State of Illinois Department of Human Services Secretary Michelle R.B. Saddler

1. State of Illinois Department of Human Services Secretary Michelle R.B. Saddler Cost Principles and Administrative Requirements of Federal and State GrantsCarol A Kraus, CFODepartment of Human ServicesAugust 6, 2013

2. Learning Objectives • Management Improvement Initiative Committee Background • Goals of MIIC • Financial and Streamlining • Federal and State Uniform Administrative Requirements • Authoritative Sources • OMB Circular A-110 (2 CFR Part 215) • Cost Allocation Overview • OMB Circular A-122 (2 CFR Part 230) • Basic Guidelines for Costs • Direct and Indirect Costs • Indirect Cost Rate Proposal • Cost Allocation Plan Process • Reporting of Time and Effort of Staff • Questions and Answers

3. Management Initiative and Improvement Committee Background P.A. 96-1141 required the Department of Human Services, Department of Healthcare and Family Services, Department of Children and Family Services and the Department of Public Health to provide recommendations to the legislature to remove redundancies of administrative burden on community providers P.A. 97-0558 created the MIIC to implement the 35 recommendations in 7 different areas. Fiscal and Streamlining Subcommittee was formed to carry out the legislative directive.

4. Goals of MIIC To reduce the redundancy of the administrative burden on Provider community • Uniform Reporting Requirements; • Uniform Auditing Requirements; • Reduce the number of on-site reviews; • Reduce the number of requests for the same information and documentation;

5. Goals of MIIC • Formed the Financial and Streamlining Subcommittee: • Subcommittee was composed of small, medium and large sized providers; • Representatives from 5 Human Service Agencies; • Representatives from Advocacy Groups. This group was charged with developing uniform requirements while complying with state and federal requirements.

6. November 2012 Report – Financial and Streamlining Progress report Summary of the steps taken for adoption of the new annual reporting requirements. In our deliberations the following steps were taken: It was determined that we should follow the federal requirements for annual reporting document; The federal general and administrative requirements were reviewed and discussed by team members; Everyone on the committee was asked to submit examples of their current reporting templates; It was determined that the Consolidated Financial Report (CRF) was used by more programs than any other collectively;

7. November 2012 Report – Financial and Streamlining Progress report A crosswalk between the CRF and the federal requirements was prepared for review; A review of the items federal requirements under the cost principles for indirect costs was reviewed to ensure that the indirect cost rate approval and the CFR in combination met federal requirements; The State Agencies and provider representatives reviewed and discussed any necessary changes A list of the required changes was provided and discussed A final vote was taken of the adoption of the CFR with the required changes.

8. Financial and Streamlining -Audits • Requiring Financial Statements Audits to be conducted when funding received over $150,000 in state and federal pass-through funding; • Audits must be conducted in accordance with Government Auditing Standards; • An OMB Circular A-133 must be conducted when federal pass-through and federal direct funding meet federal threshold ($500,000)

9. Fiscal and Streamlining – Fiscal and Administrative On-Site Reviews Goal to reduce the number of on-site reviews: Uniform Risk Factors triggering an on-site review. Low Risk – to reduce the fiscal and administrative - On-site review to once every 3-5 years; Uniform On-Site Review procedures; Require On-Site Reviewers to use the CRV;

10. Management Initiative and Improvement Committee Background P.A. 96-1141 required the Department of Human Services, Department of Healthcare and Family Services, Department of Children and Family Services and the Department of Public Health to provide recommendations to the legislature to remove redundancies of administrative burden on community providers P.A. 97-0558 created the MIIC to implement the 35 recommendations in 7 different areas. Fiscal and Streamlining Subcommittee was formed to carry out the legislative directive.

11. Fiscal and Streamlining – Future Goals • Coordination of 5 Human Service Agencies • Audit Report Review and Corrective Action • On-Site Review and Corrective Action • Indirect Cost Rate Approval • Use of CRV • Uniform Pre-Qualification Requirements • HB 2 Impact – applying uniformity for all grant making state agencies statewide

12. Provider Portal functionally allows State agencies to satisfy due diligence requirements based on data or documents, without redundant requests for the same.

