OMB Circular A-87, "Cost Principles for State, Local and Indian
Tribal Governments"

The Circular was signed by the OMB Director on May 4, 1995 and is
expected to be published in the Federal Register on Wednesday May
17, 1995.  This Circular rescinds and supersedes Circular A-87,
issued January 15, 1981.

OFFICE OF MANAGEMENT AND BUDGET                             

Cost Principles for State, Local and Indian Tribal Governments

AGENCY:  Office of Management and Budget

ACTION:  Final Revision to OMB Circular A-87, "Cost Principles
for State, Local and Indian Tribal Governments"

SUMMARY:  An interagency task force was established to review
existing cost principles for Federal awards to State and local
governments.  The task force studied Inspector General reports
and recommendations, solicited suggestions for changes to the
Circular from State and local governments, and compared for
consistency the provisions of other Office of Management and
Budget cost principles covering non-profit organizations and
universities.  Proposed revisions reflecting the results of those
efforts were published on October 12, 1988 (53 FR 40352) and
August 19, 1993 (58 FR 44212).  The extensive comments received
on these proposed revisions, discussions with interested groups,
and other related developments were considered in developing this
final revision.

DATE: Agencies shall issue codified regulations to implement the
provisions of this Circular by September 1, 1995.

ADDRESSES:  Office of Management and Budget, Office of Federal
Financial Management, Financial Standards and Reporting Branch,
Room 6025, New Executive Office Building, Washington, DC 20503. 
For a copy of the revised Circular, contact Office of
Administration, Publications Office, Room 2200, New Executive
Office Building, Washington, DC 20503, or telephone (202)395-
7332. 

FOR FURTHER INFORMATION CONTACT:  Non-Federal organizations
should contact the organization's cognizant Federal funding
agency.  Federal agencies should contact Gilbert H. Tran,
Financial Standards and Reporting Branch, Office of Federal
Financial Management, Office of Management and Budget, telephone:
(202)395-3993.

SUPPLEMENTARY INFORMATION:

A.   Background

     The Office of Management and Budget (OMB) received about 200
comments from governmental units, Federal agencies, professional
organizations and others in response to the Federal Register
notice of August 19, 1993 (58 FR 44212).  All comments were
considered in developing this final revision.

     OMB also considered the National Performance Review's
recommendations to reduce paperwork and red tape.  Changes were
made to the Circular to streamline the cost negotiation process
and defer to State and local accounting procedures whenever
possible.  Also, the policy guides in the Circular were amended
to provide that Federal agencies should work with States or
localities which wish to test alternative mechanisms for paying
costs for administering Federal programs.

     Section B presents a summary of the major public comments
grouped by subject and a response to each comment. Other changes
have been made to increase clarity and readability.  Section C
addresses procurement issues.  Section D discusses the Federal
Acquisition Streamlining Act of 1994.

B.   Public Comments and Responses

Basic Circular

Comment:  The policy subsection states that "no provision for
profit or increment above allowable cost is intended."  This
statement is currently contained in the Circular, but it is
different from that contained in other OMB cost principles
circulars and is literally incorrect.  This seems to say no
profit or increment above cost is permitted.

Response: This sentence was changed to conform with the other OMB
cost principles circulars.  There is no policy change intended by
this change.

General Principles for Determining Allowable Costs - Attachment A

Comment:  The requirement in the basic guidelines that "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 a Federal award as an indirect cost"
appears to be too expansive and should be clarified.

Response: There is no policy change intended from that in the
existing Circular.  The wording in the consistency provision was
changed to make it clear that all costs incurred for the same
purpose in like circumstances are either direct costs only or
indirect costs only with respect to final cost objectives (e.g.,
grants).  No final cost objective shall have allocated to it as
an indirect cost any cost if other costs incurred for the same
purpose, in like circumstances, have been included as a direct
cost of that or any other final cost objective.  For example, a
grantee normally allocates all travel as an indirect cost.  For
purposes of a new grant proposal, the grantee intends to allocate
the travel costs of personnel whose time is accounted for as
direct labor directly to the grant.  Since travel costs of
personnel whose time is accounted for as direct labor working on
other grants are costs which are incurred for the same purpose,
these costs may no longer be included within indirect cost pools
for purposes of allocation to any other grant. 

Comment:  The Circular lists the market price of comparable goods
or services as one test of reasonableness.  This statement may
cause problems for State agencies that are required to make
purchases from State-wide contracts.

Response: OMB recognizes that market fluctuations may result in 
a State paying higher prices on State-wide contracts.   However,
significant differences between State prices and market prices
should be analyzed.  For example, Federal awards should not be
paying higher prices for State awards based on geographical
preferences.

Comment:  The prohibition against shifting costs allocable to a
particular Federal award or other cost objective to other Federal
awards needs to be clarified.  Governmental units should not be
precluded from shifting allowable cost in accordance with program
agreements.  

Response: This section was expanded to recognize that there are
instances when it may be appropriate for governmental units to
transfer costs from one cost objective to another cost objective.

Comment:  It is not logical to require governmental units to
allocate indirect costs to all activities including donated
services.

Response: The Circular is designed to provide that Federal awards
bear their fair share of costs.  If non-Federal activities use
donated services that require a substantial amount of support
costs, it would be inequitable to charge these costs to Federal
awards.  

Comment:  The section on applicable credits needs to be
clarified.

Response: The language in this section has been revised to remove
inappropriate examples of applicable credits and references to
program income which are covered by the grants management common
rule.

Selected Items of Cost - Attachment B

Advertising and Public Relations Costs

Comment:  Clarify the allowability of certain public relations
type costs, such as job fairs and activities to promote ridership
on public transportation. 

Response: The allowability of these types of costs depends upon
the circumstances surrounding the individual case.  In
determining whether Federal awards should participate in these
types of costs, the recipient should consider how similar types
of costs are charged, and whether there is a direct benefit to
Federal awards resulting from these costs. 

Audit Services

Comment:  The Circular limits the allowability of audit costs to
single audits and does not provide reimbursement for audits of a
less comprehensive nature.

Response: This section was revised to allow the costs of other
audits.

Automatic Electronic Data Processing

Comment:  The requirement for governmental units to amortize the
costs associated with the development and testing of automated
systems would impose an unreasonable financial and administrative
burden on the governmental units.

Response: OMB eliminated the requirement for governmental units
to amortize the costs of developing and testing automated systems
until a uniform Federal policy covering all types of recipients
of Federal awards can be developed.

