[Federal Register Volume 60, Number 24 (Monday, February 6, 1995)]
[Notices]
[Pages 7105-7109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2871]
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OFFICE OF MANAGEMENT AND BUDGET
Cost Principles for Educational Institutions
AGENCY: Office of Management and Budget.
ACTION: Proposed revisions to OMB Circular A-21 and proposed rescission
of OMB Circular A-88.
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SUMMARY: This Notice offers interested parties an opportunity to
comment on proposed revisions to Office of Management and Budget (OMB)
Circular A-21, ``Cost Principles for Educational Institutions'' and
OMB's proposal to rescind OMB Circular A-88, ``Indirect Cost Rates,
Audit, and Audit Followup at Educational Institutions.''
This proposed revision, together with a separate proposed revision
published in this issue of the Federal Register, fulfills the
Administration's commitment in the fiscal year 1995 budget to ``conduct
a comprehensive review with the goal of improving the incentives that
govern overhead reimbursement for a wide range of federal research
grantees and contractors.'' It also reflects the Administration's
policies regarding Circular A-21 as described in the fiscal year 1996
budget, transmitted to Congress on February 6, 1995. Of the 14 policies
in this Notice, eight are proposed as revisions to Circular A-21 itself
in this Notice, and the other six revisions, as described below,
require [[Page 7106]] further development prior to proposed
implementation.
In brief, the proposed revisions:
(1) clarify that, when an institution transitions from a use
allowance methodology to a depreciation methodology, only the
depreciation incurred from the time of the transition--calculated as if
the asset had been depreciated over its entire life--may be allocated
to federally-sponsored research;
(2) limit the use of special studies by prohibiting them for
determining and allocating utility, library and student services costs;
(3) require all Federal funding agencies to use rates in effect at
the time of initial award throughout the life of the sponsored
agreement;
(4) eliminate the allowability of dependent tuition benefits;
(5) establish criteria for appropriate reimbursement of interest
costs;
(6) rescind Circular A-88 and establish cost negotiation cognizance
for educational institutions and cognizant agency responsibilities
through Circular A-21;
(7) establish an interagency group of Federal officials responsible
for coordinating policy development for sponsored agreements; and
(8) modify the terminology used in Circular A-21 to describe more
accurately the various cost components of sponsored agreements.
In addition, this Notice announces OMB's decision to develop other
revisions to Circular A-21. These include:
(1) establishing a process for assessing reasonable costs for
research facility construction and renovation that may be allocated to
facility cost pools and charged against sponsored agreements;
(2) developing a standard methodology for uniform treatment of
specialized services, including computational centers and biohazards;
(3) developing standard benchmarks for utility costs over the next
year, to be followed potentially by similar efforts for library and
student services costs thereafter;
(4) developing and testing a model for charging space costs
directly to research grants;
(5) examining and potentially revising the useful life schedule for
equipment; and
(6) examining methods for explaining variations in facilities and
administrative costs rates.
DATES: Comments should be received on or before April 7, 1995. Late-
filed comments will be considered to the extent practicable.
ADDRESSES: Interested parties are invited to comment on all of these
proposed changes. Comments should be submitted to the Office of
Management and Budget, Office of Federal Financial Management, Room
6025, New Executive Office Building, Washington, DC 20503. Brief
comments (3 pages or less) may be sent via facsimile (fax: 202-395-
3952).
FOR FURTHER INFORMATION CONTACT: Norwood Jackson, Office of Federal
Financial Management, Office of Management and Budget, telephone (202)
395-3993.
SUPPLEMENTARY INFORMATION: In the fiscal year 1995 President's budget,
the Administration committed to a comprehensive review of the costs of
federally-sponsored research, with the goal of making the reimbursement
system more defensible, equitable and understandable by reducing
unexplainable variations in facilities and administrative rates;
improving incentives for efficiency; and fostering consistency in the
Federal Government's approach to administering support for sponsored
research. The revisions proposed in this Notice are the result of this
review.
In the spirit of other reinvention efforts, the review process
guided by the Office of Management and Budget (OMB) and the Office of
Science and Technology Policy (OSTP) was inclusive and open. OMB and
OSTP solicited views, recommendations, and proposals from many parties,
including Federal science funding agencies; the grantee community,
including both university administrators and bench scientists; and
Congressional staff and agencies.