13. p.a. 97-0558 The Act specifically directs the Management Improvement Initiative Committee (“The Committee”) to implement recommendations. Issues unresolved by the MIIC will be presented and resolved by the GOLT Governor’s Office Leadership Team (GOLT) Management Improvement Initiative Committee (MIIC) Recommendations made to MIIC are adopted by full vote of the MIIC Deemed Status / Accreditation Team Financial Audit Reporting Team CRV Technology Team Six Subject Matter Specific Teams ask the MIIC to adopt the Team’s Recomendation Streamlining Team Medicaid Team Contract Team

14. The Problem: Redundant and inconsistent business processes impose significant administrative burden on community service providers, hindering the delivery of core human services. • Business processes vary at each of the five State agencies, and many times, they vary within multiple departments at the five State agenciesfor : • Accreditation – Deemed Status • Contract Process and Contract Documents • Reporting and Monitoring Procedures

15. The Solution: The Management Improvement Initiative The implementation of P.A. 96-1141, and P.A. 97-0558 represent a collaborative effort between the Administration, the General Assembly and the network of Community Service Providers to streamline the complex and redundant business processes behind accreditation/licensure, contracting, auditing, monitoring and reporting. The success of this Initiative is critical to the maintenance of key human service safety nets and the survival of human service providers in Illinois.

16. The inconsistency and redundancy in business process at the five State agencies causes significant administrative burden and cost to our providers, tantamount to a rate reduction and ultimately impacts service delivery. Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course

17. Note the Redundancy & Inconsistent in Business Process at the five State Agencies. Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course Accreditation Contract and Process Data/Documents in the Normal Course

18. OurGoal: A new, simplified, consistent and efficient business process across five State Agencies for accreditation, budget submission, contracting, monitoring and reporting. • ONE or a minimum set of consistent value-driven business processes • Full implementation of Accreditation - Deemed Status • Standard contract boilerplates and process • Standardized non-redundant provider monitoring • Standardized budget reporting required for compliance

19. Federal and State Uniform Administrative Requirements

20. Federal Authoritative Sources – The “Rulebooks” YOU START HERE! Catalog of Federal Domestic Assistance; OMB Circulars; Code of Federal Regulations; Federal Register; OMB Memoranda and Bulletins; Approved State Plans; Community Service Agreements;; Grant Award Letters.

21. OMB Circulars Provide the general rules and regulations for federal award management Administrative Requirements Cost Principles Internal Controls Audit Requirements Exceptions to the OMB Circulars are codified in the Code of Federal Regulations, grant agreement and grant award letter

22. What OMB Circulars Do I Follow? States, local governments, and Indian Tribes follow: A-87 for cost principles, Relocated to 2 CFR, Part 225 (362k) A-102 for administrative requirements, and A-133 for audit requirements Educational Institutions (even if part of a State or local government) follow: A-21 for cost principles, Relocated to 2 CFR, Part 220 (384k) A-110 for administrative requirements, Relocated to 2 CFR, Part 215 (280k), and A-133 for audit requirements Non-Profit Organizations follow: A-122 for cost principles, Relocated to 2 CFR, Part 230 (362k) A-110 for administrative requirements, Relocated to 2 CFR, Part 215 (280k), and A-133 for audit requirements

23. PART 215—UNIFORM ADMINISTRATIVE RIZEQUIREMENTS FOR GRANTS AND AGREEMENTS WITH INSTITUTIONS OF HIGHER EDUCATION, HOSPITALS, AND OTHER NON-PROFIT ORGANATIONS (OMB CIRCULAR A–110) • Provides uniform administrative requirements for grants and agreements • Codified in the Code of Federal Regulations at 2 CFR Part 215 • The provisions of the Circular apply to subrecipients performing work under awards if such subrecipients are non-profit organizations (2 CFR §215.5)

24. Definitions 2 CFR 215.2 Award means financial assistance that provides support or stimulation to accomplish a public purpose. Awards include grants and other agreements in the form of money or property in lieu of money, by the Federal Government to an eligible recipient. The term does not include: technical assistance, which provides services instead of money; other assistance in the form of loans, loan guarantees, interest subsidies, or insurance; direct payments of any kind to individuals; and, contracts which are required to be entered into and administered under procurement laws and regulations.

