

a pension plan covered by subsection e. for retirees and their spouses,

dependents, and survivors. PRHB costs may be computed using a
pay-as-you-go

method or an acceptable actuarial cost method in accordance with
established

written polices of the governmental unit.

\(1\) For PRHB financed on a pay as-you-go method, allowable costs

will be limited to those representing actual payments to retirees or
their

beneficiaries.

\(2\) PRHB costs calculated using an actuarial cost method

recognized by GAAP are allowable if they are funded for that year within
six

months after the end of that year. Costs funded after the six month
period

(or a later period agreed to by the cognizant agency) are allowable in
the

year funded. The cognizant agency may agree to an extension of the six
month

period if an appropriate adjustment is made to compensate for the timing
of

the charges to the Federal Government and related Federal reimbursements
and

the governmental unit\'s contributions to the PRHB fund. Adjustments may
be

made by cash refund, reduction in current year\'s PRHB costs, or other

equitable procedures to compensate the Federal Government for the time
value

of Federal reimbursements in excess of contributions to the PRHB fund.

\(3\) Amounts funded in excess of the actuarially determined amount

for a fiscal year may be used as the government\'s contribution in a
future

period.

\(4\) When a governmental unit converts to an acceptable actuarial

cost method and funds PRHB costs in accordance with this method, the
initial

unfunded liability attributable to prior years shall be allowable if

amortized over a period of years in accordance with GAAP, or, if no such
GAAP

period exists, over a period negotiated with the cognizant agency.

\(5\) To be allowable in the current year, the PRHB costs must be

paid either to:

\(a\) An insurer or other benefit provider as current year

costs or premiums, or

\(b\) An insurer or trustee to maintain a trust fund or reserve

for the sole purpose of providing post-retirement benefits to retirees
and

other beneficiaries.

\(6\) The Federal Government shall receive an equitable share of any

amounts of previously allowed post-retirement benefit costs (including

earnings thereon) which revert or inure to the governmental unit in the
form

of a refund, withdrawal, or other credit.

7

g\. Severance pay.

\(1\) Payments in addition to regular salaries and wages made to

workers whose employment is being terminated are allowable to the extent

that, in each case, they are required by (a) law, (b) employer-employee

agreement, or (c) established written policy.

\(2\) Severance payments (but not accruals) associated with normal

turnover are allowable Such payments shall be allocated to all
activities of

the governmental unit as an indirect cost.

\(3\) Abnormal or mass severance pay will be considered on a case-

by-case basis and is allowable only if approved by the cognizant Federal

agency.

h\. Support of salaries and wages. These standards regarding time

distribution are in addition to the standards for payroll documentation.

\(1\) Charges to Federal awards for salaries and wages, whether

treated as direct or indirect costs, will be based on payrolls
documented in

accordance with generally accepted practice of the governmental unit and

approved by a responsible official(s) of the governmental unit.

\(2\) No further documentation is required for the salaries and

wages of employees who work in a single indirect cost activity.

\(3\) Where employees are expected to work solely on a single

Federal award or cost objective, charges for their salaries and wages
will be

supported by periodic certifications that the employees worked solely on
that

program for the period covered by the certification. These
certifications

will be prepared at least semi-annually and will be signed by the
employee or

supervisory official having first hand knowledge of the work performed
by the

employee.

\(4\) Where employees work on multiple activities or cost

objectives, a distribution of their salaries or wages will be supported
by

personnel activity reports or equivalent documentation which meets the

standards in subsection (5) unless a statistical sampling system (see

subsection (6)) or other substitute system has been approved by the
cognizant

Federal agency. Such documentary support will be required where
employees

work on:

8

\(a\) More than one Federal award,

\(b\) A Federal award and a non-Federal award,

\(c\) An indirect cost activity and a direct cost activity,

\(d\) Two or more indirect activities which are allocated using

different allocation bases, or

\(e\) An unallowable activity and a direct or indirect cost

activity.

\(5\) Personnel activity reports or equivalent documentation must

meet the following standards:

\(a\) They must reflect an after-the-fact distribution of the

actual activity of each employee,

\(b\) They must account for the total activity for which each

employee is compensated,

\(c\) They must be prepared at least monthly and must coincide

with one or more pay periods, and

\(d\) They must be signed by the employee.

\(e\) Budget estimates or other distribution percentages

determined before the services are performed do not qualify as support
for

charges to Federal awards but may be used for interim accounting
purposes,

provided that:

\(i\) The governmental unit\'s system for establishing the

estimates produces reasonable approximations of the activity actually

performed;

\(ii\) At least quarterly, comparisons of actual costs to

budgeted distributions based on the monthly activity reports are made.
Costs

charged to Federal awards to reflect adjustments made as a result of the

activity actually performed may.be recorded annually if the quarterly

comparisons show the differences between budgeted and actual costs are
less

than ten percent; and

\(iii\) The budget estimates or other distribution

percentages are revised at least quarterly, if necessary, to reflect
changed

circumstances.

\(6\) Substitute systems for allocating salaries and wages to

Federal awards may be used in place of activity reports. These systems
are

subject to approval if required by the cognizant agency. Such systems
may

include, but are not limited to, random moment sampling, case counts, or

other quantifiable measures of employee effort.

9

\(a\) Substitute systems which use sampling methods (primarily

for Aid to Families with Dependent Children (AFDC), Medicaid, and other

public assistance programs) must meet acceptable statistical sampling

standards including:

\(i\) The sampling universe must include all of the

employees whose salaries and wages are to be allocated based on sample

results except as provided in subsection (c);

\(ii\) The entire time period involved must be covered by

the sample; and

\(iii\) The results must be statistically valid and applied

to the period being sampled.

\(b\) Allocating charges for the sampled employees\'

supervisors, clerical and support staffs, based on the results of the
sampled

employees, will be acceptable.

\(c\) Less than full compliance with the statistical sampling

standards noted in subsection (a) may be accepted by the cognizant
agency if

it concludes that the amounts to be allocated to Federal awards will be

minimal, or if it concludes that the system proposed by the governmental
unit

will result in lower costs to Federal awards than a system which
complies

with the standards.

\(7\) Salaries and wages of employees used in meeting cost sharing

or matching requirements of Federal awards must be supported in the same

manner as those claimed as allowable costs under Federal awards.

i.Donated services.