Based on their input, the Administration decided that the review
should focus on facilities costs, since the two other groups of
research costs (direct costs and administration costs) have reasonably
efficient mechanisms built into their funding policies. Direct costs,
which support researchers, laboratory equipment, and supplies
associated with a specific project, are subject to peer review and
scientists have an opportunity to exert direct control over these
costs. Administrative costs, which support the salaries of university
research managers, support staff and other shared costs related to
research, were capped at 26 percent of modified total direct costs by a
1991 revision to Circular A-21, ``Cost Principles for Educational
Institutions.'' In contrast, facilities costs are not limited or peer
reviewed. They account for almost all of the growth in research
overhead rates over the last decade and explain much of the variation
in rates among schools. Most of the specific changes proposed in this
Notice address the facilities component of research costs.
The two sections below describe the eight revisions OMB proposes to
make to Circular A-21 at this time, as well as a separate set of
revisions that require further work before they can be proposed for
implementation. OMB intends to propose these additional revisions for
comment within one year of publication of this Notice. Finally, OMB
intends to publish a recompilation of the entire Circular A-21 in the
Federal Register by March 31, 1995, reflecting all final revisions
through that date, and also to make the recompilation available
electronically on the Internet.
PROPOSED REVISIONS TO OMB CIRCULAR PA-21: The following explains the
eight specific changes proposed to Circular A-21.
(1) Clarify the policy governing the transition from use allowance
to depreciation and examine useful life schedules for equipment.
Circular A-21 would be amended to clarify that an institution may
recoup only the remaining depreciation expense representing the
remaining useful life of an asset when the institution shifts from the
use allowance methodology to depreciation. Because current language in
Circular A-21 addressing the transition issue is not sufficiently
precise, cognizant agencies have interpreted it differently. This
revision is expected to have little impact because the vast majority of
institutions now allocate costs consistent with the clarified policy.
This revision also clarifies that institutions must use either use
allowance or depreciation, but not both, in allocating the costs of any
class of assets to sponsored research. As in the past, Circular A-21
does not require institutions to shift from use allowance to
depreciation. Institutions may continue to do so at their discretion.
(2) Limit use of special cost analysis studies. Circular A-21 would
be amended so that the results of special studies for utility, library
and student services costs could not be used to determine and allocate
the costs of such services to sponsored research. The methodology for
such studies is not specified in Circular A-21 and is a source of
disagreement between cognizant agencies and institutions. The provision
in Circular A-21 allowing special studies may have been appropriate at
one time but now promotes disparity in rates and recovery. In
conjunction with limiting [[Page 7107]] special studies, OMB proposes
to develop and implement standard benchmarks for equitable allocation
of utility, library and student services costs (see proposal #3 under
``Other Issues for Public Comment'' below).
(3) Require Federal funding agencies to use rates in effect at the
time of initial award throughout the life of the sponsored agreement.
Circular A-21 would be amended to require Federal science funding
agencies to calculate outyear grant commitments using negotiated
predetermined rates or other available negotiated rates at the time of
the award. Funding agencies may not adjust future award levels for
changes in negotiated rates taking effect after the initial award. This
proposed change allows peer reviewers and funding agencies to know with
certainty the total cost of an entire sponsored agreement throughout
the decisionmaking process, and eliminates another point of
inconsistency in Federal grant policies.
(4) Eliminate the allowability of dependent tuition benefit. To
make Circular A-21 consistent with the Federal Acquisition Regulation,
this Notice proposes to prohibit the allocation of dependent tuition
benefits to sponsored agreements.
(5) Establish criteria for appropriate reimbursement of interest
costs. The proposed revision would provide that interest on buildings
and equipment would be allowable under certain circumstances which
include a favorable lease/purchase analysis, a limit on the interest
rate, and an offset of investment earnings against interest cost. The
revision will serve to provide more consistency on interest
allowability across OMB's three cost circulars: Circular A-122 for non-
profit institutions, Circular A-87 for State and local governments, and
Circular A-21 for educational institutions.
(6) Rescind Circular A-88 and establish cost negotiation cognizance
for educational institutions and cognizant agency responsibilities
through Circular A-21. This proposed revision rescinds Circular A-88.
Cost negotiation cognizance would be assigned to the Department of
Health and Human Services or the Office of Naval Research of the
Department of Defense based on funding levels for sponsored agreements
from these Departments. The Department providing the most funding would
assume cognizance. Because of this change in approach, a listing of
cognizant agency assignments is no longer necessary.