25. Definitions 2 CFR 215.2 Recipientmeans an organization receiving financial assistance directly from Federal awarding agencies to carry out a project or program. The term includes public and private institutions of higher education, public and private hospitals, and other quasi-public and private non-profit organizations such as, but not limited to, community action agencies, research institutes, educational associations, and health centers. The term may include commercial organizations, foreign or international organizations (such as agencies of the United Nations) which are recipients, sub recipients, or contractors or subcontractors of recipients or subrecipients at the discretion of the Federal awarding agency.

26. Definitions 2 CFR 215.2 Subawardmeans an award of financial assistance in the form of money, or property in lieu of money, made under an award by a recipient to an eligible subrecipient or by a sub-recipient to a lower tier subrecipient. The term includes financial assistance when provided by any legal agreement, even if the agreement is called a contract, but does not include procurement of goods and services Subrecipient means the legal entity to which a subaward is made and which is accountable to the recipient for the use of the funds provided. Pass-through entity means a non-Federal entity that provides a Federal subaward to a subrecipient to carry out part of a Federal program.

27. Pass-through Agency Responsibilities This section sets forth a pass-through entity’s responsibilities with respect to making Federal subawards and ensuring the subrecipients’ compliance with the terms and conditions of those, All pass-through entities shall: (1) Ensure that every subaward includes: • All clauses required by Federal statute, regulations, guidance, E.O.s and their implementing regulations; • Each administrative, national policy, and program-specific requirement that the Federal awarding agency requires the pass-through entity to flow down to subawards and subrecipients; • Any additional Federal requirements that the pass-through entity imposes on the subrecipient in order for the pass-through entity to meet its own responsibility to the Federal awarding agency ;

28. Pass-through Agency Responsibilities An approved Federally recognized indirect cost rate negotiated between the subrecipient and the Federal government or, if no such rate exists, either a rate negotiated between the pass-through and subrecipient entities (in compliance with Federal guidelines in this guidance),or a de minimis indirect cost rate equal to 10% of total modified direct costs A requirement that the subrecipient permit the pass-through entity and auditors to have access to the subrecipient’s records and financial statements as necessary for the pass-through entity to meet the requirements of this section, section ___.502 Standards for Financial and Program Management and Subchapter G- Audit Requirements of this Guidance; and Appropriate terms and conditions concerning closeout of the subaward.

29. Pass-through Agency Responsibilities (2) Consider imposing specific subaward conditions (not previously included in the Federal award announcement) upon a subrecipient that has materially failed to comply with the general and program-specific terms and conditions of a subaward. (3) Inform the subrecipient of the CFFA title and number, Federal award name and number, Federal award year, whether the Federal award is research and development (R&D), The pass-through entity shall provide this information to each subrecipient at the time of Federal award and with each annual continuation of the subaward. If a disbursement contains funds from multiple Federal awards or non-Federal funds, the pass-through entity shall identify the dollar amount made available under each Federal award.

30. Pass-through Agency Responsibilities (4) Ensure that subrecipients are aware of requirements imposed upon them by Federal laws, regulations, the provisions of subawards, and any supplemental requirements imposed by the pass-through entity. (5) Monitor the activities of subrecipients as necessary to ensure that Federal subawards are used for authorized purposes, in compliance with laws, regulations, and the provisions of subawards; and that subaward performance goals are achieved, in accordance with performance and financial monitoring requirements. Pass-through entity monitoring of subrecipients shall include: (A) Analyzing financial and programmatic reports submitted by subrecipients (including analyses to identify patterns and trends of program activity) and performing such other procedures as necessary to ensure proper accountability and compliance with program requirements and achievement of performance goals of the award.