\(1\) Donated or volunteer services may be furnished to a

governmental unit by professional and technical personnel, consultants,
and

other skilled and unskilled labor. The value of these services is not

reimbursable either as a direct or indirect cost. However, the value of

donated services may be used to meet cost sharing or matching
requirements in

accordance with the provisions of the Common Rule.

\(2\) The value of donated services utilized in the performance of

a direct cost activity, shall, when material in amount, be considered in
the

determination of the governmental unit\"s indirect costs or rate(s) and,

accordingly, shall be allocated a proportionate share of applicable
indirect

costs.

\(3\) To the extent feasible, donated services will be supported by

the same methods used by the governmental unit to support the
allocability of

regular personnel services.

10

12\. Contingencies. Contributions to a contingency reserve or any
similar

provision made for events the occurrence of which cannot be foretold
with

certainty as to time, or intensity, or with an assurance of their
happening,

are unallowable. The term \"contingency reserve\" excludes
self-insurance

reserves (see subsection 25.c.), pension plan reserves (see subsection

11.e.), and post-retirement health and other benefit reserves (see
subsection

11.f.) computed using acceptable actuarial cost methods.

13\. Contributions and donations. Contributions and donations, including

cash, property, and services, by governmental units to others,
regardless of

the recipient, are unallowable.

14.Defense and prosecution of criminal and civil proceedings, and
claims.

a\. The following costs are unallowable for contracts covered by 10

U.S.C. 2324(k), \"Allowable costs under defense contracts.\"

\(1\) Costs incurred in defense of any civil or criminal fraud

proceeding or similar proceeding (including filing of false
certification

brought by the United States where the contractor is found liable or has

pleaded nolo contendere to a charge of fraud or similar proceeding
(including

filing of a false certification).

\(2\) Costs incurred by a contractor in connection with any

criminal, civil or administrative proceedings commenced by the United
States

or a State to the extent provided in 10 U.S.C. 2324(k).

b\. Legal expenses required in the administration of Federal programs

are allowable. Legal expenses for prosecution of claims against the
Federal

Government are unallowable.

15\. Depreciation and use allowances.

a\. Depreciation and use allowances are means of allocating the cost of

fixed assets to periods benefitting from asset use. Compensation for the
use

of fixed assets on hand may be made through depreciation or use
allowances.

A combination of the two methods may not be used in connection with a
single

class of fixed assets (e.g., buildings, office equipment, computer
equipment,

etc.) except as provided in subsection g. Except for enterprise funds
and

internal service funds that are included as part of a State/local cost

allocation plan, classes of assets shall be determined on the same basis
used

for the governmentwide financial statements.

11

b\. The computation of depreciation or use allowances shall be based on

the acquisition cost of the assets involved. Where actual cost records
have

not been maintained, a reasonable estimate of the original acquisition
cost

may be used. The value of an asset donated to the governmental unit by
an

unrelated third party shall be its Fair market value at the time of
donation.

Governmental or quasi-governmental organizations located within the same

State shall not be considered unrelated third parties for this purpose.

c\. The computation of depreciation or use allowances will exclude:

(1)The cost of land;

\(2\) Any portion of the cost of buildings and equipment borne by or

donated by the Federal Government irrespective of where title was
originally

vested or where it presently resides; and

\(3\) Any portion of the cost of buildings and equipment contributed

by or for the governmental unit, or a related donor organization, in

satisfaction of a matching requirement.

d\. Where the use allowance method is followed, the use allowance for

buildings and improvements (including land improvements, such as paved

parking areas, fences, and sidewalks) will be computed at an annual rate
not

exceeding two percent of acquisition costs. The use allowance for
equipment

will be computed at an annual rate not exceeding 6 2/3 percent of
acquisition

cost. When the use allowance method is used for buildings, the entire

building must be treated as a single asset; the building\'s components
(e.g.,

plumbing system, heating and air condition, etc.) cannot be segregated
from

the building\'s shell. The two percent limitation, however, need not be

applied to equipment which is merely attached or fastened to the
building but

not permanently fixed to it and which is used as furnishings or
decorations

or for specialized purposes (e.g., dentist chairs and dental treatment
units,

counters, laboratory benches bolted to the floor, dishwashers, modular

furniture, carpeting, etc.). Such equipment will be considered as not
being

permanently fixed to the building if it can be removed without the

destruction of, or need for costly or extensive alterations or repairs,
to

the building or the equipment. Equipment that meets these criteria will
be

subject to the 6 2/3 percent equipment use allowance limitation.

e\. Where the depreciation method is followed, the period of useful

service (useful life) established in each case for usable capital assets
must

take into consideration such factors as type of construction, nature of
the

equipment used, historical usage patterns, technological developments,
and

the renewal and replacement policies of the governmental unit followed
for

12

the individual items or classes of assets involved. In the absence of
clear

evidence indicating that the expected consumption of the asset will be

significantly greater in the early portions than in the later portions
of its

useful life, the straight line method of depreciation shall be used.

Depreciation methods once used shall not be changed unless approved by
the

Federal cognizant or awarding agency. When the depreciation method is

introduced for application to an asset previously subject to a use
allowance,

the annual depreciation charge thereon may not exceed the amount that
would

have resulted had the depreciation method been in effect from the date
of

acquisition of the asset. The combination of use allowances and
depreciation

applicable to the asset shall not exceed the total acquisition cost of
the

asset or fair market value at time of donation.

f\. When the depreciation method is used for buildings, a building\'s

shell may be segregated from the major component of the building (e.g.,

plumbing system, heating, and air conditioning system, etc.) and each
major

component depreciated over its estimated useful life, or the entire
building

(i.e., the shell and all components) may be treated as a single asset
and

depreciated over a single useful life.

g\. A reasonable use allowance may be negotiated for any assets that

are considered to be fully depreciated, after taking into consideration
the

amount of depreciation previously charged to the government, the
estimated

useful life remaining at the time of negotiation, the effect of any
increased

maintenance charges, decreased efficiency due to age, and any other
factors

pertinent to the utilization of the asset for the purpose contemplated.

h\. Charges for use allowances or depreciation must be supported by

adequate property records. Physical inventories must be taken at least
once

every two years (a statistical sampling approach is acceptable) to
ensure

that assets exist, and are in use. Governmental units will manage
equipment

in accordance with State laws and procedures. When the depreciation
method

is followed, depreciation records indicating the amount of depreciation
taken

each period must also be maintained.

