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APPENDIX A The Regulatory Environment for Federally Funded Transportation Services Consumer-oriented transportation services often are operated using multiple funding sources; in many cases, funding comes from programs administered by various federal agencies that may pass through state agencies. Both funding agencies and the eventual recipients of the funding (whether profit, non-profit, or governmental organizations) operate in an environment regulated by specific accounting and auditing standards. The rules that govern the award and use of funds by state and local governments (and their instrumentalities) are found in guidance from the Office of Management and Budget (OMB). When governments award grants directly to private, for-profit organizations (e.g., brokers, con- sultants, architects, engineers), Federal Acquisition Regulation (FAR) policies provide govern- ing principles. FAR also provides guidance for cost allowability standards in third-party contracts with private, for-profit organizations. This oversight specifies required procedures and the types of costs eligible for funding. Recipients must be familiar with these rules and procedures to understand which costs are allowable and what types of documentation and reporting are nec- essary to ensure that funds will be available to provide the service as planned. All recipients of federal funds need to recognize that certain accounting standards must be main- tained. These standards are governed by the Financial Accounting Standards Board (FASB), an independent organization established in 1973. The Securities and Exchange Commission recog- nizes the standards established by FASB as authoritative. A parallel organization, the Governmental Accounting Standards Board (GASB), is dedicated to governmental accounting and was estab- lished in 1984. Both boards are maintained through the oversight of the Financial Accounting Foundation, which selects members and ensures adequate funding. Administrative requirements for all federal grants have been incorporated into the Code of Federal Regulations (CFR) for each federal department. These requirements affect the funding of any federal program, including all human service and transportation programs. In addition, the OMB has developed guidance regarding the allowable costs for recipients of federal funding. This guidance is set forth in various circulars. In addition, agencies or organizations providing the services using the federal funding sources identified in TCRP Report 144: Sharing the Costs of Human Services Transportation must follow some overall accounting standards and principles. For public entities, accounting standards and principles are promulgated by the GASB. For profit-making and non-profit organizations, the FASB has established standards and principles for financial reporting. 59
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60 Sharing the Costs of Human Services Transportation Policies and Procedures for Management of Federal Grants and Contracts All circulars relating to financial and audit guidance for any federal grant are in the process of being consolidated into Title 2 of the CFR. OMB circulars relevant to this project are summa- rized at http://www.whitehouse.gov/omb/grants_circulars/ and are outlined as follows: · State and local governments and Indian Tribes follow these circulars: A-87 for cost principles (relocated to 2 CFR 225), A-102 for administrative requirements (for the Department of Health and Human Services [DHHS], this is 45 CFR 92), and A-133 for auditing requirements. · Nonprofit organizations follow these circulars: A-122 for cost principles (relocated to 2 CFR 230), A-110 for administrative requirements (relocated to 2 CFR 215), and A-133 for audit requirements. · For-profit organizations follow these guidelines: FAR Subchapter E, General Contracting Requirements and OMB Circular A-76, Performance of Commercial Activities. Rules for Public Entities OMB Circular A-87: Cost Principles for State, Local, and Indian Tribal Governments This circular applies to costs being charged to each specific source of federal funding rather than to the expenses of the overall agency receiving the funding. It establishes a uniform approach "for determining costs and to promote effective program delivery, efficiency, and better rela- tionships between governmental units and the federal government." The circular includes five appendices: A. General principles for determining the specific costs relating to a federal grant. B. A long list of expense and cost categories, each defined as allowable or unallowable. C. A means to develop a Central Service Cost Allocation Plan for agency-wide costs to be allo- cated to a specific grant (as would be required for a transportation program within a local government). D. A section addressing cost allocation plans for public welfare agencies in particular. E. A more general strategy for determining an indirect cost rate proposal. The general principles in A-87's Appendix A address issues of legality and consistency in treat- ment. For example, costs must be assigned consistently as either a direct or indirect cost. In addi- tion, the general principles require the use of Generally Accepted Accounting Principles (GAAP) (discussed later in the accounting standards section) that apply to all financial entities. Some of the interesting cost categories found in Circular A-87's Appendix B include guidance for the recording of fringe benefits such as earned leave, donated services, depreciation and use allowances, capital expenditures, fundraising costs, and interest expenses. The standards established in this circular address two types of indirect costs: overall agency costs that require developing a cost allocation plan that must be certified to use in charging against a grant, and other cost categories within a department or program that may contribute only indirectly to the purposes of a particular grant. The circular outlines an approach to develop an indirect cost rate proposal for charging the appropriate portion of the indirect costs to a grant, which also must be certified.