31. Pass-through Agency Responsibilities (B) Following-up and ensuring that subrecipients take timely and appropriate action on all deficiencies detected through audits, on-site reviews, and other means. (C) Issuing a management decision for audit findings affecting the pass-through entity’s programs as required. For cross-cutting findings, pass-through entities may rely on management decisions issued by the cognizant or oversight agency for audit in lieu of issuing a separate management decision.

32. Pass-through Agency Responsibilities Depending upon the pass-through entity’s assessment of risk posed by the subrecipient, the following monitoring tools may be useful for pass-through entities to ensure proper accountability and compliance with program requirements and achievement of performance goals: (D) Performing on-site reviews of subrecipients’ program operations; (E) Providing subrecipients with training and technical assistance on program-related matters; and (F) Arranging for agreed-upon-procedures engagements.

33. Pass-through Agency Responsibilities (6) Evaluation of risk posed by subrecipients for purposes of monitoring may include such factors as: (A) The results of previous audits; (B) Whether the entity is a new subrecipient; (C) Whether the entity has new personnel or new or substantially changed systems; and (D) The extent of Federal monitoring if the subrecipient entity also receives direct awards.

34. Pass-through Agency Responsibilities (7) Ensure that every subrecipient is audited as required under section __.701 Audit Requirements if it has expended Federal funds during the respective fiscal year that equaled or exceeded the threshold for audit set forth in that section. (8) As applicable, establish audit requirements for for-profit subrecipients, which are not covered by the Single Audit Act, as amended (31 U.S.C. §§ 7501-7507), (9) Consider whether the results of subrecipient audits and on-site reviews necessitate adjustments to the pass-through entity’s own records. (10) Consider taking enforcement action against noncompliant subrecipients,

35. Pass-through Agency Responsibilities States shall follow state law and procedures when awarding and administering subawards. Federal agencies shall also require states to follow do the following: (1) Ensure that every subaward includes a provision for compliance with Record Retention and Access Requirements (2) Conform any advances of Federal subaward funds to subrecipients to substantially the same standards of timing and amount that apply to cash advances by Federal awarding agencies. (f) All pass-through entities may provide subawards based on fixed amounts up to the simplified acquisition threshold set in the Federal Acquisition Regulation at 48 CFR 13 and authorized by 41 U.S.C. § 1908 ($150,000 at the time of publication).

36. Subrecipeint Agency Responsibilities Organizations receiving HHS grant funds, whether such funds are received directly from the Federal Government, indirectly under a contract, subaward, are responsible for and must adhere to all applicable Federal statutes, regulations, and policies. Organizations also are expected to be in compliance with applicable State and local laws and ordinances. Source: US Department of Health and Human Services Grant Policy Statement January 1, 2007

37. Subrecipeint Agency Responsibilities Recipients are required to meet the standards and requirements for financial management systems set forth or referenced in 45 CFR 74.21 or 92.20, as applicable. The adequacy of the financial management system is integral to the ability of the recipient to account for the expenditure of grant funds. These standards are intended to ensure that Federal funds are handled in a responsible manner that includes adequate internal controls, cash management consistent with Department of the Treasury requirements

38. Subrecipeint Agency Responsibilities Provide accurate, current, and complete financial information about Federal awards and, for subawards, reasonable procedures for ensuring that subrecipients provide financial reports in sufficient time to allow preparation required reports. Maintain records that adequately identify the sources of funds for federally assisted activities and the purposes for which the award was used, including authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and any program income. Accounting records must be supported by source documentation such as canceled checks, paid bills, payrolls, and time and attendance records.