16\. Disbursing service. The cost of disbursing funds by the Treasurer
or

other designated officer is allowable.

17\. Employee morale, health, and welfare costs. The costs of health or

first-aid clinics and/or infirmaries, recreational facilities, employee

counseling services, employee information publications, and any related

expenses incurred in accordance with a governmental unit\'s policy are

allowable. Income generated from any of these activities will be offset

against expenses.

13

18\. Entertainment. Costs of entertainment, including amusement,
diversion,

and social activities and any costs directly associated with such costs
(such

as tickets to shows or sports events, meals, lodging, rentals,

transportation, and gratuities) are unallowable.

19\. Equipment and other capital expenditures.

a\. As used in this section the following terms have the meanings as

set forth below:

\(1\) \"Capital expenditure\" means the cost of the asset including

the cost to put it in place. Capital expenditure for equipment means the
net

invoice price of the equipment, including the cost of any modifications,

attachments, accessories, or auxiliary apparatus necessary to make it
usable

for the purpose for which it is acquired. Ancillary charges, such as
taxes,

duty, protective in transit insurance, freight, and installation may be

included in, or excluded from, capital expenditure cost in accordance
with

the governmental unit\'s regular accounting practices.

\(2\) \"Equipment\". means an article of nonexpendable, tangible

personal property having a useful life of more than one year and an

acquisition cost which equals the lesser of (a) the capitalization level

established by the governmental unit for financial statement purposes,
or (b)

\$5000.

\(3\) \"Other capital assets\" mean buildings, land, and improvements

to buildings or land that materially increase their value or useful
life.

b\. Capital expenditures which are not charged directly to a Federal

award may be recovered through use allowances or depreciation on
buildings,

capital improvements, and equipment (see. section 15). See also section
38

for allowability of rental costs for buildings and equipment.

c\. Capital expenditures for equipment, including replacement

equipment, other capital assets, and improvements which materially
increase

the value or useful life of equipment or other capital assets are
allowable

as a direct cost when approved by the awarding agency. Federal awarding

agencies are authorized at their option to waive or delegate this
approval

requirement.

d\. Items of equipment with an acquisition cost of less than \$5000 are

considered to be supplies and are allowable as direct costs of Federal
awards

without specific awarding agency approval.

14

e\. The unamortized portion of any equipment written off as a result of

a change in capitalization levels may be recovered by (1) continuing to
claim

the otherwise allowable use allowances or depreciation charges on the

equipment or by (2) amortizing the amount to be written off over a
period of

years negotiated with the cognizant agency.

f\. When replacing equipment purchased in whole or in part with

Federal funds, the governmental unit may use the equipment to be
replaced as

a trade-in or sell the property and use the proceeds to offset the cost
of

the replacement property.

20\. Fines and penalties. Fines, penalties, damages, and other
settlements

resulting from violations (or alleged violations) of, or failure of the

governmental unit to comply with, Federal, State, local, or Indian
tribal

laws and regulations are unallowable except when incurred as a result of

compliance with specific provisions of the Federal award or written

instructions by the awarding agency authorizing in advance such
payments.

21\. Fund raising and investment management costs.

a\. Costs of organized fund raising, including financial campaigns,

solicitation of gifts and bequests, and similar expenses incurred to
raise

capital or obtain contributions are unallowable, regardless of the
purpose

for which the funds will be used.

b\. Costs of investment counsel and staff and similar expenses incurred

to enhance income from investments are unallowable. However, such costs

associated with investments covering pension, self-insurance, or other
funds

which include Federal participation allowed by this Circular are
allowable.

c\. Fund raising and investment activities shall be allocated an

appropriate share of indirect costs under the conditions described in

subsection C.3.b. of Attachment A.

22.Gains and losses on disposition of depreciable property and other

capital assets and substantial relocation of Federal programs.

a\. (1) Gains and losses on the sale, retirement, or other disposition

of depreciable property shall be included in the year in which they
occur as

credits or charges to the asset cost grouping(s) in which the property
was

included. The amount of the gain or loss to be included as a credit or

charge to the appropriate asset cost grouping(s) shall be the difference

between the amount realized on the property and the undepreciated basis
of

the property.

15

\(2\) Gains and losses on the disposition of depreciable property

shall not be recognized as a separate credit or charge under the
following

conditions:

\(a\) The gain or loss is processed through a depreciation

account and is reflected in the depreciation allowable under sections 15
and

19\.

\(b\) The property is given in exchange as part of the purchase

price of a similar item and the gain or loss is taken into account in

determining the depreciation cost basis of the new item.

\(c\) A loss results from the failure to maintain permissible

insurance, except as otherwise provided in subsection 25.d.

\(d\) Compensation for the use of the property was provided

through use allowances in lieu of depreciation.

b\. Substantial relocation of Federal awards from a facility where the

Federal Government participated in the financing to another facility
prior to

the expiration of the useful life of the financed facility requires
Federal

agency approval. The extent of the relocation, the amount of the Federal

participation in the financing, and the depreciation charged to date may

require negotiation of space charges for Federal awards.

c\. Gains or losses of any nature arising from the sale or exchange of

property other than the property covered in subsection a., e.g., land or

included in the fair market value used in any adjustment resulting from
a

relocation of Federal awards covered in subsection b. shall be excluded
in

computing Federal award costs.

23.General government expenses.

a\. The general costs of government are unallowable (except as provided

in section 41). These include:

\(1\) Salaries and expenses of the Office of the Governor of a State

or the chief executive of a political subdivision or the chief
executives of

federally-recognized Indian tribal governments;

\(2\) Salaries and other expenses of State legislatures, tribal

councils, or similar local governmental bodies, such as county
supervisors,

16

city councils, school boards, etc., whether incurred for purposes of

legislation or executive direction;

\(3\) Cost of the judiciary branch of a government;

\(4\) Cost of prosecutorial activities unless treated as a direct

cost to a specific program when authorized by program regulations
(however,

this does not preclude the allowability of other legal activities of the

Attorney General); and

\(5\) Other general types of government services normally provided

to the general public, such as fire and police, unless provided for as a

direct cost in program regulations.

b\. For federally-recognized Indian tribal governments and Councils Of

Governments (COGs), the portion of salaries and expenses directly

attributable to managing and operating Federal programs by the chief

executive and his staff is allowable.