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The Regulatory Environment for Federally Funded Transportation Services 61 Table A-1. CFR references for government-wide grant requirements by department. Applies to: State and Local Universities and Nonprofit Governments Organizations Based on: Grants Management Department Common Rule OMB Circular A-110 Agriculture 7 CFR 3016 7 CFR 3019 Commerce 15 CFR 24 15 CFR 14 Defense 32 CFR 33 32 CFR 32 Education 34 CFR 80 34 CFR 74 Energy 10 CFR 600 10 CFR 600 Health and Human Services 45 CFR 92 45 CFR 74 Housing and Urban Development 24 CFR 85 24 CFR 84 Interior 43 CFR 12 43 CFR 12 Justice 28 CFR 66 28 CFR 70 Labor 29 CFR 97 29 CFR 95 State 22 CFR 135 22 CFR 145 Transportation 49 CFR 18 49 CFR 19 Treasury -- -- Veterans Affairs 38 CFR 43 -- Source: http://www.whitehouse.gov/omb/grants/chart.html. Accessed May 10, 2010. OMB Circular A-102 (for DHHS, 45 CFR 92): Uniform Administrative Requirements for Grants and Cooperative Agreements to State, Local, and Tribal Governments Federal agencies are required to have consistent and uniform government-wide policies and procedures for the management of federal grants and cooperative agreements to state and local governments. In March 1987, the U.S. President directed all grant-making agencies to follow a "common rule," which has been codified for each agency at a specific location in the CFR. Table A-1 shows the location of requirements for state and local governments as well as for non- profit organizations. (Requirements for nonprofit organizations are covered under the discus- sion of Circular A-110.) The grants management common rule, as specified for each agency providing awards to state and local governments, presents the rules for these public entities to follow when applying for grants and the financial management requirements to follow after receiving them, including rules for sub-grants, reporting, record retention, and closeout procedures. It should be noted that administrative rules for some sub-grantees, if they are agencies other than public entities, would fall under the jurisdiction of Circular A-110. OMB Circular A-133: Audit of States, Local Governments, and Nonprofit Organizations This circular applies to both public entities and private, nonprofit organizations who receive federal grant money. "It sets forth standards for obtaining consistency and uniformity among federal agencies" for auditing grant recipients. This guidance refers to both generally accepted government auditing standards (GAGAS) as defined by the Government Accounting Office (GAO) and GAAP as they are defined by the American Institute of Certified Public Accountants (AICPA). Standard requirements for the grantees are to maintain a system of internal controls that provides reasonable assurance that the grantee is managing the grant funds appropriately,
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62 Sharing the Costs of Human Services Transportation to prepare financial statements that reflect the grantee's financial position and results of opera- tions or changes in net assets, and to ensure that an audit is completed as required, and any rec- ommended corrective action is taken. The GAGAS standards require that the auditors ensure that they maintain competence, integrity, objectivity, and independence in planning, conducting, and reporting their work. OMB also publishes an annual Circular A-133 Compliance Supplement for each federal agency. This supplement provides the most up-to-date record of the many program objectives, proce- dures, and compliance requirements that have a direct and material effect on each of the pro- grams within the agency. This allows the auditors of the programs to have a complete knowledge of specific requirements. These supplements replace the agency audit guides formerly used by A-133 auditors. The most recent compliance supplement is dated March 2007. Rules for Nonprofit Organizations OMB Circular A-122, Cost Principles for Nonprofit Organizations This circular is parallel to A-87 but is intended for use by nonprofit organizations. However, in addition to establishing principles to help determine what costs are, the focus is to ensure that "the Federal Government bear its fair share of costs except where restricted or prohibited by law," rather than promoting effectiveness among and between various levels of government. Three appendices in the circular lay out the general principles, the individual items of cost, and those agencies--primarily very large or unusual nonprofits--for which this guidance is not appli- cable (e.g., the Urban Institute, SRI International, and Blue Cross and Blue Shield Organizations). Within the general principles, the circular addresses the basic considerations as with Circular A-87, but it also addresses direct and indirect costs and the methods for allocating them. There is no Central Service Cost Allocation Plan, only guidance on developing indirect cost rates. The "Selected Items of Cost" list is similar to the one in A-87, including the same categories of interest mentioned earlier. Neither list is meant to be exhaustive; if a cost category