Circular A-87 revised.

• Author: Zitzow, Chris M.
• Position: Office of Management and Budget Circular A-87

The federal government's revised guidelines for reimbursing administrative costs to governments that manage federal programs require greater attention to documentation and reporting.

It took seven years for the Office of Management and Budget (OMB) to issue the newly revised OMB Circular A-87, "Cost Principles for State and Local and Indian Tribal Governments," which was published in the Federal Register on May 17, 1995. This circular sets forth the federal government's guidelines for reimbursing administrative costs to state, local, and Indian Tribal governments that manage federal programs. For accounting professionals and those who administer state and federal programs, the revision is a landmark event because it is the first time the circular has undergone a major rewrite since the late 1960s when the concept of reimbursing state and local government a portion of their administrative costs for managing federal grants was first introduced.

There are several major changes in the circular that will have a significant impact on the documentation, allowability, and accountability of costs claimed by state and local governments. In addition to these new reporting requirements, there are fewer federal audit reviews of these costs due to restructuring and downsizing in the federal government. This lack of review could mean that state and local governments might incorrectly charge administrative costs if they are not familiar with the circular's principles. It is important that finance officials are aware of the changes in the circular so they can avoid potential audit findings in the future under the new rules.

The purpose of this article is to identify the key changes to the circular so that finance officials may become familiar with the new requirements. The new circular applies, in most cases, to cost allocation plans and indirect-cost rate proposals for fiscal years beginning on or after September 1, 1995. Finance officials should begin to become familiar with the requirements now so they will be able to implement them in the next fiscal year.

Ten Major Changes

The 10 major changes to the circular, outlined in Exhibit 1, will require that state and local governments pay more attention to documentation and reporting requirements for administrative costs. Costs such as interest, personnel services, depreciation, fringe benefits, taxes, data processing, and legal costs have new rules and requirements that must be met to qualify for reimbursement. For most state and local governments, the new rules have not yet been fully implemented, and there is some confusion on how to interpret the documentation requirements. The main provisions relating to these costs are outlined in the following sections.

Exhibit 1 THE NEW CIRCULAR A-87: 10 MAJOR CHANGES

1) Interest costs are allowable with some restrictions.

2) Personnel services costs for some employees will require that activity reports be maintained monthly, account for total time, and be signed by the employee.

3) Equipment costs are allowable, and the capitalization...