MEMORANDUM NO. 99-4

February 1, 1999

TO THE HEADS OF ALL STATE AGENCIES

The Federal Government's Office of Management and Budget (OMB) has issued Circular A-87 to establish the principles and standards for determining allowable costs, both direct and indirect, for Federal awards carried out through grants, cost reimbursement contracts, and other agreements with State and local governments. All State agencies operating programs funded by the Federal Government are reminded of the requirement to comply with the principles contained in OMB Circular A-87.

The latest OMB Circular A-87 which was revised May 4, 1995, as further amended August 29,1997 is now in effect. Major changes that may effect State agencies are that interest costs with some restrictions are allowable costs, some employees will be required to maintain activity reports accounting for their total time, automatic electronic data processing costs can be expensed in the year they are incurred, certification of cost allocation plans must state that the plan does not include unallowable costs, and payments of Accrued Sick and Vacation Leave at Retirement or Termination cannot be charged directly to a Federal Program.

Effective July 1, 1999 payments for Accrued Sick Leave or Vacation cannot be charged directly to a Federal Program. All such payments made on behalf of terminating or retiring employees whose salaries and wages are charged directly to Federal programs must be charged to other funding sources within the employing State agency. Prior to the beginning of the fiscal year, the Office of Policy and Management will issue guidelines regarding agency reimbursements for these expenditures.

The cost of accrued leave payments will be recovered from Federal Programs as an indirect cost. Agencies preparing fixed rate indirect cost proposals based on 1997-98 costs must include the cost of accrued leave payments and their associated fringe benefit costs as an indirect cost only when determining the estimated costs for the 1999-2000 fiscal year. When determining actual costs for final rate purposes or for calculation of the carry-forward, accrued leave costs must be treated as a direct cost, as they actually were in 1997-98. For agencies estimating indirect costs for 1999-2000, it is recommended that the agency's average of the last three to four years expenditures for accrued leave be used in lieu of the 1997-98 payments, since the 1997-98 expenditures for accrued leave were inflated by the Early Retirement Incentive. Agencies with cost allocation plans should include the current fiscal years expenditures for accrued leave and their associated fringe benefit costs as an indirect cost.

State agencies requiring a copy of OMB Circular A-87 may obtain one from one of the following sources:

Executive Office of the President (EOP), Publications Office, 202-395-7332

or

Via the Internet at http://www.whitehouse.gov/WH/EOP/omb

or

The Federal Register at 60 FR 26484 (Available in paper at the State Library or any Federal Depository Library or via GPO Access on the Internet, http://www.access.gpo.gov.)

Additionally, the Federal Department of Health and Human Services has issued an Implementation Guide (ASMB C-10) for OMB Circular A-87 regarding indirect costs and cost allocation plans. This guide, Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government can be obtained from:

U. S. Government Printing Office, Superintendent of Documents, Mail Stop: SSOP,

Washington, DC 20402-9328, 202-512-1800

or

Via the Internet at http://www.hhs.gov/progorg/grantsnet/

Please call our Budget and Financial Analysis Division at 860-702-3364 if you have any questions regarding this memorandum.

NW:RK

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