(7) Establish an interagency group of Federal officials to
coordinate policy development for sponsored agreements. This proposed
change would establish an interagency working group co-chaired by OMB
and the Office of Science and Technology Policy (OSTP), comprised of
officials responsible for policy development for sponsored agreements.
This group would be charged with recommending changes to Circular A-21
and other OMB cost principles circulars based on recommendations of
Federal agencies and non-Federal organizations. This group would
recommend pilot projects designed to test ways to streamline the
operations of sponsored agreements, reduce costs, or improve program
delivery.
(8) Modify terminology used to describe research cost components.
Circular A-21 would be amended to change terminology from ``indirect
costs'' to ``facilities costs and administrative costs.'' The terms
used currently to describe costs are perceived as insufficiently
descriptive.
Other Issues For Public Comment: In addition to the specific revisions
described above, OMB is also considering the following issues for
possible future implementation through Circular A-21. Public comment is
solicited on these issues. Should OMB decide to revise Circular A-21 to
address these issues, specific changes will be proposed for comment at
that time.
(1) Assessing reasonable costs for research facility construction
and renovation that may be allocated to facility cost pools and charged
against sponsored agreements or allocated directly. Circular A-21
requires that costs allocated to sponsored research be reasonable, and
sets as a standard for reasonableness the ``prudent person'' test,
i.e., whether a ``prudent person'' would have incurred the costs under
similar circumstances. The rise in facilities costs over the past ten
years and the significant variation in facilities rates among
institutions have caused some to question how well and how consistently
the ``prudent person'' test has been applied to facilities costs.
A committee of Federal officials from relevant agencies would be
formed to develop benchmarks for the reasonable costs of construction
of various types of space, adjusted for variable costs (e.g., energy,
type of research) in each region of the U.S. The committee would seek
input from the university community, private sector, and others.
Benchmarks for renovation would be set at the same level as those for
new construction. Benchmarks would be set at or slightly below a given
standard to encourage efficiencies and would be indexed to inflation
using a rate appropriate for construction. Benchmarks for each region
of the country and by type of research facility would be published in
the Federal Register for comment by January 2, 1996.
Cognizant agencies and institutions would use these benchmarks to
determine the facility costs that may be charged to sponsored
agreements. If proposed facility costs fall below the relevant
benchmark, the depreciation or use allowance and interest costs of the
building could be allocated to sponsored agreements in accordance with
Circular A-21. If the proposed costs exceed the benchmarks, only the
amounts provided by the benchmarks could be allocated without prior
approval by the panel described below.
Review of costs above the benchmarks would be carried out by a
panel of Federal officials. The review would consider special
circumstances related to individual projects. If a university fails to
obtain approval for reimbursement of the full allocated share of the
facility costs, it could either accept the benchmark rate, or submit a
revised justification.
The goals of the new process are to make as objective as possible
the assessment and allocation of costs to sponsored research, to assure
equitable results, and to encourage efficient construction and
renovation of research facilities. Benchmarks will reflect only what
the government will pay for space, and in no way will limit what
universities may spend on infrastructure. The review process will be
proposed in a future revision to Circular A-21.
(2) Develop a standard methodology for uniform treatment of
specialized services. Circular A-21 requires that costs associated with
the use of specialized service facilities (e.g., animal care,
computational centers, and biohazards) be charged as direct costs. This
requirement was intended to avoid assessing facility charges to
investigators who do not use specialized services. To comply with this
provision, some institutions have developed usage rates that reflect
the full costs of the facility; as a result, charges for services such
as animal per diem have increased as the total costs of operating the
facility have been added to the daily costs of caring for each animal.
Colleges and universities have not allocated the costs of specialized
services uniformly to cost pools.
OMB intends to identify the operating expenses of special
facilities that should be allocated to the direct costs and those to be
included in a facility-specific rate or the general facilities cost
pool. The costs associated with each category [[Page 7108]] should be
uniform across institutions. The new methodology should promote greater
uniformity of cost allocation among institutions while stabilizing the
impact on project costs. This methodology will be proposed in a future
revision to Circular A-21.
(3) Develop standard benchmarks for utility costs. In conjunction
with the proposed revision in this Notice to eliminate special studies
for utility costs, OMB plans to develop a benchmark ratio, based on
determinants of the ratio of utility usage to research space, to
standardize the allocation of such costs to sponsored research. These
benchmarks will be proposed in a future revision to Circular A-21.
