TO:Project Directors and Fiscal Management Staff for ED 

Discretionary Grants

FROM:Philip A. Maestri 

Director, Risk Management Service

SUBJECT:Key Financial Management Requirements for Discretionary 

Grants Awarded by the Department of Education (ED)

As part of the Department's on-going efforts to make you aware of your responsibilities associated with managing Federal funds, I am writing to remind you of important financial management requirements that apply to discretionary grant awards.

In general, the Department expects that you will administer ED grants in accordance with generally accepted business practices, exercising prudent judgment so as to maintain proper stewardship of taxpayer dollars. This includes using fiscal control and fund accounting procedures that insure proper disbursement of and accounting for Federal funds. In addition, you may use grant funds only for obligations incurred during the funding period.

Title 2 of the Code of Federal Regulations Part 200, “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” establishes requirements for Federal awards made to non-Federal entities.  The Education General Administrative Regulations in 34 CFR (EDGAR) 75, 76, 77, 79, 81, 82, 84, 86, 97, 98, and 99] contain additional requirements for administering discretionary grants made by this Department.  The most recent version of these regulations may be accessed at the following URLs: 

The Education General Administrative Regulations (EDGAR)

2 CFR Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards

The attached document, "Selected Topics in Administering ED Discretionary Grants," highlights major administrative requirements of 2 CFR Part 200.  In addition, a few of the topics discuss requirements that this Department imposes on its discretionary grantees under EDGAR, Part 75 (Direct Grants). The specific sections of 2 CFR Part 200 and of EDGAR that address the topics discussed are shown in parentheses. I urge you to read the full text of these and other topics in EDGAR and in 2 CFR Part 200. 

Please keep in mind that a particular grant might be subject to additional requirements of the authorizing statute for the program that awarded the grant and/or any regulations issued by the program office. You should become familiar with those requirements as well, because program-specific requirements might differ from those in 2 CFR Part 200 and in EDGAR.

In closing, I recommend that the project director and the fiscal management staff of a grantee organization communicate frequently with each other about the grant budget. Doing so will help to assure that you use Federal funds only for those expenditures associated with activities that conform to the goals and objectives approved for the project. 

You should direct any questions you might have about the topics discussed in the attached document or about any other aspect of administering your grant award to the ED program staff person named in Block 3 of the Grant Award Notification.

Attachment

# Selected Topics in Administering ED Discretionary Grants

# I. Financial Management Systems (2 CFR Part 200.302 )

In general, grantees are required to have financial management systems that:

· provide for accurate, current, and complete disclosure of results regarding the use of funds under grant projects;

· provide adequate source documentation for Federal and non-Federal funds used under grant projects;

· contain procedures to determine the allowability, allocability, and reasonableness of obligations and expenditures made by the grantee; and

· enable the grantee to maintain effective internal control and fund accountability procedures, e.g., requiring separation of functions so that the person who makes obligations for the grantee is not the same person who signs the checks to disburse the funds for those obligations.

State systems must account for funds in accordance with State laws and procedures that apply to the expenditure of and the accounting for a State's own funds. A State's procedures, as well as those of its subrecipients and cost-type contractors, must be sufficient to permit the preparation of reports that may be required under the award as well as provide the tracing of expenditures to a level adequate to establish that award funds have not been used in violation of any applicable statutory restrictions or prohibitions. 

# II. Payment (2 CFR Part 200.305)

Under this part --

· the Department pays grantees in advance of their expenditures if the grantee demonstrates a willingness and ability to minimize the time between the transfer of funds to the grantee and the disbursement of the funds by the grantee;

· grantees repay to the Federal government interest earned on advances; and

· grantees subject to Part 74 deposit grant funds in interest-bearing accounts (grantees subject to part 80 are encouraged to also deposit grant funds in interest-bearing accounts).

In general, grantees should make payment requests frequently, only for small amounts sufficient to meet the cash needs of the immediate future. 

The Department has recently encountered situations where grantees failed to request funds until long after the grantee actually expended its own funds for the costs of its grant. Grantees need to be aware that, by law, Federal funds are available for grantees to draw down for only a limited period of time, after which the funds revert to the U.S. Treasury. In some cases grantees have requested funds too late for the Department to be able to pay the grantees for legitimate costs incurred during their project periods. The Department urges financial managers to regularly monitor requests for payment under their grants to assure that Federal funds are drawn from the ED G5 Payment System at the time those funds are needed for payments to vendors and employees. 