24\. Idle facilities and idle capacity.

a\. As used in this section the following terms have the meanings set

forth below:

\(1\) \"Facilities\" means land and buildings or any portion thereof,

equipment individually or collectively, or any other tangible capital
asset,

wherever located, and whether owned or leased by the governmental unit.

\(2\) \"Idle facilities\" means completely unused facilities that are

excess to the governmental unit\'s current needs.

\(3\) \"Idle capacity\" means the unused capacity of partially used

facilities. It is the difference between (a) that which a facility could

achieve under 100 percent operating time on a one-shift basis less
operating

interruptions resulting from time lost for repairs, setups,
unsatisfactory

materials, and other normal delays and (b) the extent to which the
facility

was actually used to meet demands during the accounting period. A multi-

shift basis should be used if it can be shown that this amount of usage
would

normally be expected for the type of facility involved.

\(4\) \"Cost of idle facilities or idle capacity\" means costs such as

maintenance, repair, housing, rent, and other related costs, e.g.,
insurance,

interest, and depreciation or use allowances.

b\. The costs of idle facilities are unallowable except to the extent

that:

17

\(1\) They are necessary to meet fluctuations in workload; or

\(2\) Although not necessary to meet fluctuations in workload, they

were necessary when acquired and are now idle because of changes in
program

requirements, efforts to achieve more economical operations,
reorganization,

termination, or other causes which could not have been reasonably
foreseen.

Under the exception stated in this subsection, costs of idle facilities
are

allowable for a reasonable period of time, ordinarily not to exceed one
year,

depending on the initiative taken to use, lease, or dispose of such

facilities.

c\. The costs of idle capacity are normal costs of doing business and

are a factor in the normal fluctuations of usage or indirect cost rates
from

period to period. Such costs are allowable, provided that the capacity
is

reasonably anticipated to be necessary or was originally reasonable and
is

not subject to reduction or elimination by use on other Federal awards,

subletting, renting, or sale, in accordance with sound business,
economic, or

security practices. Widespread idle capacity throughout an entire
facility

or among a group of assets having substantially the same function may be

considered idle facilities.

25.Insurance and indemnification.

a\. Costs of insurance required or approved and maintained, pursuant to

the Federal award, are allowable.

b\. Costs of other insurance in connection with the general conduct of

activities are allowable subject to the following limitations:

\(1\) Types and extent and cost of coverage are in accordance with

the governmental unit\'s policy and sound business practice.

\(2\) Costs of insurance or of contributions to any reserve covering

the risk of loss of, or damage to, Federal Government property are

unallowable except to the extent that the awarding agency has
specifically

required or approved such costs.

c\. Actual losses which could have been covered by permissible

insurance (through a self-insurance program or otherwise) are
unallowable,

unless expressly provided for in the Federal award or as described
below.

However, the Federal Government will participate in actual losses of a
self

insurance fund that are in excess of reserves. Costs incurred because of

losses not covered under nominal deductible insurance coverage provided
in

keeping with sound management practice, and minor losses not covered by

insurance, such as spoilage, breakage, and disappearance of small hand
tools,

which occur in the ordinary course of operations, are allowable.

18

d\. Contributions to a reserve for certain self-insurance programs

including workers compensation, unemployment compensation, and severance
pay

are allowable subject to the following provisions:

\(1\) The type of coverage and the extent of coverage and the rates

and premiums would have been allowed had insurance (including
reinsurance)

been purchased to cover the risks.However, provision- for known or
reasonably

estimated self-insured liabilities, which do not become payable for more
than

one year after the provision is made, shall not exceed the discounted
present

value of the liability. The rate used for discounting the liability must
be

determined by giving consideration to such factors as the governmental
unit\'s

settlement rate for those liabilities and its investment rate of return.

\(2\) Earnings or investment income on reserves must be credited to

those reserves.

\(3\) Contributions to reserves must be based on sound actuarial

principles using historical experience and reasonable assumptions.
Reserve

levels must be analyzed and updated at least biennially for each major
risk

being insured and take into account any reinsurance, coinsurance, etc.

Reserve levels related to employee-related coverages will normally be
limited

to the value of claims (a) submitted and adjudicated but not paid, (b)

submitted but not adjudicated, and (c) incurred but not submitted.
Reserve

levels in excess of the amounts based on the above must be identified
and

justified in the cost allocation plan or indirect cost rate proposal.

\(4\) Accounting records, actuarial studies, and cost allocations

(or billings) must recognize any significant differences due to types of

insured risk and losses generated by the various insured activities or

agencies of the governmental unit. If individual departments or agencies
of

the governmental unit experience significantly different levels of
claims for

a particular risk, those differences are to be recognized by the use of

separate allocations or other techniques resulting in an equitable

allocation.

\(5\) Whenever funds are transferred from a self-insurance reserve

to other accounts (e.g., general fund), refunds shall be made to the
Federal

Government for its share of funds transferred, including earned or
imputed

interest from the date of transfer.

e\. Actual claims paid to or on behalf of employees or former employees

for workers\' compensation, unemployment compensation, severance pay,
and

19

similar employee benefits (e.g., subsection 11.f. for post retirement
health

benefits), are allowable in the year of payment provided (1) the
governmental

unit follows a consistent costing policy and (2) they are allocated as a

general administrative expense to all activities of the governmental
unit.

f\. Insurance refunds shall be credited against insurance costs in the

year the refund is received.

g\. Indemnification includes securing the governmental unit against

liabilities to third persons and other losses not compensated by
insurance or

otherwise. The Federal Government is obligated to indemnify the
governmental

unit only to the extent expressly provided for in the Federal award,
except

as provided in subsection d.

h\. Costs of commercial insurance that protects against the costs of

the contractor for correction of the contractor\'s own defects in
materials or

workmanship are unallowable.