Compensation for Personnel Services

Comment:  The potential paperwork burdens associated with
accounting for employee leave payments and accruals could be
substantial.

Response: This section was simplified by modifying many of the
prescriptive accounting rules for leave.

Comment:  Interest cost associated with pension contributions
should be allowed if the governmental unit's contributions are
delayed.

Response: References to interest payments were deleted.  However,
language was inserted into the Circular to make it clear that
Federal reimbursement of pension cost must be adjusted when the
governmental unit's payments to the fund are late.  The
adjustment should compensate for the additional cost because of
the timing of the charges to the Federal Government and the
governmental unit's contribution to the pension fund.

Comment:  Governmental units should not be required to use
separate cost allocation procedures for classes of employees that
experience different actuarial gains and losses (e.g., police and
fire departments).

Response: This requirement was deleted from the Circular.

Comment:  The requirement that a governmental unit obtain Federal
approval for changing its method for determining pension and
post-retirement health benefit costs should be deleted.

Response: This requirement was deleted.  Pension costs and post-
retirement health benefit costs determined in accordance with
Generally Accepted Accounting Principles (GAAP) and the
provisions of the Circular will be allowable. For contracts 
covered under Cost Accounting Standards (CAS), CAS 412 and 413
promulgated by the Cost Accounting Standards Board shall
establish the allocability of pension costs.  

Comment:  The current principles applicable to support of
personnel costs have worked well and require no change.

Response: OMB believes additional guidance is necessary.  Federal
agencies have found that the absence of sufficient guidance on
documentation to support salaries charged to Federal awards has
caused numerous audit findings and resulted in endless wasted
hours of negotiation between Federal agencies and governmental
units.  Based on the comments received, OMB made a number of
changes to the requirements in this section of the Circular to
clarify and simplify Federal requirements for documenting
salaries charged to Federal awards.   

Defense and Prosecution of Criminal and Civil Proceedings, and
Claims 

Comment:  OMB proposed to substantially amend the provisions on
the allowability of legal and related expenses.  In the 1981
version of the Circular, this provision is found at Attachment B,
section 16 (46 FR 9552).  In the latest proposal, the proposed
revisions were at Attachment B, section 14 (58 FR 44222).

State and local governments contended that the proposed revisions
on the allowability of legal and related expenses would be unfair
and would deny them due process.

State and local governments also objected to the specific
proposed revisions dealing with legal proceedings based on the
Major Fraud Act and the Federal Acquisition Regulation (48 CFR
31.205-47) in Attachment B, sections 14.a. through f.  State and
local governments contended that those provisions are ambiguous,
inconsistent and overly broad.  In addition, these commenters
argued that the provisions were designed for commercial
contractors and should not be applied to grants.

Response: After reviewing the comments on the proposed revisions,
OMB decided not to amend the current provision on the
allowability of legal and related expenses.  In the revised
Circular, this provision is now found at section 14.b.

In this revision, OMB has added a provision at section 14.a. 
This provision, which was in the proposal, simply restates the
currently-applicable, statutory restrictions in 10 U.S.C.
2324(k).

Depreciation and Use Allowances

Comment:  It is unclear if a use charge can be charged while an
asset is in service.

Response: The Circular now provides that a reasonable use
allowance may be negotiated for fully depreciated assets;
therefore, OMB believes a reasonable use allowance could be
negotiated for an asset for as long as the asset is in service.

Comment:  It is not clear whether accelerated depreciation is
allowed.

Response: The preferred method of depreciation is the straight
line method.  However, other methods may be used when there is
evidence that an asset will be used up faster in the earlier
portion of its useful life.

Comment:  The estimated useful lives of equipment and buildings
used to compute use allowances should be shortened.

Response: No changes were made.  Governmental units have the
option of claiming depreciation which is usually based on the
actual life of the asset.

Comment:  It is not clear why classes of assets needed to be
determined on a State-wide, local-wide, or Tribal-wide basis.

Response: This section was amended to say classes of assets shall
be determined on the same bases used for the governmental unit's
financial statements.

Equipment and Other Capital Expenditures

Comment:  The capitalization level for equipment seems to be
arbitrarily low.  The criterion of $25,000, which is recognized
by the Department of Health and Human Services (HHS), might be
more appropriate.

Response: The $5000 criterion is in line with capitalization
levels used by government contractors and others.  The HHS
criterion is limited to equipment used on a few very large
programs where equipment purchases are a very small percentage of
total program costs.  For CAS-covered contracts subject to "full
coverage", the threshold for equipment is $1500 as established
under CAS 404. 

Comment:  Clarify the term "article" as used in the definition of
equipment.  The Circular defines equipment "as being an article
of nonexpendable property." 

Response: The definition of "capital expenditure" was added to
further define the term "equipment."  However, if further
guidance is needed in this area, governmental units should follow
their own accounting practices when defining equipment.

Comment:  It is not clear what is meant by "The total acquisition
costs are not allowable as indirect costs during the period
acquired."  

Response: This section was clarified.  It now says that capital
expenditures which are not authorized to be charged directly to
an award may be recovered through use allowances or depreciation.

Comment:  The impact of depreciation as proposed in the Circular
would shift costs to the governmental unit, not make any
provision for the time value of money, increase administrative
costs to track resulting depreciation schedules, and erode the
partner relationship between Federal agencies and governmental
units.

Response: The accounting treatment for depreciation as prescribed
by the Circular is based on GAAP.  Further, the provisions ensure
that the Federal Government pays its fair share of costs,
including interest on financing.

Fund Raising and Investment Management Costs

Comment:  It is not clear whether costs related to raising funds
from employees within an organization for charitable activities,
such as the United Way, would be allowable since the Circular
disallows fund raising costs.

Response:  Generally, the prohibition on fund raising activities
covered by the Circular is for those activities where the
governmental unit raises funds for its own use.  Incidental fund
raising from an organization's own employees for charitable
organizations, such as the United Way, is considered part of
normal operating expenses and, therefore, allowable.

Gains and Losses on Disposition of Depreciable Property and Other
Capital Assets and Substantial Relocation of Federal Programs

Comment:  The provisions which would require governmental units
to reimburse the Federal Government when Federal awards were
relocated from facilities where the Federal Government
participated in the financing is inappropriate.

Response: This section was amended.  It now requires governmental
units to obtain prior approval from the cognizant agency for
substantial relocations of Federal awards from buildings for
which the Federal Government participated in the financing.