is not included, this does not imply that the cost is unallowable. OMB Circular A-110 (2 CFR 215): Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations This circular presents the administrative requirements for nonprofit organizations (and others as named in the title) to apply to receive and then, after receiving an award, to undertake the financial management of any federal grant. As for the requirements under the common rule for public entities, there are general, pre-award requirements, post-award requirements, and after- the-award requirements (closeout). Table 3-1 in Volume 2 of TCRP Report 144 shows the locations for each federal agency in the CFR where Circular A-110 has been codified. Rules for Profit-Making Organizations Although funding for human services transportation usually originates from public sources, such as federal and state programs, the actual providers of transportation services are more com- monly becoming profit-making enterprises. There also is a regulatory environment in which these companies must operate. When the awards originate at the federal level, the applicable reg- ulations have been authorized by the Federal Acquisition Regulations System. The authoritative document that governs the contracts public and nonprofit organizations have with private busi- nesses is the FAR. The regulations contained in the FAR represent the uniform policies and pro- cedures for contracts executed by all executive agencies. The FAR document includes a general description of its purpose; definitions and administrative matters; and sections on competition
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The Regulatory Environment for Federally Funded Transportation Services 63 and acquisition planning, contract methods and contract types, socioeconomic programs (e.g., those geared to small businesses), general contracting requirements, and contract management. FAR Subchapter E--General Contracting Requirements The section providing policies and procedures relevant to contracting with private transporta- tion services is Part 31.2--Contracts with Commercial Organizations. This section provides guidance for determining allowability of costs based on their reasonableness, allocability, GAAP, and terms or limitations of the contract. It describes direct and indirect costs and provides a list of selected costs as with Circulars A-87 and A-122 described earlier. Section 16--Types of Contracts of the FAR document outlines various situations in which profit can be charged (e.g., in the form of a fixed price plus fee contract). OMB Circular A-76, Performance of Commercial Activities This circular addresses the processes and practices for determining whether a commercial activ- ity will be performed by a public or private source. It clarifies the process for making competitive selections between public and private service providers. It also requires that grantors create "a level playing field" to ensure that commercial activities are performed by the best source at the lowest possible cost. In addition, its goal is to improve program performance by increasing visibility and strengthening accountability. Standards for the Fair Presentation of Financial Statements All businesses, governmental entities, and other not-for-profit organizations must report finan- cial information to their respective constituencies. Generally, the objective of external financial statements is to communicate the economic effects of completed transactions and certain other events on the financial position and operations of the entity. Financial statements are the external expression of the results of the system of accounting used by business and non-business enterprises. Standards of accounting begin with GAAP. They include quantitative principles of cost, revenue, and matching and qualitative principles of reporting, reliability, and comparability. Standards for presentation of financial information are established by FASB and GASB. Accounting standards relevant to the funding scenario for transportation providers are found in GASB statements at http://www.gasb.org for governmental entities and in Statements of Financial Accounting Board Standards (SFAS) and Statements of Financial Accounting Concepts (SFAC) at http://www.fasb.org for nonprofit organizations and for-profit business enterprises. State and local governments are regulated by the following: · GASB Statement No. 29: The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental Entities. · GASB Statement No. 34: Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments. Nonprofit organizations are regulated by the following: · SFAC No. 4: Objectives of Financial Reporting by Non-business Organizations. · SFAS No. 117: Financial Statements of Not-for-Profit Organizations. Regulations for State and Local Governments: GASB Statements No. 29 and 34 The purpose of GASB statements is to develop "standards of state and local accounting and finan- cial reporting that will (a) result in useful information for users of financial reports and (b) guide and educate the public, including issuers, auditors, and users of those financial reports."