# III. Personnel (EDGAR §§ 75.511-75.519 and 2 CFR Part 200 Subpart E)

The rules in Part 75 cover issues such as paying consultants with grant funds, waiving the requirement for a full-time project director, making changes in key project staff, and prohibiting dual compensation of staff. General rules governing reimbursement of salaries and compensation for staff working on grant projects are addressed in the cost principles in 2 CFR Part 200 Subpart E.  In all cases, payments of any type to personnel must be supported by complete and accurate records of employee time and effort. For those employees that work on multiple functions or separately funded programs or projects, the grantee must also maintain time distribution records to support the allocation of employee salaries among each function and separately funded program or project. 

# IV. Cost Principles (2 CFR Part 200 Subpart E)

All costs incurred under any grant are subject to the cost principles found in 2 CFR Part 200 Subpart E.  The cost principles provide lists of selected items of allowable and unallowable costs, and must be used in determining the allowable costs of work performed under the grant.

# V. Procurement Standards (2 CFR Part 200.317-326)

Under 2 CFR Part 200.317, States are required to follow the procurement rules the States have established for purchases funded by non-Federal sources.   When procuring goods and services for a grant’s purposes, all other grantees may follow their own procurement procedures, but only to the extent that those procedures meet the minimum requirements for procurement specified in the regulations.  These requirements include written competition procedures and codes of conduct for grantee staff, as well as requirements for cost and price analysis, record-keeping and contractor compliance with certain Federal laws and regulations.  These regulations also require grantees to include certain conditions in contracts and subcontracts, as mandated by the regulations and statutes. 

# VI. Indirect Costs (EDGAR §§75.560-564 and 2 CFR Part 200.414)

***For programs reimbursing the full share of indirect costs (Full reimbursement):***

The Department reimburses grantees for its portion of indirect costs that a grantee incurs. Any grantee charging indirect costs to a grant must use the indirect cost rate (**ICR**), negotiated with its *cognizant agency,*i.e., either the Federal agency from which it has received the most direct funding, subject to indirect cost support, the particular agency specifically assigned cognizance by the Office of Management and Budget, or the State agency that provides the most subgrant funds to the grantee. 

If a grantee has not established a current ICR with its cognizant agency at the time of award, the Department generally will authorize the grantee to use a temporary rate, of 10 percent of budgeted direct salaries and wages, or a de minimis rate of 10 percent of MTDC consisting of all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward (i.e. subgrant) or subcontract.

Use of the temporary rate of 10 percent of budgeted direct salaries and wages is subject to the following limitations: 

1. The grantee may only recover indirect cost incurred at the start of the next grant budget period.

2. The grantee may not request additional funds to recover indirect costs.  If the grantee believes that the indirect rate recovery is less than it should be, the grantee should submit an indirect cost proposal for the next full fiscal year to the ED Indirect Cost Group for negotiation of an indirect cost rate agreement.   

Use of the de minimis rate of 10 percent of MTDC consisting of all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward (i.e. subgrant) or subcontract is subject to the following limitations: 

1. In accordance with 2 CFR 200.414(f), States, Local Governments and Indian Tribes may not use the de minimis rate; thus, this rate may only be used by institutions of higher education (IHE), and non-profit organizations.

2. Grantees that are subject to ED’s training grant and supplement-not-supplant provisions may not use the de minimis rate.

3. The de minimis rate may be used indefinitely; however, if a qualifying grantee chooses to use the de minimis rate to recover indirect costs, it must do so for all of its Federal awards until such time as the grantee negotiates an ICR with its cognizant agency.

4. Once a grantee obtains a federally recognized ICR that is applicable to its grant, the grantee may use that ICR to claim indirect cost reimbursement accordingly:

a. The grantee may only recover indirect cost incurred at the start of the next grant    budget period.

b. The grantee may not request additional funds to recover indirect costs.  If the grantee believes that the indirect rate recovery is less than it should be, the grantee should submit an indirect cost proposal for the next full fiscal year to the ED Indirect Cost Group for negotiation of an indirect cost rate agreement.   

Grantees should be aware that the Department is very often ***not*** the cognizant agency for its own grantees. Rather, the Department accepts, for the purpose of funding its awards, the current ICR established by the appropriate cognizant agency.  