26\. Interest.

a\. Costs incurred for interest on borrowed capital or the use of a

governmental unit\'s own funds, however represented, are unallowable
except as

specifically provided in subsection b. or authorized by Federal
legislation.

b\. Financing costs (including interest) paid or incurred on or after

the effective date of this Circular associated with the otherwise
allowable

costs of building acquisition, construction, or fabrication,
reconstruction

or remodeling completed on or after October 1, 1980 is allowable,
subject to

the conditions in (1) - (4). Financing costs (including interest) paid
or

incurred on or after the effective date of this Circular associated with

otherwise allowable costs of equipment is allowable, subject to the

conditions in (1) - (4)

\(1\) The financing is provided (from other than tax or user fee

sources) by a bona fide third party external to the governmental unit;

\(2\) The assets are used in support of Federal awards;

\(3\) Earnings on debt service reserve funds or interest earned on

borrowed funds pending payment of the construction or acquisition costs
are

used to offset the current period\'s cost or the capitalized interest,
as

appropriate. Earnings subject to being reported to the Federal Internal

Revenue Service under arbitrage requirements are excludable.

20

\(4\) Governmental units will negotiate the amount of allowable

interest whenever cash payments (interest, depreciation, use allowances,
and

contributions) exceed the governmental unit\'s cash payments and other

contributions attributable to that portion of real property used for
Federal

awards.

27\. Lobbying. The cost of certain influencing activities associated
with

obtaining grants, contracts, cooperative agreements, or loans is an

unallowable cost. Lobbying with respect to certain grants, contracts,

cooperative agreements, and loans shall be governed by the common rule,
\"New

Restrictions on Lobbying\" published at 55 FR 6736 (February 26, 1990),

including definitions, and the Office of Management and Budget
\"Government-

wide Guidance for New Restrictions on Lobbying\" and notices published
at 54

FR 52306 (December 20, 1989), 55 FR 24540 (June 15, 1990), and 57 FR
1772

(January 15, 1992), respectively.

28\. Maintenance, operations and repairs. Unless prohibited by law, the
cost

of utilities, insurance, security, janitorial services, elevator
service,

upkeep of grounds, necessary maintenance, normal repairs and
alterations, and

the like are allowable to the extent that they: (1) keep property
(including

Federal property, unless otherwise provided for) in an efficient
operating

condition, (2) do not add to the permanent value of property or
appreciably

prolong its intended life, and (3) are not otherwise included in rental
or

other charges for space. Costs which add to the permanent value of
property

or appreciably prolong its intended life shall be treated as capital

expenditures (see sections 15 and 19).

29\. Materials and supplies. The cost of materials and supplies is

allowable. Purchases should be charged at their actual prices after

deducting all cash discounts, trade discounts, rebates, and allowances

received. Withdrawals from general stores or stockrooms should be
charged at

cost under any recognized method of pricing, consistently applied.
Incoming

transportation charges are a proper part of materials and supply costs.

30\. Memberships, subscriptions, and professional activities.

a\. Costs of the governmental unit\'s memberships in business,

technical, and professional organizations are allowable.

b\. Costs of the governmental unit\'s subscriptions to business,

professional, and technical periodicals are allowable.

c\. Costs of meetings and conferences where the primary purpose is the

dissemination of technical information, including meals, transportation,

rental of meeting facilities, and other incidental costs are allowable.

21

d\. Costs of membership in civic and community, social organizations

are allowable as a direct cost with the approval of the Federal awarding

agency.

e\. Costs of membership in organizations substantially engaged in

lobbying are unallowable.

31\. Motor pools. The costs of a service organization which provides

automobiles to user governmental units at a mileage or fixed rate and/or

provides vehicle maintenance, inspection, and repair services are
allowable.

32\. Pre-award costs. Pre-award costs are those incurred prior to the

effective date of the award directly pursuant to the negotiation and in

anticipation of the award where such costs are necessary to comply with
the

proposed delivery schedule or period of performance. Such costs are

allowable only to the extent that they would have been allowable if
incurred

after the date of the award and only with the written approval of the

awarding agency.

33\. Professional service costs.

a\. Cost of professional and consultant services rendered by persons or

organizations that are members of a particular profession or possess a

special skill, whether or not officers or employees of the governmental
unit,

are allowable, subject to section 14 when reasonable in relation to the

services rendered and when not contingent upon recovery of the costs
from the

Federal Government.

b\. Retainer fees supported by evidence of bona fide services available

or rendered are allowable.

34\. Proposal costs. Costs of preparing proposals for potential Federal

awards are allowable. Proposal costs should normally be treated as
indirect

costs and should be allocated to all activities of the governmental unit

utilizing the cost allocation plan and indirect cost rate proposal.
However,

proposal costs may be charged directly to Federal awards with the prior

approval of the Federal awarding agency.

35\. Publication and printing costs. Publication costs, including the
costs

of printing (including the processes of composition, plate-making, press

work, and binding, and the end products produced by such processes),

distribution, promotion, mailing, and general handling are allowable.

36\. Rearrangements and alterations. Costs incurred for ordinary and
normal

rearrangement and alteration of facilities are allowable. Special

arrangements and alterations costs incurred specifically for a Federal
award

are allowable with the prior approval of the Federal awarding agency.

22

37\. Reconversion costs. Costs incurred in the restoration or
rehabilitation

of the governmental unit\'s facilities to approximately the same
condition

existing immediately prior to commencement of Federal awards, less costs

related to normal wear and tear, are allowable.

38\. Rental costs.

a\. Subject to the limitations described in subsections b. through d.

of this section, rental costs are allowable to the extent that the rates
are

reasonable in light of such factors as: rental costs of comparable
property,

if any; market conditions in the area; alternatives available; and, the
type,

life expectancy, condition, and value of the property leased.

b\. Rental costs under sale and leaseback arrangements are allowable

only up to the amount that would be allowed had the governmental unit

continued to own the property.

c\. Rental costs under less-than-arms-length leases are allowable only

up to the amount that would be allowed had title to the property vested
in

the governmental unit. For this purpose, less-than-arms-length l-eases

include, but are not limited to, those where:

\(1\) One party to the lease is able to control or substantially

influence the actions of the other;

\(2\) Both parties are parts of the same governmental unit; or

\(3\) The governmental unit creates an authority or similar entity

to acquire and lease the facilities to the governmental unit and other

parties.

d\. Rental costs under leases which are required to be treated as

capital leases under GAAP are allowable only up to the amount that would
be

allowed had the governmental unit purchased the property on the date the

lease agreement was executed. This amount would include expenses such as

depreciation or use allowance, maintenance, and insurance. The
provisions of

Financial Accounting Standards Board Statement 13 shall be used to
determine

whether a lease is a capital lease. Interest costs related to capital
leases

are allowable to the extent they meet the criteria in section 26.

