Financial Management Workshop for CILs…Regulations and Beyond IL-NET presentation on May 25-27, 2016 Module 3: Regulatory Changes PAULA MCELWEE: Let's look at the changes in regulations. How Uniform Guidance rules affect funding and reporting. JOHN HEVERON: Thanks Paula. Before I do that, I wanted to make one more comment, sort of a pitch for having a tax person on your development and fundraising committee, if you have one. There are some very unique and I would say illogical tax rules that can either benefit your organization or wreak some havoc if they are not properly understood by somebody in charge with raising money for the organization. One example of that is the requirement that the charity acknowledge a contribution by the due date of the tax return for the year of the gift. There have been a few cases recently, where there were large contributions that didn't get this acknowledgment, that IRS disallowed, and the tax court ultimately said, IRS is right, we see in fact you did make this contribution, but one of the requirements for a deductible contribution is the acknowledgment and that didn't happen until after the required due date, so it's disallowed. I'm talking about a lot of dollars. It was a very unhappy donor. There's another rule about a transaction called a transaction called a bargain sale. Where an individual can sell something to your organization at less than fair market value, but even though it's a sale, they can take a charitable contribution deduction for it. The math is sort of complicated here. But this can be a really nice thing for a donor and for your organization, if they were to donate a building or some property. I'm sorry, sell it to you at a bargain sale below market they can get a charitable contribution deduction. Again, it's complicated. You don't ever want to be advising donors on taxes. You should never do that. But you can certainly tell them to talk to their tax advisers about a bargain sale. The third one, back to the not so good category would be a donor can't deduct a gift of an undivided interest in something. Best example of that is if somebody donates space to you, so they have not given you the property, have not sold you the property, it is an undivided interest in property they own. It's not a deduction for them. So get somebody with tax skills on that fundraising committee, or have a consultant for types of issues like this, so you don't alienate your donors. Moving on to the next segment here. So we talked about Uniform Guidance and what Uniform Guidance is, is a set of rules about administration of federal funds that you would receive. Actually, they're even broader than that. They include guidance for us as independent auditors as well. Guidance about how to allocate costs. Guidance about internal controls. Previously these rules were found in several Office of Management and Budget publications. There were publications about allocating federal costs, there were publications about audits, and indirect cost rates. All of these things got rolled into this electronic document that we refer to as Uniform Guidance. It's really much easier to navigate now than it has been in the past. Being an electronic document, it's much more searchable. It's very well organized, it has a section on allowable costs but it also has a section alphabetically listing all sorts of different costs and interpreting them for you. For example, there is a section on audit. And the question has come up a number of times, can my budget pay for our annual audit? And even some funders have read Uniform Guidance and see the section that says, you are, you cannot request reimbursement for a compliance audit if it's not required. And it's not required unless you spend more than $750,000 of Federal awards in a year. But a compliance audit isn't a financial statement audit. It's different. In a financial statement audit, if it is required by your bylaws or if the organization determines it is a best practice or in the best interest of the organization, it can be included as part of your indirect cost. It just has a very detailed listing of everything from advertising to travel and it really is a useful document to look at. That's what Uniform Guidance is. HHS, our U.S. Department of Health and Human Services, of course, is your new oversight agency. And they rewrote their regulations around the Uniform Guidance. Although, actually, Paula, as you pointed out, they really are simply about the numbers. PAULA MCELWEE: It's very interesting, because so far, that's what we're getting. So those of you who remember EDGAR, so there was the OMB Circulars but then this long section in the Code of Federal Regulations that repeated that information, and expanded on it, and so the Department of Education, when we were under them, had quite a bit of other stuff, besides the actual OMB Circulars that we had to respond to. So far, on the Health and Human Services side, they're using only the Code of Federal Regulations related specifically to Uniform Guidance, which is the 200 section. And they're not at this point adding things in. So it gives us a little more straight forward interpretation as a results, so that's been really kind of nice to see. JOHN HEVERON: The information you find online, there is pretty much what your regulations are going to be. We provided a link to that. Our experience, from all the audits that we went through, and then some follow-up things that have happened over the past few years, is