Review cost allocation for Human Services departments

July 30, 2018|Bridget Van Laanen

When you’re managing Human Services cost reporting related to county-wide cost allocation plans, you need an in-depth understanding of the financial complexities within your many departments.

Human Services departments have unique and complex financial reporting systems. For Human Services staff to effectively manage and allocate program costs to maximize revenues, they must have a complete understanding of the funding mechanisms and program requirements, as well as the necessary accounting expertise.

This article is the third in a series highlighting specific financial reporting challenges faced by Human Services departments. Read the previous article, and then dive deeper into cost reporting.

Indirect cost allocation plans: Why?!

One of the most misunderstood cost categories reported by Human Services departments is indirect costs derived from a county-wide indirect cost allocation plan. You may have attended training or read information that referenced federal regulations; the majority of these regulations discuss negotiated indirect cost rates or de minimis rates of 10%. While a flat rate might sound good, it is not allowed for Wisconsin counties.

A cost allocation plan involves the development and documentation of a county’s methodology for cost allocation for use in expenditure reporting. The Allowable Cost Policy Manual for the Wisconsin Department of Health Services specifically requires a county-wide indirect cost allocation plan and a separate cost allocation plan in accordance with the applicable federal regulations; both plans must be reviewed by the county’s independent auditor.

What does the indirect cost allocation plan really do?

The purpose of a county-wide indirect cost allocation plan is to gather and allocate the costs of central services departments to all their users, which can be both end-user and other central services departments.

A prime example of a central services department is a county treasurer—they provide services to other departments, namely collecting, recording and depositing receipts and printing checks, while also handling tax collection for the general county. The cost of staff time, supplies and overhead expenditures related to the nongeneral services can be pooled by each service and allocated to the user departments through the indirect cost plan. To allocate costs between functional services, the county treasurer’s office would track staff time spent on each service, either by 100% time reporting or by using sample days or weeks each month.

This information would be used to allocate the treasurer’s expenditures between receipts, checks and tax collection functions. Those amounts are subsequently allocated to user departments using a reasonable allocation basis; in the case of cash receipts, the total number of receipts per department could be used as an allocation basis. User department costs by central services departments are summarized as part of the indirect cost allocation plan. Once finalized, the county’s finance department distributes the indirect cost report allocation to user departments.

What’s with the dates?

Because indirect cost plans use finalized information and are usually prepared by an outside contractor, there is a two-year lag between the expenditures used and the actual year of use. For example, a cost plan using finalized 2016 expenditures will be completed in 2016 and the amount will be used for calendar-year 2018 grant reporting. Cost plan preparers account for this lag by calculating a roll-forward adjustment, which compares the allocated amounts used from the indirect cost plan two years prior and adjusts it to the allocated amounts calculated in the current plan.

Need for constant plan monitoring and updates

It is the county’s responsibility to review the prior year’s indirect cost plan and evaluate the need to change any cost pools, allocation bases and end-user departments. Although these may not change dramatically, it is likely some changes occur every year. If these are not monitored and updated annually, these small changes can cause thousands of dollars of cost to be incorrectly allocated.

One way cost pools may change is if certain costs that were typically allocated through the plan are now being allocated monthly on the general ledger, such as phone or building use charges. An allocation basis may change due to restructuring of responsibilities which can result in end-user departments handling more of a central service function than other county departments (for example, entering accounts payable information directly into the county’s accounting system), which requires the related allocation to be weighted appropriately. End-user departments could also change when there is a structural reorganization or a change in grants received that requires a separate subdepartment category.

After evaluating any changes, the county needs to provide current information to the cost plan provider and then review the completed plan and calculations. The county should ensure there is enough time for the plan to be completed, reviewed and, if necessary, revised before it is needed for grant reporting. It is imperative that the county involve Human Services staff and other users of the plan amounts in the development process to ensure the necessary amounts are provided.

I’ve got it, now what?

Assuming it is correctly designed, the plan can then be used as part of the monthly expenditure reporting process. In most counties, the amounts from the plan should be further allocated by the end-user departments and subdepartments.

For Human Services departments, that allocation should be part of a stratified agency management, support and overhead (AMSO) allocation. Because Human Services departments can typically operate over 100 grant and billing programs, the indirect cost plan should include appropriate subdepartments that can easily be further allocated to only the affected grants.

For instance, the Economic Support area may be housed within a separate building or on its own floor, or part of a consortium which changes some of the services provided to the subdepartment compared to other Human Services subdepartments. In this case, the indirect cost allocation plan could segregate the Economic Support area to avoid under- and over-allocating costs.

Considering the large number of cost pools and bases used within a plan and the number of unique programs operated by a Human Services department, most counties should develop a separate cost allocation plan to further allocate indirect costs. In many cases, relying on the AMSO allocation to distribute indirect costs to all department programs may not be the most appropriate methodology.

Two cost allocation plans?

The Department of Health Services (DHS) Audit Guide also mentions a Cost Allocation Plan, which is actually a completely separate document from the Indirect Cost Allocation Plan. The county-wide plan should be either a separate document or part of its standard policies and procedures. A Cost Allocation Plan details which costs the county charges as direct, allocated or indirect, as well as how they charge the allocated costs to the user departments. Within the plan, or within a separate document such as the AMSO allocation, the Human Services department should also detail how they allocate their allocated and indirect costs.

Indirect costs, direct billing and internal service funds

Some counties use internal service funds to directly bill user departments for certain pools of cost, such as self-insurance programs, vehicles or information technology. These funds bill based on pre-established rates, which should include estimates of both direct and allocated costs, as well as any indirect and replacement (depreciation) costs. Uniform Guidance allows internal service funds to maintain a reasonable level of working capital reserves, which is defined as up to 60 calendar days’ cash expenses for normal operating purposes. A working capital reserve exceeding 60 calendar days should be monitored closely by the county.

What to do

Review your indirect cost plan with the appropriate employees annually and make sure it supports the user departments. The plan’s main purpose is to allow user departments to claim eligible costs for their grant and billing programs—if the plan doesn’t calculate accurate amounts or is designed poorly, it is not achieving its purpose.

For assistance with this kind of project, please contact Bridget Van Laanen at 920-455-4234 or any member of the Schenck Government & Not-for-profit team at 800-236-2246.

Bridget Van Laanen, CPA, is a human services specialist, who has over a decade of experience auditing and providing specialty services to counties.