***For programs with restricted indirect cost rates (Partial Reimbursement):***

The Department has established a *restricted indirect cost rate* that must be used when the statute authorizing the program under which the grant was funded contains a supplement-not-supplant provision that requires a reduction in the indirect cost rate so that costs which are unallowable under these types of programs are not recovered through the indirect cost rate.  The detailed requirements of restricted rates are in EDGAR at §§75.563 and 76.563-569.  

Guidance on how to calculate the restricted rate is available at:  http://www.ed.gov/about/offices/list/ocfo/fipao/icgindex.html.  The restricted rate should be used in projecting indirect costs. 

If the grant is made to a government under a program subject to a supplement-not-supplant requirement, the grantee must notify the cognizant agency that the grant is subject to a restricted indirect cost rate, as calculated under §75.563 and §§76.564-76.569, and negotiate a restricted ICR with the Department (the grantee should ask its cognizant agency to contact the Department’s Indirect Cost Group in order to coordinate a review of the restricted indirect cost proposal).

If a gantee other than a State or local government does not want to negotiate a restricted rate with its cognizant agency, the grantee has the option of charging indirect costs at 8% of the Modified Total Direct Costs (MTDC) of its grant for the life of the grant in accordance with EDGAR at §76.564(c), unless the Department determines that the actual restricted ICR is lower than 8% of MTDC.  If a non-governmental grantee chooses to charge indirect costs at 8% of its MTDC, it must maintain records, available for audit, that demonstrate that the grantee incurs indirect costs of at least 8% of MTDC.

Grantees must bear in mind that items of cost excluded from restricted indirect cost rates may **not** be charged to grants as direct cost items. Nor may they be used to satisfy matching or cost-sharing requirements under a grant or charged to other Federal awards. 

***For programs that are designated training grants (Limited reimbursement at 8%):***

EDGAR limits reimbursement of indirect costs under training grants to non-governmental grantees.  These grantees may recover indirect costs under training grants up to the grantee’s actual indirect costs as determined by the grantee’s negotiated indirect cost agreement or 8% of modified total direct costs, whichever rate is lower.

**Note:**This limitation does not apply to State agencies, local governments or Federally-recognized Indian tribal governments. [EDGAR §75.562(c)(2)].

Grantees charging indirect costs to a Department training grant at the 8% rate must have a negotiated rate with their *cognizant agency,* i.e., either the Federal agency from which it has received the most direct funding subject to indirect cost support, the particular agency specifically assigned cognizance by the Office of Management and Budget, or the State agency that provides the most subgrant funds to the grantee. If an applicant selected for funding under this program has not already established a current indirect cost rate with its cognizant agency as a result of current or previous funding, the Department generally will authorize the grantee to use a temporary rate, of 10 percent of budgeted direct salaries and wages. 

Use of the temporary rate of 10 percent of budgeted direct salaries and wages is subject to the following limitations:

1. The grantee may only recover indirect cost incurred at the start of the next grant budget period.

2. The grantee may not request additional funds to recover indirect costs.  If the grantee believes that the indirect rate recovery is less than it should be, the grantee should submit an indirect cost proposal for the next full fiscal year to the ED Indirect Cost Group for negotiation of an indirect cost rate agreement.   

Although grantees are not required to submit, at the time of application, a copy of their indirect cost agreement to claim the 8% training rate, they must have documentation available for audit that shows that the indirect costs incurred under the grant are at least 8% of MTDC.  

Grantees should be aware that indirect cost amounts exceeding the limitation, described in the first paragraph of this section, may **not** be charged to direct cost categories, used to satisfy matching or cost-sharing requirements, or charged to another Federal award. [§75.562(c)(5)]

# VII. Audit Requirements (2 CFR Part 200 Subpart F)

2 CFR 200 Subpart F requires that grantees obtain a non-Federal audit of their expenditures under their Federal grants if the grantee expends more than $750,000 in Federal funds in one fiscal year. 2 CFR Part 200 Subpart F contains the requirements imposed on grantees for audits done in connection with the law. 

The Department recommends hiring auditors who have specific experience in auditing Federal awards under the regulations  and the Compliance Supplement.

## OTHER CONSIDERATIONS

Some other topics of financial management covered in 2 CFR Part 200 that might affect particular grants include program income (2 CFR Part200.307), cost sharing or matching (2 CFR Part200.306), property management requirements for equipment and other capital expenditures (2 CFR Parts200.313, 200.439). 

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� If the grantee gets funds under another grant that is not subject to the restricted indirect cost rate, it will not have the option of not negotiating an ICR.

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