Insurance and Indemnification

Comment:  It is not apparent why provisions for liabilities,
which do not become payable for more than one year after a self
insurance provision is made, are limited to the discounted value
of the liability.

Response: This requirement is designed to cover only those cases
where the amount of the liability is firm or reasonably certain. 
This provision helps to avoid excessive reserve balances for the
current fiscal year.  It limits current year premiums to the
present value of the future (known or reasonably certain)
liability.  When that future liability becomes due, prior years
premiums plus earnings (i.e., interest or investment income) from
those premiums will be available to satisfy that debt.

Comment:  The Circular states that self-insurance reserves must
be based on sound actuarial principles using the most likely
assumptions. This seems to be an attempt to limit sound actuarial
principles.  

Response: This language was not intended to restrict sound
actuarial principles. The language was changed to clarify that
sound actuarial assumptions should recognize actual past, as well
as probable future, events when determining premiums and reserve
levels.

Interest

Comment:  Interest expense should be allowable not only for
building modifications, as provided in the 1981 revision of
Circular A-87, but also for acquisitions of equipment made prior
to the issuance date of the revised Circular.  The proposed
provision is objectionable because it would require dual records
and impose an unreasonable and unnecessary administrative burden
on State and local governments.

Response:  The provision was rewritten to allow interest expense
paid or incurred on or after the revised Circular's effective
date to be charged to Federal awards for existing as well as
newly-acquired equipment.  

Historically, OMB has not allowed interest on debt issued prior
to the effective date of an interest policy revision (pre-
revision debt).  In 1980, OMB allowed State and local governments
interest on debt issued to acquire buildings, but not on pre-
revision debt (45 FR 27363).  In 1982, in a revision to Circular
A-21, "Cost Principles for Educational Institutions," OMB allowed
interest on debt issued to acquire buildings and equipment, but
not on pre-revision debt (47 FR 33658).  In 1994, in a proposed
revision to Circular A-122, "Cost Principles for Non-Profit
Organizations," OMB proposed to allow interest debt issued to
acquire buildings and equipment, but not on pre-revision debt (59
FR 49091).  

In view of the fact that pre-revision debt was incurred with full
knowledge of the cost policy that was in effect at that time, OMB
does not believe that grantees should expect the Federal
Government to allow interest on this debt without such a decision
being cost-justified from the Federal Government's perspective. 
OMB believes the Federal Government should only allow interest on
pre-revision debt when the cost of maintaining dual records on
pre-revision and post-revision assets and related debt (all or a
portion of these recordkeeping costs are chargeable to the
Federal programs as administrative costs) is less than the
interest cost on pre-revision debt.

With respect to debt incurred to purchase buildings, OMB believes
that the cost of maintaining dual records is cost-justified in
view of the limited number of buildings and debt issues for which
separate records would have to be maintained, and the substantial
interest cost associated with long term debt used to finance
buildings.  Thus, as OMB has previously explained, "[a]applying
the new rules to old buildings would appear to provide a windfall
recovery, and might drive up overhead costs of federally assisted
programs" (47 FR 33658, also see 45 FR 27363).

Equipment acquired by State and local governments (except
computers), while substantial in terms of the number of pieces,
is relatively nominal in cost and has a relatively short life
span.  As a result, the outstanding interest on debt issued to
finance this equipment is relatively nominal.  Moreover, State
and local governments would still bear the major share of the
financing costs, even if pre-revision debt were allowable.  By
contrast, the cost of maintaining dual records for a large number
of items and related debt would likely be substantial.  Given the
different balance between administrative and interest costs, OMB
has decided that, in this instance, the administrative costs
associated with maintaining separate records to track pre-
revision and post-revision debt is not cost-justifiable from the
Federal Government's perspective.

The basis for the allowance of pre-revision debt for equipment of
State and local governments is consistent with the basis for
OMB's treatment of such debt for educational institutions (in
1982) and OMB's proposed treatment of such debt for non-profit
organizations (in 1994).  The cost of equipment acquired by
educational institutions and non-profit organizations through
debt financing can be significant (e.g., over $650,000 for x-ray
crystallography equipment, $348,000 for a vantage flow cytometer
for high speed cell analysis, and $265,000 for an electron
microscope).  Equipment of this type and related debt has a
longer life, and in turn, significantly higher interest cost. 
Moreover, as with buildings, there are only a limited number of
pieces of such equipment, which reduces the administrative costs
of dual records.  Given the amount of interest involved in the
financing of these assets compared with the relatively nominal
administrative burden associated with maintaining dual records,
OMB believes the cost of maintaining dual records is justifiable.

Comment:  The requirement for a governmental unit to document, as
part of its decisionmaking process, that capital leasing is the
most economical option does not belong in Circular A-87.
 
Response:  The requirement for lease analysis as part of the
governmental unit's decisionmaking process and its proper
documentation is addressed in the Grants Management Common Rule
under Section __.36(b)(4).  This requirement is not addressed in
Circular A-87.

Comment:  Governmental units would not recover their full costs
because of provisions in the Circular which provide that a credit
is due the Federal Government when Federal payments for interest,
depreciation, use charges and other contributions for building
use exceed the interest and principal payments made by the
government (positive cash flow).

Response:  OMB deleted the provisions in the Circular which would
require credits under the conditions described above.  However,
governmental units will be required to negotiate the amount of
allowable interest whenever cash payments (interest, use
allowances, depreciation and contributions) exceed governmental
unit cash payments and other governmental unit contributions. 
OMB will study this matter further to ensure fair and equitable
policies are established for the States and the Federal
Government. 

Memberships, Subscriptions, and Professional Activities

Comment:  Membership costs in some civic and community
organizations should be allowable when the purpose is to promote
services provided by the Federal award.

Response:  The language has been revised to allow memberships in
civic and community organizations as a direct cost with the prior
approval of the Federal awarding agency. 

Professional Service Costs

Comment:  Simplify the section on professional service costs by
eliminating the factors to consider in determining the
allowability of professional service costs.  

Response:  Eight subsections listing the factors were deleted.

Proposal Costs

Comment:  It is not clear why proposal costs should normally be
treated as indirect costs and allocated to all activities.  Such
costs should be treated as direct costs if they can be identified
with a specific award.

Response:  OMB added a provision to allow governmental units to
charge proposal costs directly to a Federal award with the prior
approval of the Federal awarding agency.

Taxes

Comment:  If OMB adopts the proposed revision affecting sales tax
reimbursement, the revision should become effective at some later
date to allow time to change State and local laws.

