Call to Order and Roll Call
The 2nd meeting of the Government Nonprofit Contracting Task Force was held on Monday, August 22, 2016, at 11:00 AM, in Room 131 of the Capitol Annex. Representative Russ A. Meyer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Russ A. Meyer, Chair; Senator Max Wise, Co-Chair; Senators Danny Carroll, Denise Harper Angel, and Stephen West; Representatives Dennis Horlander, Arnold Simpson, and Addia Wuchner, Promod Bishnoi, Danielle Clore, Samantha Davis, Tim Feeley, Robert Jones, Robin Kinney, Mardi Montgomery, Judy Piazza, and Michelle Sanborn.
Guests: Andrew English, Justice and Public Safety Cabinet, Tracy Thurston, Kentucky Housing Association, Charles Harman, Department of Education, Thelma Hawkins, Department of Education, and Beth Bowsky, National Council of Nonprofits.
LRC Staff: Judy Fritz, Van Knowles, Daniel Carter, and Jay Jacobs.
Senator Wise moved to approve the July 7, 2016 meeting minutes. Tim Feeley seconded the motion. The motion carried with a voice vote.
Understanding New OMB Guidance Regulations
Beth Bowsky, Policy Specialist for Government-Nonprofit Contracting with the National Council of Nonprofits, gave an overview of the OMB Uniform Guidance (Uniform Guidance) and its implications for Kentucky.
Uniform Guidance is the consolidation of eight OMB circulars related to grants and contracts and codified in the Code of Federal Regulations, effective December 26, 2014. Consolidation simplifies the process and avoids duplication and conflicts among the circulars. Uniform Guidance was created in response to several executive orders stating that the grants process needed to be streamlined and include more protections to prevent waste, fraud, and abuse. The Council on Financial Assistance Reform (COFAR), suggested combining the circulars. The ultimate goal of Uniform Guidance is to streamline contracting processes, strengthen oversight, and increase efficiency and effectiveness to improve outcomes.
Uniform Guidance is divided into three sections: Administrative Reforms, Cost Principle Reforms, and Audit Reforms. Under Administrative Reforms, pre-award requirements for states include: providing information specific to the contract or grant, making funds available for awards at least 30 days in advance, and following selection process criteria for competitive grants. There are about 1,000 OMB forms, but the federal government is looking at ways to reduce and standardize forms to ease the application and contracting processes. Cost Principle Reforms addresses the most important piece for nonprofits: paying allowable and indirect costs. The rules under Cost Principle Reforms are outlined and provide guidance as to which direct and indirect costs are accepted.
In response to a question by Representative Wuchner, Mrs. Bowsky stated that the federal government will be providing standardized forms for states to use. A question the state will have to decide is whether to continue to use the federal forms as the money passes through the state’s procurement system.
Procurement requirements, under Uniform Guidance, require nonprofits to follow federal acquisition regulations when making purchases using federal dollars. States may continue to use their own policies and procedures, but nonprofits must follow the new regulations.
Understanding Uniform Guidance definitions are important to ensure that monitoring procedure requirements are followed, for monitoring procedures are different depending on whether the procurement is considered a “grant” or a “contract.” Grants are used to carry out a public purpose. Contracts are for acquiring property or services for the federal awarding agency or pass-through entity’s direct benefit or use. A subaward is an award provided by a pass-through entity to a subrecipient for the subrecipient to carry out part of a federal award. It does not include payment to a contractor. A subaward may be provided through any form of legal agreement, including an agreement that the pass-through entity considers a contract.
Uniform Guidance differentiates between a “contractor” and a “subrecipient.” While the differences do not affect indirect cost reimbursement, they affect how the recipient of the grant or contract should be monitored and audited. Contractors typically are awarded contracts, while subrecipients are typically awarded grants. Determining whether the money will be used for a contract or grant and whether the recipient is a contractor or subrecipient will establish whether the money is counted toward a single audit and other reporting and auditing requirements. Almost all federal funding passed through the state and awarded to nonprofits would be considered grants, even though the state would consider the transaction a contract. The transaction may continue through the state’s procurement system so long as the monitoring and risk assessment align with Uniform Guidance regulations. There is an additional concern that the state does not require competitive bidding for some grants that would be required to be bid under Uniform Guidance.
Uniform Guidance has made changes regarding auditing. Uniform Guidance increases the limit for a single audit from $500,000 to $750,000. The state will want to investigate which nonprofits are getting single audits. The changes in auditing provide an emphasis on collaboration between agencies and nonprofits to reduce waste, fraud, and abuse, called “cooperative resolutions.” The cooperative resolution process emphasizes agencies and nonprofits to work together to correct any findings in an audit with corrective action plans.
Uniform Guidance also requires any pass-through entity, like the Commonwealth, to notify a subrecipient in writing the amount of funds awarded, and the source of funds. Notification is important because it will help the nonprofit determine whether the funds will be counted towards the single audit threshold, and whether Uniform Guidance applies.
Before an award is finalized, the pass-through entity must complete a risk assessment of the subrecipient it has selected to receive the award. The risk assessment focuses on whether the nonprofit is able to properly manage government funds. The risk assessment will also determine what monitoring requirements apply.
Representative Wuchner asked the members to see who was aware of Uniform Guidance and whether they have implemented it. Few nonprofits and state agencies were aware or have implemented Uniform Guidance.