39. Subrecipeint Agency Responsibilities Maintain effective control over and accountability for all cash, real and personal property, and other assets under the award; adequately safeguard those assets; and ensure that they are used only for authorized purposes. Compare actual expenditures or outlays with the approved budget for the award.

40. Subrecipeint Agency Responsibilities Minimize the time elapsing between any advance payment under this award and the disbursement of the funds for direct program costs and the proportionate share of any allowable indirect or facilities and administrative costs, and ensure that the timing and amount of any payments to subrecipients conform to this standard. Subrecipients must notify DHS Program Contact when financial management problems are discovered. Deficiencies in a recipient’s financial management system, whether reported by the recipient or identified by the DHS Administrative On Site Review or Audit, may result in the imposition of special award conditions, use of the reimbursement payment method, or other increased monitoring by the awarding office. Determine the allowability of costs in accordance with the applicable Federal cost principles, program regulations, and other requirements cited in the CSA Agreement. This includes the ability to readily identify unobligated balances, accelerated or delayed expenditures, and cost transfers.

41. OMB Circular A-110 Summary of Fiscal Requirements • Financial management systems that provide • Effective control over and accountability for all funds, property and other assets • Comparison of outlays with budgetary amounts for each award • Cash management written procedures • Written procedures for determining the reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles (OMB Circular A-122) • Accounting records including cost accounting records that are supported by source documentation

42. Accounting Systems • Cost Allocation is predicated on the premise that organizations maintain an adequate accounting system and accounting records to document costs and support claims (2 CFR §215.21(b)(7))

43. MAINTAIN COMPLETE AND ACCURATE FINANCIAL RECORDS • Identify all costs related to the grant agreement • Keep track of all funds received and paid out • Identify and separate allowable and non-allowable project costs • If applicable, demonstrate how each funding source is maintained and charged separately • Account for all hours worked and be able to identify to which project the hours are allocated

44. Why is Cost Allocation Important? What are the Federal requirements governing the funding received? What is a Cost Allocation Plan? How do I calculate indirect cost rates? What are allowable or unallowed costs? What is the difference between Direct and Indirect Costs? How does this impact my organization?

45. Cost Allocation Overview • What is “Cost Allocation”? • Cost Allocation is a Process to Determine the “Total Cost” of a “Cost Objective” • Achieved By Distributing or Apportioning Costs to a Benefiting “Cost Objective”… • Using Statistical Data or Metrics that Measure the Usage of a Service or the Relative Benefit Received

46. Commingling of Funds • The accounting systems of all recipients and subrecipients must ensure that Federal funds for a particular award are not commingled with funds from other Federal awards or other sources. Each award must be accounted for separately. Recipients and subrecipients are prohibited from commingling funds on either a program-by-program or project-by-project basis. • Federal funds specifically budgeted and/or received for one project may not be used to support another. Where a recipient's or subrecipient's accounting system cannot comply with this requirement, the recipient or subrecipient shall establish a system to provide adequate fund accountability for each project it has been awarded. Part II, Chapter 3, Financial Guide, U.S. Department of Justice, Office of Justice Programs (OJP)

47. Cost Allocation Overview • What is a “Cost Objective”? • A “Cost Objective” is a particular award, contract, grant, project, service, or other activity of an organization for which cost data are desired and for which provision is made to accumulate and measure the costs

48. Cost Allocation Overview • What is the “Total Cost” of a Cost Objective? • “Total Cost” is composed of the sum of the allowabledirect costs and allocableindirect costs, less any applicable credits.

49. Direct Costs Can be identified specifically with a particular final cost objective (i.e., a particular award, service or direct activity) Indirect Costs Incurred for common or joint objectives and cannot be readily identified with a particular final cost objective Total Costs = Direct + Indirect

50. Allocating Indirect Costs • Allocation Bases: The methodology or statistical measure by which Indirect Costs are distributed to other benefiting services and/or cost objectives • Examples May Include: • Number of Active Employees; • Number of Transactions Processed; • Square Footage Occupied; • Salaries and Wages of Units Supervised;