Response:  OMB agrees that there should be a phase-in period. 
The Circular allows governmental units three years to phase-in
the change.

Comment:  If the sales tax proposal were adopted, it would become
a burden to separately account for State sales taxes paid on
Federal grant purchases.

Response:  The Circular allows reasonable approximations to be
used where the identification of the actual amount of unallowed
taxes would require an inordinate amount of effort.

Comment:  State sales taxes should be allowable when a
governmental unit is in a position that makes exclusion
administratively impossible, i.e., when employees in travel
status must pay sales taxes upon receipt of goods and services.

Response:  States should attempt a reasonable approximation.

Comment:  Some State and local governments and Indian Tribal
governments would lose substantial amounts of revenue if sales
taxes were not chargeable to purchases made in connection with
federally-funded programs.

Response:  The intention of the tax provision is to address State
or local government taxes, or changes in tax policy, that
disproportionately affect a federally-funded program.  Under the
Circular, such taxes are unallowable.  (As explained in the next
comment-and-response, where a Federal statute prescribes a
different treatment for taxes, that statute controls.)

     For example, a tax would disproportionately affect a Federal
program if the tax were defined or applied so that it was imposed
only in connection with that program, or only in connection with
Federal programs generally.  Another example would be if a sales
tax were imposed on a good or service that in practice is used
solely or disproportionately in connection with Federal programs. 
These examples are for illustration, and are not meant to be
exclusive.  Whether a particular tax, or change in tax policy,
would disproportionately affect a Federal program will have to be
determined based on a review of the tax and the Federal programs
in question.  

     When a governmental unit pays a tax to itself, that self-
assessed tax is not a true cost to the governmental unit. 
Especially where a self-assessed tax disproportionately affects a
Federal program, it is not appropriate for the governmental unit
to be able to characterize that tax as a "cost" of its
participation in the Federal program.  If such disproportionate,
self-assessed taxes were treated as allowable, even though they
disproportionately affect Federal programs, governmental units
could define or apply taxes in such a way that their net impact
would largely be to increase the Federal Government's
contribution, rather than to raise revenues from the taxpayer. 
To the extent that making such taxes unallowable would result in
a loss of Federal assistance awards, the Circular allows three
years for governmental units to phase-out any existing taxes that
disproportionately affect Federal programs.   (For the larger
formula grant programs, the disallowance of such taxes would not
result in any loss of Federal assistance awards; the funds which
are now used to pay self-assessed taxes could be used to further
the objectives of the Federal assistance.)  
     
Comment:  The proposed revision on sales taxes is directly
contrary to the legislative intent of Public Law 102-234,
"Medicaid Voluntary Contributions and Provider Specific Tax
Amendments of 1991."  The proposal should be revised to preclude
its application to broad-based health care related taxes paid by
public entities.

Response:  The Circular would not take precedence over a statute. 
If any statute specifically prescribes policies and specific
requirements that differ from the Circular, the statute will
govern.

Comment:  State sales taxes collected by another level of
government should be exempt from the provisions of the Circular.

Response:  As noted above, the Circular's disallowance is
directed at self-assessed taxes.  Thus, if a local government
receives  an award directly from the Federal Government, and pays
a State sales tax on purchases made in connection with that
award, the tax is an allowable cost.  (However, as previously
noted, the Circular does not restrict the authority of Federal
agencies to identify taxes where Federal participation is
inappropriate.)

     However, if the local government does not receive the award
directly from the Federal Government, but instead receives the
award indirectly by virtue of a State pass-through, then the
sales tax that the local government pays the State is in reality
a self-assessed tax, which would be unallowable if the tax
disproportionately affects a Federal program.    

Comment:  It is not clear whether the prohibition on payment of
sales taxes applies to out-of-state sales tax.

Response:  Since they are not self-assessed, taxes assessed by
other States, or political subdivisions of other States, are not
unallowable under the Circular.  (However, as previously noted,
the Circular does not restrict the authority of Federal agencies
to identify taxes where Federal participation is inappropriate.)

Travel Costs

Comment:  Airfare costs in excess of the lowest available
commercial discount fare are unallowable.   With today's
confusing array of super savers and fare wars, the burden
involved in proving the lowest airfare would be considerable.

Response:  The travel provisions were changed to say travel costs
in excess of the customary standard (coach or equivalent) airfare
are unallowable.

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

Comment:  Working capital reserves in many cases should not be
limited to 60 days cash expenses.  Time consuming collections,
uneven usage levels, and unanticipated demand for services are
some of the reasons for authorizing a larger reserve.

Response:  OMB believes the 60 day reserve should provide the
flexibility required by most funds to operate from one billing
cycle to the next.  However, the Circular was amended to provide
for a larger reserve in exceptional cases when approved by the
cognizant Federal agency.

Comment:  The Circular should not restrict governmental units
from engaging an accounting firm to prepare an indirect cost
proposal and then engaging the same firm to make subsequent
audits.

Response:  This provision was deleted from the Circular.  This
issue will be addressed as part of OMB policy changes to other
OMB grants management circulars.

Comment:  What are the criteria OMB uses for making cognizant
assignments and for defining "major governments"? 

Response:  OMB is in the process of reviewing the cognizant
assignments for governmental units.  Only governmental units
receiving substantial amounts of direct Federal assistance will
be assigned a Federal cognizant agency and be required to submit
plans to those cognizant agencies.  Because the mix of Federal
awards has changed so much since the last list was issued, OMB
needs to develop a new dollar criterion for defining "major."

Comment:  States and other prime grantees should not be required
to monitor subrecipient cost allocation plans and/or negotiate
sub-recipient indirect costs.

Response:  The grants management common rule requires
governmental units to monitor subawards to assure compliance with
applicable Federal requirements.  These requirements include
compliance with the cost principles.  In those cases where the
subrecipient does not receive any Federal awards directly from
the Federal Government, Federal agencies would not have any
direct responsibility for negotiating indirect costs.  

Comment:  Attachment C, Section E states that "The documentation
requirements in this section may be modified, expanded, or
reduced by the cognizant agency on a case-by-case basis."  This
specific sentence might allow a Federal cognizant agency to
unreasonably and unilaterally expand the documentation
requirements.  

Response:  Federal agencies should have the flexibility to obtain
additional data, when necessary.  However, OMB agrees that this
type of request should be the exception rather than the rule.

Comment:  Documentation for internal service funds seems
excessive since these areas are audited.  This documentation is
more appropriately included in a State or local government's
financial statements and work papers for the fiscal year rather
than in the entity's cost allocation plan.