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64 Sharing the Costs of Human Services Transportation GASB Statement No. 29 established that governmental entities must use accounting and finan- cial reporting principles designed specifically for public organizations. It states that these entities may not use the FASB statements and interpretations that apply to nonprofit organizations (e.g., SFAS No. 117, discussed in the next section). This statement confirms that the common use of proprietary fund accounting by governmental entities and the inapplicability of fundraising activ- ities differentiate them significantly from private, nonprofit organizations. It is an initial statement that was later enhanced by GASB No. 34, the current authority for public entities. GASB Statement No. 34, issued in June 1999, established new financial reporting requirements for state and local governments. It retains the requirement to provide information about funds, which are established by governing bodies "to show restrictions on the planned use of resources or to measure, in the short term, the revenues and expenditures arising from certain activities." These requirements were issued to help governmental bodies demonstrate their stewardship of public resources in both the long term and the short term. New requirements include the preparation of government-wide financial statements and fund- specific financial statements. They also require that budgetary comparison schedules be included that allow citizens to compare the final financial picture--as recorded in the financial statements-- to the budget, which usually includes significant public input to the budget as it was passed at the beginning of the calendar year or fiscal year. Finally, this statement adds more required supple- mentary information (RSI) in the form of a report called Management's Discussion and Analysis (MD&A), which must appear before the financial statements. In it, financial managers must make an objective and easily readable analysis of the government's financial performance for the year. Regulations for Nonprofit Organizations: SFAC No. 4 and SFAS No.117 SFAC No. 4 differentiates accounting and external financial reporting objectives for non- business entities from those of business enterprises. Issued in 1980, it temporarily assumes that non-business accounting objectives are similar for governmental entities and other not-for-profit organizations. (This was changed in 1987 with the issuance of the GASB Statement No. 29, dis- cussed previously.) SFAC No. 4 provides a definition of the characteristics of a non-business organization. Among the most important factors are · Significant receipts of resources from providers who do not expect to be repaid. · Operating purposes other than a profit motive. · Absence of ownership interests that can be sold, transferred, or redeemed. · Transactions involving contributions and grants. · Lack of performance measures comparable to a business enterprises' profit motive. SFAS No. 117 establishes standards for general purpose, external financial statements pro- vided by a not-for-profit organization. It was issued in 1993 and remains the current standard. It was developed as part of a project to standardize requirements across all types of nonprofit entities whose financial information was presented in varying, inconsistent manners. Basically, this statement is the first time that all not-for-profit organizations are required to include all of the same statements as business enterprises to be consistent with GAAP: · A statement of financial position (balance sheet). · A statement of activities (income statement). · A statement of cash flows. · Accompanying notes to financial statements. This statement incorporates the principles of FASB No. 93, which requires that nonprofit organ- izations recognize the cost of using up long-lived tangible assets as depreciation in their external financial statements. It also incorporates FASB No. 95, which adapts statements of cash flow to nonprofits, and coordinates with FASB No. 116, which addresses accounting for contributions.