39\. Taxes.

a\. Taxes that a governmental unit is legally required to pay are

allowable, except for self-assessed taxes that disproportionately affect

Federal programs or changes in tax policies that disproportionately
affect

Federal programs. This provision becomes effective for taxes paid during

23

the governmental unit\'s first fiscal year that begins on or after
January 1,

1998, and applies thereafter.

b\. Gasoline taxes, motor vehicle fees, and other taxes that are in

effect user fees for benefits provided to the Federal Government are

allowable.

c\. This provision does not restrict the authority of Federal agencies

to identify taxes where Federal participation is inappropriate. Where
the

identification of the amount of unallowable taxes would require an
inordinate

amount of effort, the cognizant agency may accept a reasonable
approximation

thereof.

40\. Training. The cost of training provided for employee development is

allowable.

41\. Travel costs.

a\. General. Travel costs are allowable for expenses for

transportation, lodging, subsistence, and related items incurred by
employees

traveling on official business. Such costs may be charged on an actual
cost

basis, on a per diem or mileage basis in lieu of actual costs incurred,
or on

a combination of the two, provided the method used is applied to an
entire

trip, and results in charges consistent with those normally allowed in
like

circumstances in non-federally-sponsored activities. Notwithstanding the

provisions of section 23, travel costs of officials covered by that
section,

when specifically related to Federal awards, are allowable with the
prior

approval of a grantor agency.

b\. Lodging and subsistence. Costs incurred by employees and officers

for travel, including costs of lodging, other subsistence, and
incidental

expenses, shall be considered reasonable and allowable only to the
extent

such costs do not exceed charges normally allowed by the governmental
unit in

its regular operations as a result of the governmental unit\'s policy.
In the

absence of a written governmental unit policy regarding travel costs,
the

rates and amounts established under subchapter I of Chapter 57 of Title
5,

United States Code \"Travel and Subsistence Expenses; Mileage
Allowances,\" or

by the Administrator of General Services, or the President (or his
designee)

pursuant to any provisions of such subchapter shall be used as guidance
for

travel under Federal awards (41 U.S.C. 420, \"Travel Expenses of
Government

Contractors\").

c\. Commercial air travel. Airfare costs in excess of the customary

standard (coach or equivalent) airfare, are unallowable except when such

accommodations would: require circuitous routing, require travel during

unreasonable hours, excessively prolong travel, greatly increase the

24

duration of the flight, result in increased cost that would offset

transportation savings, or offer accommodations not reasonably adequate
for

the medical needs of the traveler. Where a governmental unit can
reasonably

demonstrate to the awarding agency either the nonavailability of
customary

standard airfare or Federal Government contract airfare for individual
trips

or, on an overall basis, that it is the governmental unit\'s practice to
make

routine use of such airfare, specific determinations of nonavailability
will

generally not be questioned by the Federal Government, unless a pattern
of

avoidance is detected. However, in order for airfare costs in excess of
the

customary standard commercial airfare to be allowable, e.g., use of
first-

class airfare, the governmental unit must justify and document on a
case-by-

case basis the applicable condition(s) set forth above.

d\. Air travel by other than commercial carrier. Cost of travel by

governmental unit-owned, -leased, or -chartered aircraft, as used in
this

section, includes the cost of lease, charter, operation (including
personnel

costs), maintenance, depreciation, interest, insurance, and other
related

costs. Costs of travel via governmental unit-owned, -leased, or
-chartered

aircraft are unallowable to the extent they exceed the cost of allowable

commercial air travel, as provided for in subsection c.

42\. Under-recovery of costs under Federal agreements. Any excess costs
over

the Federal contribution under one award agreement are unallowable under

other award agreements.

25

Circular No. A-87

Attachment C

STATE/LOCAL-WIDE CENTRAL SERVICE COST ALLOCATION PLANS

TABLE OF CONTENTS

A. General

B. Definitions

1\. Billed central services

2\. Allocated central services

3\. Agency or operating agency

C. Scope of the Central Service Cost Allocation Plans

D. Submission Requirements

E. Documentation Requirements for Submitted Plans

1\. General

2\. Allocated central services

3\. Billed services

a\. General

b\. Internal service funds

c\. Self-insurance funds

d\. Fringe benefits

4\. Required certification

F. Negotiation and Approval of Central Service Plans

G.Other Policies

1\. Billed central service activities

2\. Working capital reserves

3.Carry-forward adjustments of allocated central service costs

4\. Adjustments of billed central services

5\. Records retention

6\. Appeals

7\. OMB assistance

A. General.

1\. Most governmental units provide certain services, such as motor

pools, computer centers, purchasing, accounting, etc., to operating
agencies

on a centralized basis. Since federally-supported awards are performed

within the individual operating agencies, there needs to be a process
whereby

these central service costs can be identified and assigned to benefitted

activities on a reasonable. and consistent basis. The central service
cost

allocation plan provides that process. All costs and other data used to

distribute the costs included in the plan should be supported by formal

accounting and other records that will support the propriety of the
costs

assigned to Federal awards.

2\. Guidelines and illustrations of central service cost allocation

plans are provided in a brochure published by the Department of Health
and

Human Services entitled \"A Guide for State and Local Government
Agencies:

Cost Principles and Procedures for, Establishing Cost Allocation Plans
and

Indirect Cost Rates for Grants and Contracts with the Federal
Government.\" A

copy of this brochure may be obtained from the Superintendent of
Documents,

U.S. Government Printing Office.

B. Definitions.

1\. \"Billed central services\" means central services that are billed
to

benefitted agencies and/or programs on an individual fee-for-service or

similar basis. Typical examples of billed central services include
computer

services, transportation services, insurance, and fringe benefits.

2\. \"Allocated central services\" means central services that benefit

operating agencies but are not billed to the agencies on a
fee-for-service or

similar basis. These costs are allocated to benefitted agencies on some

reasonable basis. Examples of such services might include general
accounting,

personnel administration, purchasing, etc.

3\. \"Agency or operating agency\" means an organizational unit or sub-

division within a governmental unit that is responsible for the
performance

or administration of awards or activities of the governmental unit.

C. Scope of the Central Service Cost Allocation Plans. The central
service

cost allocation plan will include all central service costs that will be

claimed (either as a billed or an allocated cost) under Federal awards
and

will be documented as described in section E. Costs of central services

omitted from the plan will not be reimbursed.