Response:  OMB amended this section to require only the largest
funds to submit data.  If the required data are included in the
governmental unit's financial statements, submission of the
financial statements to the Federal cognizant agency will meet
the requirements of the Circular.

Comment:  OMB proposed to add provisions requiring the
certification of cost allocation plans and of indirect cost rates
(see preamble (58 FR 44218); Attachment C, Section E.4 (58 FR
44229); Attachment D, Section D.3 (58 FR 44230-31); and
Attachment E, Section D.3 (58 FR 44233)).  States objected to the
inclusion of the phrase "under penalty of perjury" in the
proposed certification.  They contended that the phrase is
unnecessary.

Response:  OMB has decided to amend the Circular to add the
proposed certifications, but OMB has accepted the commenters'
suggestion that the phrase "under penalty of perjury" not be
included in the certifications.  OMB believes that, when the
Federal Government is dealing with State and local governments,
it is unnecessary to require that the certifying government
official sign a certification stating that it is made "under
penalty of perjury."  State and local officials should not
conclude, however, that the omission of the phrase "under penalty
of perjury" means that no potential legal liability is associated
with a certification's submission.  In this regard, note the
provision in Federal law imposing criminal penalties for "false,
fictitious or fraudulent statements or representations" (18
U.S.C. 1001).  The Department of Justice is responsible for
enforcing this provision (and other laws regarding false
statements and claims).  OMB expresses no opinion concerning the
potential legal liabilities that are associated with making the
certifications in the revised Circular.

Comment:  Restricting the authority to reopen Central Service
Plans to the Federal cognizant agency is inequitable.  

Response:  This section was changed to state that agreements may
be subject to reopening only 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.

Comment:  GAAP for State and local governments do not require
internal service activities to be accounted for and reported in
proprietary accounts.

Response: The requirement for internal service activities to be
accounted for in proprietary accounts was deleted.

Comment:  Remove the requirement that a carry forward adjustment
is not permitted for a central service activity that was not
included in the approved plan.

Response:  The carry forward technique was intended to permit
adjustments for differences between actual and estimated costs of
services included in a cost allocation plan.   It was not
intended to shift the entire cost of an activity excluded from
the year of the plan to a future year.  There may be
circumstances where a change to the plan should be considered
(e.g., the service did not exist when the plan was established
and was initiated during the year covered by the plan).  This
type of amendment should modify the plan itself and would not be
handled through a carry forward adjustment.

Comment:  Adjustments of billed services do not provide a
workable solution for the larger central services of the States. 
The dollar limitation of $50,000 for making adjustments through
allocated central services is too low.

Response:  This section was rewritten to provide governmental
units more options and flexibility in making adjustments to
Federal awards.

Public Assistance Cost Allocation Plans - Attachment D

Comment:  The public assistance cost allocation plans are
narrative descriptions of cost allocation procedures rather than
allocations of actual costs.  The provisions dealing with refunds
or adjustments related to unallowable costs and the certification
of cost allowability do not appear appropriate. 

Response:  The certification and the provisions dealing with
refunds and adjustments were deleted. 

State and Local Indirect Cost Rate Proposals - Attachment E

Comment:  The Circular is silent on the time period for use of
predetermined rates.

Response:  The Circular was amended to encourage the use of
indirect cost rates for a period of two to four years. 

Comment:  Governmental units should notify the Federal Government
of any accounting changes that might make it necessary to
renegotiate the predetermined rate.

Response:  A provision was added to the certification which
requires the governmental unit to notify the Federal Government
of any accounting changes that would effect the application of
the predetermined rate.

C.   Procurement Issues

Several procurement issues arose during the Federal Government's
internal review process.  This section clarifies the procurement
issues.

Effective date for governmental units with predetermined rates
beyond September 1, 1995

     For a governmental unit that already has established
indirect cost rates beyond September 1, 1995, the effective date
of the revised Circular shall be at the start of the next
accounting period beginning on or after September 1, 1995, for
which the governmental unit has not yet established a
predetermined indirect cost rate. 

Depreciation method(s) for CAS-covered contracts

     CAS-covered contracts subject to "full coverage" under CASB
shall follow the standards promulgated by CASB in the computation
of depreciation.

Allowability of interest expenses for CAS-covered contracts

     For contracts subject to CAS 414 (48 CFR 9903.414, cost of
money as an element of the cost of capital), and CAS 417 (48 CFR
9903.417, cost of money as an element of the cost of capital
assets under construction), the imputed cost of money determined
allocable in accordance with CAS 414 and 417 may be claimed as an
allowable cost.  When cost of money is claimed, interest shall
not be an allowable direct or indirect cost under such contracts.

D.   Federal Acquisition Streamline Act

     The Federal Acquisition Streamlining Act (FASA) of 1994,
enacted on October 13, 1994, amended Section 306(e) of the
Federal Property and Administrative Services Act of 1949 (41
U.S.C. 256, Public Law 103-355, Section 2151, 108 Stat. 3309-12),
to specify certain items of costs as not allowable under Federal
covered contracts.  OMB is undertaking a review of these FASA
provisions, for the purpose of determining whether the
unallowable cost provisions of Circular A-87, and of OMB's other
cost principles circulars, should be amended in light of the FASA
provisions on unallowable costs.  If OMB ultimately concludes
that amendments may be appropriate, OMB will issue a proposal
seeking public comment on the proposed revisions.

   
John B. Arthur
Associate Director for Administration.

Billing Code 3110-01-M

                                                          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.   Required 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
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. 

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 allocating 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 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
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 as 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
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 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.

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.

          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.
Circular No. A-87
Attachm                                                            ent 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.  Underrecovery 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) 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 as 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
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 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)  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.  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.  

     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. 

     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:

               (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.  

               (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. 

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 government-
wide financial statements.

     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 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.

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.  

     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.

          (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, 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:

          (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. 

     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 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.

          (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.  

     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.

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 leases 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 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 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.  Underrecovery of costs under Federal agreements.  Any excess
costs over the Federal contribution under one award agreement are
unallowable under other award agreements.

                                                          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.   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 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
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:

                    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.
     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.
     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.
                                                          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

F.   Unallowable Costs

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.
C.   Policy.  State public assistance agencies will develop,
document and implement, and the Federal Government will review,
negotiate, and approve, public assistance cost allocation plans
in accordance with Subpart E of 45 CFR Part 95. The plan will
include all programs administered by the State public assistance
agency.  Where a letter of approval or disapproval is transmitted
to a State public assistance agency in accordance with Subpart E, 
the letter will apply to all Federal agencies and programs. The
remaining sections of this Attachment (except for the requirement
for certification) summarize the provisions of Subpart E of 45
CFR Part 95. 