that if you demonstrate that you understand the concepts of cost allocation, and indirect cost plans, in Uniform Guidance, you will have a better result with funders, particularly if they audit your programs. Who was sharing with us about an auditor who was not, to put table one on the spot here. But can you just tell what the value was of knowing what you were talking about? You will make it work. AUDIENCE MEMBER: Okay. We, the auditors wanted us to go, what's the word? Elaborate more on our timesheets what we were doing, our indirect staff. Like our receptionist, myself as the accountant, all of our indirect staff, to elaborate more on what we were doing and how it's allocated to our grants, on our timesheets, which is nearly impossible to do. We have a Cost Allocation Plan and now we have a indirect cost rate that is in our policy that our indirect staff time is allocated per that rate, per, for each one of our grants, and the things, everything that we work on, because I work on everything, every single day. We ended up, they ended up giving us a finding saying that wasn't acceptable based on some older rule or their interpretation of that rule, and then we had to call Paula to help us out to kind of explain the way it is now and how we should go about it and the way that we're doing it is right. And so they pulled the finding and we were able to explain it better to them. PAULA McELWEE: Picture that Personal Activity Report, and it has columns, and if an indirect staff person is 100% indirect, then that's where they put 100% of their time is under that indirect column, and then it's allocated not on the basis of other items on there but on the basis of the indirect cost rate. Are you following that? What the state is saying, no, no, no you ought to tell us on our PAR how you allocate it. Our response was, that is in the Indirect Cost Rate Proposal, which has been approved, and so that tells you that this percentage goes here, and this percentage goes here goes here, not in that case your personnel activity report. Does that make sense? I hope I did it right John. JOHN HEVERON: Absolutely. Really, it is so valuable to be familiar with these concepts, make sure your staff are familiar with these concepts. The audits go a lot better when that happens. The first series of audits, that I mentioned go back a few years, we even saw some issues where a lot of the auditors really were not fully familiar with some of the requirements, and they had some judgments about what those requirements were. So if you're solid on this stuff and know that you've got Paula as a resource. PAULA MCELWEE: And I call John as often as I need to. JOHN HEVERON: And I am plan B, I am back up to Paula. It really can make a huge difference and avoid you getting pushed into something that isn't really a requirement. PAULA McELWEE: John, I'd Like to add one other thing. When we were working with you all on your indirect cost rate proposals, there were times when you said, well, how am I supposed to do it? And our response to you is, tell us how you're supposed to do it. So sometimes, as long as you can show that it is reasonable, necessary, properly allocated, you know, allowable, is you have that responsibility, show that. Your policies have the responsibility to describe that. Your indirect cost rate, you need to apply what you said you were going to apply. And, but you have some leeway in exactly how you create those documents. Your policies and procedures, and your documentation and Indirect Cost Rate Proposals are things that you do have some leeway in how you lay them out, as long as they're within those requirements. It gives you a little bit of flexibility, in how you figure out some of this stuff. Is it necessarily only one way? If it works better for your organization for some reason to do it another way, we won't always say this is the only way you can do this. There are some things. There are some things where you have some leeway. JOHN HEVERON: Thanks, Paula. So the key things that you need to know with the new rules are, you have to have written procedures for internal control over Federal awards, we're going to talk about that a little more later. You need to be aware of the new rules for time and effort reporting. You're going to get a full dose of that tomorrow. The new procedures for indirect costs, and we'll talk about those as well. And then procurement requirements. And we've got a whole section and a great example of what we believe is a fully compliant procurement policy when we get into the procedures manual. Those are the things you need to know. The things you need to do, if you haven't already, adopt policies to comply with these new rules. Again, the procedures manual we will provide, will help with that. Identify who will be responsible for compliance with these rules. Who in your organization? Get training for those individuals in the new rules. And it sounds like most of you have already done this, but apply for an indirect cost rate or elect the 10% deminimis rate and what this does, it may increase the reimbursement you are going to get. I think the jury is still out on this. But I know there were a lot of programs that weren't being fully funded in the past, and a part of the new Uniform Guidance really creates a mandate for government agencies to fully fund their programs, that they are funding. In other words, to fund the direct and the indirect. Now that doesn't mean you're going to get all of the money you would