D. Submission- Requirements.

1\. Each State will submit a plan to the Department of Health and Human

Services for each year in which it claims central service costs under
Federal

awards. The plan should include (a) a projection of the next year\'s

allocated central service cost (based either on actual costs for the
most

recently completed year or the budget projection for the coming year),
and

\(b\) a reconciliation of actual allocated central service costs to the

estimated costs used for either the most recently completed year or the
year

immediately preceding the most recently completed year.

2

2\. Each local government that has been designated as a \"major local

government\" by the Office of Management and Budget (OMB) is also
required to

submit a plan to its cognizant agency annually. OMB periodically lists
major

local governments in the Federal Register.

3\. All other local governments claiming central service costs must

develop a plan in accordance with the requirements described in this
Circular

and maintain the plan and related supporting documentation for audit.
These

local governments are not required to submit their plans for Federal
approval

unless they are specifically requested to do so by the cognizant agency.

Where a local government only receives funds as a sub-recipient, the
primary

recipient will be responsible for negotiating indirect cost rates and/or

monitoring the sub-recipient\'s plan.

4\. All central service cost allocation plans will be prepared and,

when required, submitted within six months prior to the beginning of
each of

the governmental unit\'s fiscal years in which it proposes to claim
central

service costs. Extensions may be granted by the cognizant agency on a
case-

by-case basis.

E. Documentation Requirements for Submitted Plans. The documentation

requirements described in this section may be modified, expanded, or
reduced

by the cognizant agency on a case-by-case basis. For example, the

requirements may be reduced for those central services which have little
or

no impact on Federal awards. Conversely, if a review of a plan indicates

that certain additional information is needed, and will likely be needed
in

future years, it may be routinely requested in future plan submissions.

Items marked with an asterisk (\*) should be submitted only once;
subsequent

plans should merely indicate any changes since the last plan.

1\. General. All proposed plans must be accompanied by the following:

an organization chart sufficiently detailed to show operations including
the

central service activities of the State/local government whether or not
they

are shown as benefiting from central service functions; a copy of the

Comprehensive Annual Financial Report (or a copy of the Executive Budget
if

budgeted costs are being proposed) to support the allowable costs of
each

central service activity included in the plan; and, a certification (see

subsection 4.) that the plan was prepared in accordance with this
Circular,

contains only allowable costs, and was prepared in a manner that treated

similar costs consistently among the various Federal awards and between

Federal and non-Federal awards/activities.

2\. Allocated central services. For each allocated central service,

the plan must also include the following: a brief description of the

service\*, an identification of the unit rendering the service and the

operating agencies receiving the service, the items of expense included

3

in the cost of the service, the method used to distribute the cost of
the

service to benefitted agencies, and a summary schedule showing the
allocation

of each service to the specific benefitted agencies. If any
self-insurance

funds or fringe benefits costs are treated as allocated (rather than
billed)

central services, documentation discussed in subsections 3.b. and c.
shall

also be included.

3\. Billed services.

a\. General. The information described below shall be provided

for all billed central services, including internal service funds, self-

insurance funds, and fringe benefit funds.

b\. Internal service funds.

\(1\) For each internal service fund or similar activity with

an operating budget of \$5 million or more, the plan shall include: a
brief

description of each service; a balance sheet for each fund based on

individual accounts contained in the governmental unit\'s accounting
system;

a revenue/expenses statement, with revenues broken out by source, e.g.,

regular billings, interest earned, etc.; a listing of all non-operating

transfers (as defined by Generally Accepted Accounting Principles
(GAAP))

into and out of the fund; a description of the procedures (methodology)
used

to charge the costs of each service to users, including how billing
rates are

determined; a schedule of current rates; and, a schedule comparing total

revenues (including imputed revenues) generated by the service to the

allowable costs of the service, as determined under this Circular, with
an

explanation of how variances will be handled.

\(2\) Revenues shall consist of all revenues generated by the

service, including unbilled and uncollected revenues. If some users were
not

billed for the services (or were not billed at the full rate for that
class

of users), a schedule showing the full imputed revenues associated with
these

users shall be provided. Expenses shall be broken out by object cost

categories (e.g., salaries, supplies, etc.).

c\. Self-insurance funds. For each self-insurance fund, the plan

shall include: the fund balance sheet; a statement of revenue and
expenses

including a summary of billings and claims paid by agency; a listing of
all

non-operating transfers into and out of the fund; the type(s) of risk(s)

covered by the fund (e.g., automobile liability, workers compensation,
etc.);

an explanation of how the level of fund contributions are determined,

including a copy of the current actuarial report (with the actuarial

assumptions used) if the contributions are determined on an actuarial
basis;

and, a description of the procedures used to charge or allocate fund

contributions to benefitted activities. Reserve levels in excess

4

of claims (1) submitted and adjudicated but not paid, (2) submitted but
not

adjudicated, and (3) incurred but not submitted must be identified and

explained.

d\. Fringe benefits. For fringe benefit costs, the plan shall

include: a listing of fringe benefits provided to covered employees, and
the

overall annual cost of each type of benefit; current fringe benefit

policies\*; and procedures used to charge or allocate the costs of the

benefits to benefitted activities. In addition, for pension and post-

retirement health insurance plans, the following information shall be

provided: the governmental unit\'s funding policies, e.g., legislative
bills,

trust agreements, or State-mandated contribution rules, if different
from

actuarially determined rates; the pension plan\'s costs accrued for the
year;

the amount funded, and date(s) of funding; a copy of the current
actuarial

report (including the actuarial assumptions); the plan trustee\'s
report; and,

a schedule from the activity showing the value of the interest cost

associated with late funding.

4\. Required certification. Each central service cost allocation plan

will be accompanied by a certification in the following form:

5

CERTIFICATE OF COST ALLOCATION PLAN

This is to certify that I have reviewed the cost allocation plan

submitted herewith and to the best of my knowledge and belief:

\(1\) All costs included in this proposal \[identify date\] to establish

cost allocations or billings for \[identify period covered by plan\] are

allowable in accordance with the requirements of OMB Circular A-87,
\"Cost

Principles for State and Local Governments,\" and the Federal award(s)
to

which they apply. Unallowable costs have been adjusted for in allocating

costs as indicated in the cost allocation plan.