D.   Submission, Documentation, and Approval of Public Assistance
     Cost Allocation Plans.

     1.   State public assistance agencies are required to
promptly submit amendments to the cost allocation plan to HHS for
review and approval.

     2.   Under the coordination process outlined in subsection
E, affected Federal agencies will review all new plans and plan
amendments and provide comments, as appropriate, to HHS.  The
effective date of the plan or plan amendment will be the first
day of the quarter following the submission of the plan or
amendment, unless another date is specifically approved by HHS.
HHS, as the cognizant agency acting on behalf of all affected
Federal agencies, will, as necessary, conduct negotiations with
the State public assistance agency and will inform the State
agency of the action taken on the plan or plan amendment. 

E.   Review of Implementation of Approved Plans.

     1.   Since public assistance cost allocation plans are of a
narrative nature, the review during the plan approval process
consists of evaluating the appropriateness of the proposed
groupings of costs (cost centers) and the related allocation
bases.  As such, the Federal Government needs some assurance that
the cost allocation plan has been implemented as approved. This
is accomplished by reviews by the funding agencies, single
audits, or audits conducted by the cognizant audit agency.

     2.   Where inappropriate charges affecting more than one
funding agency are identified, the cognizant HHS cost negotiation
office will be advised and will take the lead in resolving the
issue(s) as provided for in Subpart E of 45 CFR Part 95.    

     3.   If a dispute arises in the negotiation of a plan or
from a disallowance involving two or more funding agencies, the
dispute shall be resolved in accordance with the appeals
procedures set out in 45 CFR Part 75. Disputes involving only one
funding agency will be resolved in accordance with the funding
agency's appeal process.
     4.   To the extent that problems are encountered among the
Federal agencies and/or governmental units in connection with the
negotiation and approval process, the Office of Management and
Budget will lend assistance, as required, to resolve such
problems in a timely manner. 

F.   Unallowable Costs.  Claims developed under approved cost
allocation plans will be based on allowable costs as identified
in this Circular.  Where unallowable costs have been claimed and
reimbursed, they will be refunded to the program that reimbursed
the unallowable cost using one of the following methods:  (a) a
cash refund, (b) offset to a subsequent claim, or (c) credits to
the amounts charged to individual awards.
Circular No. A-87
At                                                            tachment E 

                                                                                        STATE AND LOCAL INDIRECT COST RATE PROPOSALS

TABLE OF CONTENTS

A.   General

B.   Definitions
     1.   Indirect cost rate proposal
     2.   Indirect cost rate
     3.   Indirect cost pool
     4.   Base
     5.   Predetermined rate
     6.   Fixed rate
     7.   Provisional rate
     8.   Final rate
     9.   Base period

C.   Allocation of Indirect Costs and Determination of Indirect
     Cost Rates
     1.   General
     2.   Simplified method
     3.   Multiple allocation base method
     4.   Special indirect cost rates

D.   Submission and Documentation of Proposals
     1.   Submission of indirect cost rate proposals
     2.   Documentation of proposals
     3.   Required certification

E.   Negotiation and Approval of Rates

F.   Other Policies
     1.   Fringe benefit rates
     2.   Billed services provided by the grantee agency
     3.   Indirect cost allocations not using rates
     4.   Appeals
     5.   Collections of unallowable costs and erroneous payments
     6.   OMB assistance

A.   General.

     1.   Indirect costs are those that have been incurred for
common or joint purposes.  These costs benefit more than one cost
objective and cannot be readily identified with a particular
final cost objective without effort disproportionate to the
results achieved.  After direct costs have been determined and
assigned directly to Federal awards and other activities as
appropriate, indirect costs are those remaining to be allocated
to benefitted cost objectives. A cost may not be allocated to a
Federal award as an indirect cost if any other cost incurred for
the same purpose, in like circumstances, has been assigned to a
Federal award as a direct cost.

     2.   Indirect costs include (a) the indirect costs
originating in each department or agency of the governmental unit
carrying out Federal awards and (b) the costs of central
governmental services distributed through the central service
cost allocation plan (as described in Attachment C) and not
otherwise treated as direct costs. 

     3.   Indirect costs are normally charged to Federal awards
by the use of an indirect cost rate.  A separate indirect cost
rate(s) is usually necessary for each department or agency of the
governmental unit claiming indirect costs under Federal awards. 
Guidelines and illustrations of indirect cost proposals 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.

     4.   Because of the diverse characteristics and accounting
practices of governmental units, the types of costs which may be
classified as indirect costs cannot be specified in all
situations.  However, typical examples of indirect costs may
include certain State/local-wide central service costs, general
administration of the grantee department or agency, accounting
and personnel services performed within the grantee department or
agency, depreciation or use allowances on buildings and
equipment, the costs of operating and maintaining facilities,
etc. 

     5.   This Attachment does not apply to State public
assistance agencies.  These agencies should refer instead to
Attachment D.

B.   Definitions.

     1.   "Indirect cost rate proposal" means the documentation
prepared by a governmental unit or subdivision thereof to
substantiate its request for the establishment of an indirect
cost rate. 

     2.   "Indirect cost rate" is a device for determining in a
reasonable manner the proportion of indirect costs each program
should bear.  It is the ratio (expressed as a percentage) of the
indirect costs to a direct cost base. 

     3.   "Indirect cost pool" is the accumulated costs that
jointly benefit two or more programs or other cost objectives.
     4.   "Base" means the accumulated direct costs (normally
either total direct salaries and wages or total direct costs
exclusive of any extraordinary or distorting expenditures) used
to distribute indirect costs to individual Federal awards.  The
direct cost base selected should result in each award bearing a
fair share of the indirect costs in reasonable relation to the
benefits received from the costs.

     5.   "Predetermined rate" means an indirect cost rate,
applicable to a specified current or future period, usually the
governmental unit's fiscal year.  This rate is based on an
estimate of the costs to be incurred during the period.  Except
under very unusual circumstances, a predetermined rate is not
subject to adjustment.  (Because of legal constraints,
predetermined rates are not permitted for Federal contracts; they
may, however, be used for grants or cooperative agreements.) 
Predetermined rates may not be used by governmental units that
have not submitted and negotiated the rate with the cognizant
agency.  In view of the potential advantages offered by this
procedure, negotiation of predetermined rates for indirect costs
for a period of two to four years should be the norm in those
situations where the cost experience and other pertinent facts
available are deemed sufficient to enable the parties involved to
reach an informed judgment as to the probable level of indirect
costs during the ensuing accounting periods.