like to have. That doesn't mean that you will be able to carry on the level of services that you feel you need to in every case, but it does mean they are supposed to fully fund your direct and indirect cost, either based on your indirect cost rate or your 10% deminimis. Just a couple of things about the 10% deminimis. Based on the maybe 50 indirect cost rate proposals that we reviewed. I don't think too many of you actually have only 10% of indirect cost. So while it's simpler to do that, it will not fully fund you, and one of the questions, one of the key issues that one of the tables raised is, getting enough money. We can't help you increase funding, but we can help you through the use of an indirect cost rate of getting funding for your indirect as well as your direct. PAULA McELWEE: One of the things I think I heard a lot of confusion about, maybe you could speak to, is you have to put all of your indirect costs into whatever you said your indirect costs are going to be. Right, you take it out of your direct, put it over here in indirect. So if you have more than 10%, you run the risk of having an indirect cost that's not reimbursable. JOHN HEVERON: Right. Absolutely. PAULA McELWEE: Concern, especially about those, so do talk to us if you're in that situation. JOHN HEVERON: You have to have fundraising or some other discretionary funds to be able to cover that. PAULA McELWEE: According to the staff, from the, you know, from the ACL, Independent Living Administration, they said they were hearing from a lot of centers, that they were going to pick that, and it's not that simple. I think, Tim, is there a question here maybe we can take? Cause that one might have been a stunner. AUDIENCE MEMBER: I have a question related to, I don't know whether it's theory or what it would be, is indirect cost rate the same as what we used to call administrative costs? Some early classes I had in budgeting for nonprofits, they used to talk about United Way only looking at a certain percentage of administrative costs in order to assess whether your program is working the way it should work, and when you're talking indirect, is that comparable? So every individual within that works for you has in essense some administrative costs and then you start getting to the receptionist, the bookkeepers, the accountants that may be 100% administrative applied across. JOHN HEVERON: So generally, for most organizations that aren't very large, management in general, or general and administrative costs are going to equate to indirect. We will talk more about that and their certainly can be exceptions to that. But as a general rule, that's a very good starting point. PAULA McELWEE: This afternoon, that's our topic, so we won't get into more questions right now. Do write your questions down, we'll make sure we get them in the afternoon session. JOHN HEVERON: Just a few more things on the new regulations, there's a new term, contractor, that replaces the term vendor, but it still describes an organization that is providing products or services not receiving funding. So as an independent auditor, I would be a contractor, and so you don't need to look at my cost, but you do need to go through procurement procedures with an auditor. Payments to contractors are not subject to the cost allocation rules but they are subject to the rules for procurements. There's also a definition of program income, and some of your funding controls, or dictates, how that program income will be used. And Uniform Guidance adds their definition for the terms should and must. Must is an absolute. Should is a best practice, and we'll have an illustration of that with internal controls. So for internal controls, you must establish and maintain internal controls over Federal awards that provide reasonable assurance that you are managing them in compliance with general funding requirements and the specific rules for funding you receive. So that means you need to have a written policy, and you need to provide training to your staff. And the test of that, of course, is going to be when the auditor comes in and asks your staff, where is your internal control policy? So they should be able to find out where that is. That's how that gets tested. That was a must. You must establish and maintain internal controls. Now, here's a should. Internal controls should be in compliance with the Green Book, which is called Standards for Internal Controls in the Federal Government or with the COSO report, which is a report of several leadership organizations, like the American Institute of CPAs, and other organizations that set standards for internal controls. And we will be reviewing those. The new rules for time and effort reporting are different from what we had in the past. In the past, there were some very, very stringent rules that were applied inconsistently. They were misunderstood by agencies. They were misunderstood, I think even by auditors, including independent auditors like ourselves, and funding auditors. The new rules are more flexible, but we are expecting more stringent enforcement. Back in the old days, it would simply be what program has funding, that is where we are going to charge our payroll and other costs. At the same time that was happening, there were very specific rules, about an absolute requirement to have personnel activity reports, even for people who weren't working in different areas, even for people who were working in the same area time after time. So the new rules