\(2\) All costs included in this proposal are properly allocable to

Federal awards on the basis of a beneficial or causal relationship
between

the expenses incurred and the awards to which they are allocated in

accordance with applicable requirements. Further, the same costs that
have

been treated as indirect costs have not been claimed as direct costs.

Similar types of costs have been accounted for consistently.

I declare that the foregoing is true and correct.

Governmental Unit:

Signature:

Name of Official:

Title:

Date of Execution:

F. Negotiation and Approval of Central Service Plans.

1\. All proposed central service cost allocation plans that are

required to be submitted will be reviewed, negotiated, and approved by
the

Federal cognizant agency on a timely basis. The cognizant agency will
review

the proposal within six months of receipt of the proposal and either

negotiate/approve the proposal or advise the governmental unit of the

additional documentation needed to support/evaluate the proposed plan or
the

changes required to make the proposal acceptable. Once an agreement with
the

governmental unit has been reached, the agreement will be accepted and
used

by all Federal agencies, unless prohibited or limited by statute. Where
a

Federal funding agency has reason to believe that special operating
factors

affecting its awards necessitate special consideration, the funding
agency

will, prior to the time the plans are negotiated, notify the cognizant

agency.

6

2\. The results of each negotiation shall be formalized in a written

agreement between the cognizant agency and the governmental unit. This

agreement will be subject to re-opening if the agreement is subsequently

found to violate a statute or the information upon which the plan was

negotiated is later found to be materially incomplete or inaccurate. The

results of the negotiation shall be made available to all Federal
agencies

for their use.

3\. Negotiated cost allocation plans based on a, proposal later found

to have included costs that: (a) are unallowable (i) as specified by law
or

regulation, (ii) as identified in Attachment B of this Circular, or
(iii) by

the terms and conditions of Federal awards, or (b) are unallowable
because

they are clearly not allocable to Federal awards, shall be adjusted, or
a

refund shall be made at the option of the Federal cognizant agency.
These

adjustments or refunds are designed to correct the plans and do not

constitute a reopening of the negotiation.

G. Other Policies.

1\. Billed central service activities. Each billed central service

activity must separately account for all revenues (including imputed

revenues) generated by the service, expenses incurred to furnish the
service,

and profit/loss.

2\. Working capital reserves. Internal service funds are dependent

upon a reasonable level of working capital reserve to operate from one

billing cycle to the next. Charges by an internal service activity to

provide for the establishment and maintenance of a reasonable level of

working capital reserve, in addition to the full recovery of costs, are

allowable. A working capital reserve as part of retained earnings of up
to

60 days cash expenses for normal operating purposes is considered
reasonable.

A working capital reserve exceeding 60 days may be approved by the
cognizant

Federal agency in exceptional cases.

3\. Carry-forward adjustments of allocated central service costs.

Allocated central service costs are usually negotiated and approved for
a

future fiscal year on a \"fixed with carry-forward\" basis. Under this

procedure, the fixed amounts for the future year covered by agreement
are not

subject to adjustment for that year. However, when the actual costs of
the

year involved become known, the differences between the fixed amounts

previously approved and the actual costs will be carried forward and
used as

an adjustment to the fixed amounts established for a later year. This

\"carry-forward\" procedure applies to all central services whose costs
were

fixed in the approved plan. However, a carry-forward adjustment is not

permitted, for a central service activity that was not included in the

approved plan, or for unallowable costs that must be reimbursed
immediately.

7

4\. Adjustments of billed central services. Billing rates used to

charge Federal awards shall be based on the estimated costs of providing
the

services, including an estimate of the allocable central service costs.

A comparison of the revenue generated by each billed service (including

total revenues whether or not billed or collected) to the actual
allowable

costs of the service will be made at least annually, and an adjustment
will

be made for the difference between the revenue and the allowable costs.

These adjustments will be made through one of the following adjustment

methods: (a) a cash refund to the Federal Government for the Federal
share of

the adjustment, (b) credits to the amounts charged to the individual

programs, (c) adjustments to future billing rates, or (d) adjustments to

allocated central service costs. Adjustments to allocated central
services

will not be permitted where the total amount of the adjustment for a

particular service (Federal share and non-Federal) share exceeds
\$500,000.

5\. Records retention. All central service cost allocation plans and

related documentation used as a basis for claiming costs under Federal
awards

must be retained for audit in accordance with the records retention

requirements contained in the Common Rule.

6\. Appeals. If a dispute arises in the negotiation of a plan between

the cognizant agency and the governmental unit, the dispute shall be
resolved

in accordance with the appeals procedures of the cognizant agency.

7\. OMB assistance. To the extent that problems are encountered among

the Federal agencies and/or governmental units in connection with the

negotiation and approval process, OMB will lend assistance, as required,
to

resolve such problems in a timely manner.

8

Circular No. A-87

Attachment D

PUBLIC ASSISTANCE COST ALLOCATION PLANS

TABLE OF CONTENTS

A. General

B. Definitions

1\. State public assistance agency

2\. State public assistance agency costs

C. Policy

D.Submission, Documentation, and Approval of Public Assistance Cost

Allocation Plans

E. Review of Implementation of Approved Plans

A. General. Federally-financed programs administered by State public

assistance agencies are funded predominately by the Department of Health
and

Human Services (HHS) In support of its stewardship requirements, HHS has

published requirements for the development, documentation, submission,

negotiation, and approval of public assistance cost allocation plans in

Subpart E of 45 CFR Part 95. All administrative costs (direct and
indirect)

are normally charged to Federal awards by implementing the public
assistance

cost allocation plan. This Attachment extends these requirements to all

Federal agencies whose programs are administered by a State public
assistance

agency. Major federally-financed programs typically administered by
State

public assistance agencies include: Aid to Families with Dependent
Children,

Medicaid, Food Stamps, Child Support Enforcement, Adoption Assistance
and

Foster Care, and Social Services Block Grant.

B. Definitions.

1\. \"State public assistance agency\" means a State agency
administering

or supervising the administration of one or more public assistance
programs

operated by the State as identified in Subpart E of 45 CFR Part 95. For
the

purpose of this Attachment, these programs include all programs
administered

by the State public assistance agency.

2\. \"State public assistance agency costs\" means all costs incurred
by,

or allocable to, the State public assistance agency, except expenditures
for

financial assistance, medical vendor payments, food stamps, and payments
for

services and goods provided directly to program recipients.