     6.   "Fixed rate" means an indirect cost rate which has the
same characteristics as a predetermined rate, except that the
difference between the estimated costs and the actual, allowable
costs of the period covered by the rate is carried forward as an
adjustment to the rate computation of a subsequent period.

     7.   "Provisional rate" means a temporary indirect cost rate
applicable to a specified period which is used for funding,
interim reimbursement, and reporting indirect costs on Federal
awards pending the establishment of a "final" rate for that
period.

     8.   "Final rate" means an indirect cost rate applicable to
a specified past period which is based on the actual allowable
costs of the period.  A final audited rate is not subject to
adjustment.

     9.   "Base period" for the allocation of indirect costs is
the period in which such costs are incurred and accumulated for
allocation to activities performed in that period.  The base
period normally should coincide with the governmental unit's
fiscal year, but in any event, shall be so selected as to avoid
inequities in the allocation of costs.

C.   Allocation of Indirect Costs and Determination of Indirect
     Cost Rates.

     1.   General.

          a.   Where a governmental unit's department or agency
has only one major function, or where all its major functions
benefit from the indirect costs to approximately the same degree,
the allocation of indirect costs and the computation of an
indirect cost rate may be accomplished through simplified
allocation procedures as described in subsection 2.

          b.   Where a governmental unit's department or agency
has several major functions which benefit from its indirect costs
in varying degrees, the allocation of indirect costs may require
the accumulation of such costs into separate cost groupings which
then are allocated individually to benefitted functions by means
of a base which best measures the relative degree of benefit. 
The indirect costs allocated to each function are then
distributed to individual awards and other activities included in
that function by means of an indirect cost rate(s).

          c.   Specific methods for allocating indirect costs and
computing indirect cost rates along with the conditions under
which each method should be used are described in subsections 2,
3 and 4.

     2.   Simplified method.

          a.   Where a grantee agency's major functions benefit
from its indirect costs to approximately the same degree, the
allocation of indirect costs may be accomplished by (1)
classifying the grantee agency's total costs for the base period
as either direct or indirect, and (2) dividing the total
allowable indirect costs (net of applicable credits) by an
equitable distribution base.  The result of this process is an
indirect cost rate which is used to distribute indirect costs to
individual Federal awards.  The rate should be expressed as the
percentage which the total amount of allowable indirect costs
bears to the base selected.  This method should also be used
where a governmental unit's department or agency has only one
major function encompassing a number of individual projects or
activities, and may be used where the level of Federal awards to
that department or agency is relatively small.

          b.   Both the direct costs and the indirect costs shall
exclude capital expenditures and unallowable costs.  However,
unallowable costs must be included in the direct costs if they
represent activities to which indirect costs are properly
allocable.

          c.   The distribution base may be (1) total direct
costs (excluding capital expenditures and other distorting items,
such as pass-through funds, major subcontracts, etc.), (2) direct
salaries and wages, or (3) another base which results in an
equitable distribution. 

     3.   Multiple allocation base method.

          a.   Where a grantee agency's indirect costs benefit
its major functions in varying degrees, such costs shall be
accumulated into separate cost groupings.  Each grouping shall
then be allocated individually to benefitted functions by means
of a base which best measures the relative benefits.

          b.   The cost groupings should be established so as to
permit the allocation of each grouping on the basis of benefits
provided to the major functions.  Each grouping should constitute
a pool of expenses that are of like character in terms of the
functions they benefit and in terms of the allocation base which
best measures the relative benefits provided to each function.
The number of separate groupings should be held within practical
limits, taking into consideration the materiality of the amounts
involved and the degree of precision needed.

          c.   Actual conditions must be taken into account in
selecting the base to be used in allocating the expenses in each
grouping to benefitted functions.  When an allocation can be made
by assignment of a cost grouping directly to the function
benefitted, the allocation shall be made in that manner.  When
the expenses in a grouping are more general in nature, the
allocation should be made through the use of a selected base
which produces results that are equitable to both the Federal
Government and the governmental unit.  In general, any cost
element or related factor associated with the governmental unit's
activities is potentially adaptable for use as an allocation base
provided that:  (1) it can readily be expressed in terms of
dollars or other quantitative measures (total direct costs,
direct salaries and wages, staff hours applied, square feet used,
hours of usage, number of documents processed, population served,
and the like), and (2) it is common to the benefitted functions
during the base period.

          d.   Except where a special indirect cost rate(s) is
required in accordance with subsection 4, the separate groupings
of indirect costs allocated to each major function shall be
aggregated and treated as a common pool for that function.  The
costs in the common pool shall then be distributed to individual
Federal awards included in that function by use of a single
indirect cost rate.

          e.   The distribution base used in computing the
indirect cost rate for each function may be (1) total direct
costs (excluding capital expenditures and other distorting items
such as pass-through funds, major subcontracts, etc.), (2) direct
salaries and wages, or (3) another base which results in an
equitable distribution.  An indirect cost rate should be
developed for each separate indirect cost pool developed.  The
rate in each case should be stated as the percentage relationship
between the particular indirect cost pool and the distribution
base identified with that pool.

     4.   Special indirect cost rates.

          a.   In some instances, a single indirect cost rate for
all activities of a grantee department or agency or for each
major function of the agency may not be appropriate.  It may not
take into account those different factors which may substantially
affect the indirect costs applicable to a particular program or
group of programs.  The factors may include the physical location
of the work, the level of administrative support required, the
nature of the facilities or other resources employed, the
organizational arrangements used, or any combination thereof. 
When a particular award is carried out in an environment which
appears to generate a significantly different level of indirect
costs, provisions should be made for a separate indirect cost
pool applicable to that award.  The separate indirect cost pool
should be developed during the course of the regular allocation
process, and the separate indirect cost rate resulting therefrom
should be used, provided that:  (1) the rate differs
significantly from the rate which would have been developed under
subsections 2. and 3., and (2) the award to which the rate would
apply is material in amount.

          b.   Although this Circular adopts the concept of the
full allocation of indirect costs, there are some Federal
statutes which restrict the reimbursement of certain indirect
costs.  Where such restrictions exist, it may be necessary to
develop a special rate for the affected award.  Where a
"restricted rate" is required, the procedure for developing a
non-restricted rate will be used except for the additional step
of the elimination from the indirect cost pool those costs for
which the law prohibits reimbursement. 