are more flexible but we firmly believe that they are going to be enforced to a much greater extent. Specifically, the new rules require that how you charge payroll and related costs must be based on records that actually reflect, after the fact, work performed. And you also need to have a policy that explains how you do that. So we've talked a bit about applying for indirect cost rates, we've talked about the 10% deminimis, which would probably leave you with inadequate funding. People have asked, how do we elect the 10%? You would simply put it into your budget. However, a new requirement just came out for that. There's a schedule of expenditures of Federal awards for organizations that do compliance reporting. If you elect the 10% deminimis rate you need to disclose that in that schedule. If you don't do an indirect cost rate or elect the 10%, then all of your dollars need to be spent directly for federal programs. In other words, the federal programs would only reimburse direct costs, not your indirect, if you don't do one of these things, and by the way, that's not how it happened in the past. But this is a new set of rules here. So if you don't have an indirect cost rate, and you don't elect the 10% deminimis, then you can only be reimbursed for the direct part. You still need to break out costs between direct and indirect, but you would only be reimbursed for your direct. I can't imagine anybody going in that direction. Finally, on this slide, if you have an indirect cost rate in place you can elect to keep that in place for up to four years. Don't know if anybody has attempted to do that. I think, this, because of all the changes in the rules, this really is an opportune time to update your indirect cost rate, even if you have one. AUDIENCE MEMBER: I have a Part B center, not a Part C center and I think that means I don't have to do the indirect cost allocation. PAULA McELWEE: That depends on what your state is telling you. So our understanding is it will still at some point be required, so you ought to start working on it. But in some states, the designated state entity that is in charge of the oversight for that state has not yet changed from cost allocation to indirect cost rates. They too will be required to do that. So you just as well start working on it. Is that what your understanding is, John? JOHN HEVERON: Yep. PAULA MCELWEE: Show the state, you would show the designated state agency what you've done in your budget and then they would respond from there. AUDIENCE MEMBER: We have our approved indirect cost rate. However, we submitted it the first time, our request, sent back and requirement's to use the general and admin off our financial statement as the indirect costs. Which we don't think are really going to be accurate representation of the indirect costs so now my question is, if we report our indirect costs properly, as we think they are during the year, it's possible that our indirect cost rate will end up to be not sufficient and then what do we do? JOHN HEVERON: That's a good question and really a relevant one. As we looked at these Indirect Cost Rate Proposals, we were getting the audited financial statements and in some cases, the general and administrative in those financial statements, really did not cover all of the general and administrative. You're going to have to work through the math first. What was the, were there inadequate indirect costs? In other words, were there more indirect costs than included in the general, administrative? AUDIENCE MEMBER: Yes. Because, what we did, after we took a look after going through the training, about what should be an indirect cost and we actually did what we thought was accurate and that's what we submitted. The rate didn't come out that different. You know. But I don't want to get to the end of the year and say, oh, so, your last month of indirect costs you can't get reimbursed for it because you've already used your whole percentage. JOHN HEVERON: It's difficult to deal with specifics like this. I would love to see some examples of that. Because they've already approved it. AUDIENCE MEMBER: Uh- huh. JOHN HEVERON: And that's not a good thing. You know, that's not a good thing, if that audit report really excludes some key indirect items. Your only other option would be to directly allocate them. But if they are truly administrative, benefiting all the programs, it's going to create a lot of work. It's going to really devalue the functionality of having an indirect cost rate. I mean, this sounds like a miserable thing but it really is a tremendous time saver if it's done right, because you know, really just need to add on a percentage to your direct cost. Time for one more Tim? Yes. AUDIENCE MEMBER: I was curious if you knew of any time billing software that could be used for payroll and cost allocation purposes. JOHN HEVERON: You know, before the Pennsylvania conference we did look at some different softwares, and I don't remember exactly what was available then. We did find a number of them online. You know, I don't like to promote anybody's specific product, but I know that there's a payroll company called Paychecks, they were started in Rochester, so a lot of us use them in our community. But they're nationwide, and they bought a another company that, I can't do this. It's not a cheap solution. And sometimes internal software solution might be better, so you really should look online. We did find a couple for that earlier conference as I said.