Educating state agencies and nonprofits about Uniform Guidance has been an obstacle. It was acknowledged that the federal government has not done a good job. In many cases, federal agencies are not applying Uniform Guidance correctly. To properly utilize Uniform Guidance, education will become essential.
Mr. Jones stated that in his experience there were variances in the level of implementation based on the type of grant and Mrs. Bowsky added it also depends on the federal agency.
If a nonprofit has a federally approved indirect cost rate, all pass-through entities are required to pay that rate. If a nonprofit does not have a federally approved rate and has never had a federally approved rate, it can either elect to use the ten percent de minimis rate or ten percent of modified total direct cost as its indirect cost reimbursement, or it can negotiate a rate based on federal cost principles. Federal cost principles are set to try to standardize allowable costs. Because of budget constraints, Mrs. Bowsky predicts that the difference in cost reimbursement will be made up by a reduction in services.
Indirect cost reimbursement applies to both contracts and grants under Uniform Guidance. There are exceptions if there is a cap in indirect costs in federal statute, and for any block grants created under the 1981 Omnibus Budget Reconciliation Act. Community services block grants, however, are subject to indirect cost reimbursement under Uniform Guidance.
Mrs. Bowsky stated that cabinets need to understand federal cost principles in terms of which costs are allowable, how to determine direct and indirect costs, and how to properly allocate costs so there will be consistency and regularity in negotiations.
Any payments not covering full costs is addressed by Uniform Guidance by the indirect cost requirement. The indirect cost requirement is a significant step forward toward the goal of more reasonable reimbursement for nonprofits. Ensuring proper implementation of the indirect cost requirements across all cabinets and their subdivisions will help resolve some issues with paying full costs.
In response to a question by Mr. Jones, Mrs. Bowsky stated that the nonprofit is required to be paid on a grant when there is an approved federal rate and that the state cannot change the rate.
The federal government is in the process of standardizing government contracting to the state level, and some of those processes can be passed down to nonprofits and local governments. Aligning with Uniform Guidance can avoid having two parallel systems and would provide information and guidance for decision making purposes.
Uniform Guidance requires reimbursements be made within thirty days of billing unless an agency detects there is something improper.
Before Uniform Guidance went into effect, federal agencies were allowed to submit some variations for approval. The Department of Education submitted several variations, which have different requirements than Uniform Guidance.
In response to a question by Mrs. Clore, Mrs. Bowsky stated that Uniform Guidance says what information must be in an application so the information will be consistent.
Mrs. Bowsky also stated definitions of additional terms not covered in the presentation and their meaning. The definition of indirect cost is organizational costs that are shared across programs according to Uniform Guidance. Administrative costs are for program administration which can be direct or indirect costs. Federal regulations usually cap administrative costs but rarely caps indirect costs.
In response to a question by Mrs. Clore, Mrs. Bowsky indicated the only state that has fully embraced Uniform Guidance is Illinois. She does not know of any negatives for implementing Uniform Guidance, but the change would not come easy.
Experiences and Perspectives from State Agencies
Charles Harman, Director of Budget and Financial Management with the Department of Education, stated that the combination of all the OMB circulars has gone well and that it has been a painless transition for his department.
Thelma Hawkins, Grants Branch Manager with the Department of Education, stated that the grants for education work in conjunction with the school year. The department is finishing its first year with the implementation of Uniform Guidance.
Tracy Thurston, Managing Director of Corporate Planning and Accountability with the Kentucky Housing Corporation (KHC), stated that KHC is the recipient of federal awards as well as pass-through funds to subrecipients in the state. KHC is considered a pass-through agency for state funds as well. Uniform Guidance has alleviated some of the issues that took place in the past. KHC has experienced some difficulty with different rule sets for state and federal awards. The biggest challenges so far are with subrecipient agencies and dealing with indirect cost rates. KHC does not have indirect cost rates approved. There is a lack of education with the subrecipients on the allowable indirect cost rate. Subrecipient monitoring is going to create more work for KHC. Overall, the Uniform Guidance has been easy to implement.
Discussion of Advantages and Disadvantages of mirroring OMB Guidance Regulations in Kentucky
Mr. Bishnoi stated that it has taken his agency a long time to get an indirect rate established. In dealing with the Commonwealth on indirect costs, he is only getting ten percent regardless if the federally approved rate is higher.
Mr. Jones stated that his organization has worked hard to get the federal rate and is not consistently getting the approved rate at the state level. There is a gap between the Commonwealth and the federal government that needs to be addressed.
Mr. Feeley stated that there may be some confusion about indirect costs, indirect rates, and administrative costs.
Representative Wuchner stated there needs to be a focus on clarifying the definitions of indirect costs, indirect rates, and administrative costs.
Mrs. Clore stated that using the single audit would simplify the monitoring process.
Representative Wuchner state that it would be important to discuss streamlining of the audit process.
Mr. Feeley stated that Kentucky should get ahead of the curve and embrace Uniform Guidance.
Mrs. Clore stated that there needs to be more training between nonprofits and the Commonwealth.
Representative Meyer said that the next task force meetings will be Wednesday, September 7th, 2016, at 1 p.m., Monday, September 26th, 2016, at 11 a.m., Monday, October 24, 2016, at 11 a.m., and Tuesday, November 15th, 2016, at 1 p.m.
A copy of the PowerPoint presentation and other meeting materials are a part of official record in the Legislative Research Commission Library. There being no further business, the meeting was adjourned at 12:05 p.m.