D.   Submission and Documentation of Proposals.

     1.   Submission of indirect cost rate proposals.

          a.   All departments or agencies of the governmental
unit desiring to claim indirect costs under Federal awards must
prepare an indirect cost rate proposal and related documentation
to support those costs.  The proposal and related documentation
must be retained for audit in accordance with the records
retention requirements contained in the Common Rule.

          b.   A governmental unit for which a cognizant agency
assignment has been specifically designated must submit its
indirect cost rate proposal to its cognizant agency.  The Office
of Management and Budget (OMB) will periodically publish lists of
governmental units identifying the appropriate Federal cognizant
agencies.  The cognizant agency for all governmental units or
agencies not identified by OMB will be determined based on the
Federal agency providing the largest amount of Federal funds.  In
these cases, a governmental unit must develop an indirect cost
proposal in accordance with the requirements of this Circular and
maintain the proposal and related supporting documentation for
audit.  These governmental units are not required to submit their
proposals 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 and/or monitoring the sub-recipient's plan.

          c.   Each Indian tribal government desiring
reimbursement of indirect costs must submit its indirect cost
proposal to the Department of the Interior (its cognizant Federal
agency).

          d.   Indirect cost proposals must be developed (and,
when required, submitted) within six months after the close of
the governmental unit's fiscal year, unless an exception is
approved by the cognizant Federal agency.  If the proposed
central service cost allocation plan for the same period has not
been approved by that time, the indirect cost proposal may be
prepared including an amount for central services that is based
on the latest federally-approved central service cost allocation
plan.  The difference between these central service amounts and
the amounts ultimately approved will be compensated for by an
adjustment in a subsequent period. 

     2.   Documentation of proposals.  The following shall be
included with each indirect cost proposal:

          a.   The rates proposed, including subsidiary work
sheets and other relevant data, cross referenced and reconciled
to the financial data noted in subsection b.  Allocated central
service costs will be supported by the summary table included in
the approved central service cost allocation plan.  This summary
table is not required to be submitted with the indirect cost
proposal if the central service cost allocation plan for the same
fiscal year has been approved by the cognizant agency and is
available to the funding agency.

          b.   A copy of the financial data (financial
statements, comprehensive annual financial report, executive
budgets, accounting reports, etc.) upon which the rate is based.
Adjustments resulting from the use of unaudited data will be 
recognized, where appropriate, by the Federal cognizant agency in
a subsequent proposal.

          c.   The approximate amount of direct base costs
incurred under Federal awards.  These costs should be broken out
between salaries and wages and other direct costs.

          d.   A chart showing the organizational structure of
the agency during the period for which the proposal applies,
along with a functional statement(s) noting the duties and/or
responsibilities of all units that comprise the agency.  (Once
this is submitted, only revisions need be submitted with
subsequent proposals.)

     3.   Required certification.  Each indirect cost rate
proposal shall be accompanied by a certification in the following
form:

                       CERTIFICATE OF INDIRECT COSTS

     This is to certify that I have reviewed the indirect cost
rate proposal submitted herewith and to the best of my knowledge
and belief:

          (1)  All costs included in this proposal [identify
date] to establish billing or final indirect costs rates for
[identify period covered by rate] are allowable in accordance
with the requirements of the Federal award(s) to which they apply
and OMB Circular A-87, "Cost Principles for State and Local
Governments." 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
agreements 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 and
the Federal Government will be notified of any accounting changes
that would affect the predetermined rate.

     I declare that the foregoing is true and correct.

Governmental Unit:              ________________________

Signature:                      ________________________

Name of Official:               ________________________

Title:                          _________________________

Date of Execution:              _________________________

E.   Negotiation and Approval of Rates.

     1.   Indirect cost rates will be reviewed, negotiated, and
approved by the cognizant Federal agency on a timely basis.  Once
a rate has been agreed upon, it 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
indirect cost rates, the funding agency will, prior to the time
the rates are negotiated, notify the cognizant Federal agency.

     2.   The use of predetermined rates, if allowed, is
encouraged where the cognizant agency has reasonable assurance
based on past experience and reliable projection of the grantee
agency's costs, that the rate is not likely to exceed a rate
based on actual costs.  Long-term agreements utilizing
predetermined rates extending over two or more years are
encouraged, where appropriate.

     3.   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 agreed upon rates 
shall be made available to all Federal agencies for their use.

     4.   Refunds shall be made if proposals are 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.  These adjustments or refunds will be made
regardless of the type of rate negotiated (predetermined, final,
fixed, or provisional).  

F.   Other Policies.

     1.   Fringe benefit rates.  If overall fringe benefit rates
are not approved for the governmental unit as part of the central
service cost allocation plan, these rates will be reviewed,
negotiated and approved for individual grantee agencies during
the indirect cost negotiation process.  In these cases, a
proposed fringe benefit rate computation should accompany the
indirect cost proposal.  If fringe benefit rates are not used at
the grantee agency level (i.e., the agency specifically
identifies fringe benefit costs to individual employees), the
governmental unit should so advise the cognizant agency.
 
     2.   Billed services provided by the grantee agency.  In
some cases, governmental units provide and bill for services
similar to those covered by central service cost allocation plans
(e.g., computer centers).  Where this occurs, the governmental
unit should be guided by the requirements in Attachment C
relating to the development of billing rates and documentation
requirements, and should advise the cognizant agency of any
billed services.  Reviews of these types of services (including
reviews of costing/billing methodology, profits or losses, etc.)
will be made on a case-by-case basis as warranted by the
circumstances involved.

     3.   Indirect cost allocations not using rates.  In certain
situations, a governmental unit, because of the nature of its
awards, may be required to develop a cost allocation plan that
distributes indirect (and, in some cases, direct) costs to the
specific funding sources.  In these cases, a narrative cost
allocation methodology should be developed, documented,
maintained for audit, or submitted, as appropriate, to the
cognizant agency for review, negotiation, and approval.
 
     4.   Appeals.  If a dispute arises in a negotiation of an
indirect cost rate (or other rate) between the cognizant agency
and the governmental unit, the dispute shall be resolved in
accordance with the appeals procedures of the cognizant agency.

     5.   Collection of unallowable costs and erroneous payments. 
Costs specifically identified as unallowable and charged to
Federal awards either directly or indirectly will be refunded
(including interest chargeable in accordance with applicable
Federal agency regulations).

     6.   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.