After benchmarks for utility costs have been developed and implemented,
OMB will also consider employing similar processes and models to
develop benchmarks for libraries and student services.
(4) Develop and test a model for charging space costs directly to
research grants. Over the last several years, policymakers, scientists
and negotiators have discussed the idea of identifying project-specific
space costs and charging those costs directly to grants. Direct
charging would strengthen the incentive for colleges and universities
to allocate space efficiently. Charging space directly to sponsored
agreements would also help clarify the true costs of research and
subject these costs to peer review and program oversight on a project-
by-project basis.
The idea of charging space directly has not been adopted because
some perceive it as too complicated from a technical perspective. The
Federal Demonstration Project (FDP), which was established to test ways
to improve flexibility and reduce the administrative costs associated
with grantmaking, is well-suited to test the idea of direct charging
space to grants. Further, the National Performance Review recommended
using the FDP as a model program to reduce overhead on research grants.
OMB has requested the FDP to develop a model for and to test direct
charging of space.
(5) Examine and potentially revise the useful life schedule for
equipment. OMB intends to review the current useful life schedules for
equipment to ensure cost recovery policies keep pace with the changing
nature of scientific equipment. Useful life schedules will be updated
in future proposed revisions of Circular A-21, as appropriate.
(6) Examine methods for explaining variations in facilities and
administrative costs rates. OMB will review ways of collecting data to
explain rate variation, to include establishing a uniform chart of
accounts. OMB solicits comments on methods that will provide
appropriate data in a cost-effective manner.
John B. Arthur,
Associate Director for Administration.
The following are proposed revisions to sections A, E, G, and J of
Circular A-21:
(1) Amend Section A by: (a) deleting paragraph 2.f, (b) changing
the number of the current paragraph 3 to 4, and (c) adding a new
paragraph 3 as follows:
3. Cognizant agency assignments and responsibilities.
a. Cognizant agency assignments. Cost negotiation cognizance is
assigned to the Department of Health and Human Services (DHHS) or the
Department of Defense, Office of Naval Research (ONR), based on which
of these two Departments provides more Federal funding through
sponsored agreements to an educational institution (including its
component parts) for the most recent three years available using data
published by the National Science Foundation in its annual report
entitled ``Selected Data on Federal Support to Universities and
Colleges.'' Cognizant assignments as of December 31, 1994, will
continue in effect through educational institution years ending during
1997, except for those institutions with cognizant agencies other than
DHHS or ONR. Cognizance for these institutions will transfer to DHHS or
ONR not later than the end of the period covered by the current
negotiated indirect cost agreement. Once cognizance is established, it
will continue for a five-year period.
b. Acceptance of rates. The negotiated rates will be accepted by
all Federal agencies. This does not preclude agencies from paying a
lower rate pursuant to a class of sponsored agreements or a single
sponsored agreement.
c. Correcting deficiencies. The cognizant agency will negotiate
changes needed to correct systems deficiencies relating to
accountability for sponsored agreements. The cognizant agency will seek
the views of other affected agencies before entering into negotiations
and invite their participation.
d. Resolving questioned costs. The cognizant agency will conduct
any necessary negotiations with the institution regarding amounts
questioned by audit that are due the government related to costs
covered by a negotiated agreement. Prior to reaching final agreement
with an institution, the cognizant agency will seek the views of other
agencies concerned.
e. Reimbursement. Reimbursement to cognizant agencies for work
performed under this Circular may be made by reimbursement billing
under the Economy Act, 31 U.S.C. 1535.
f. Procedure for establishing facilities and administrative cost
rates. The cognizant agency will arrange with the institution to
provide copies of facilities and administrative cost proposals to all
interested agencies. Agencies wanting such copies should notify the
cognizant agency. Facilities and administrative cost rates will be
established by one of the following methods:
(1) Formal negotiation. The cognizant agency will advise all
interested agencies of its intention to negotiate, and schedule a pre-
negotiation conference, if necessary. The cognizant agency will then
arrange a negotiation conference with the institution. If an agency
does not wish to be represented in these meetings, the cognizant agency
will represent that agency.
(2) Other than formal negotiation. This will include cases where
the institution and cognizant agency determine that agreement can be
reached without a formal negotiation conference; for example, through
correspondence or use of the simplified method described in this
Circular.
g. Formalizing determinations and agreements. The cognizant agency
will formalize all determinations or agreements reached with the
institution and provide copies to other agencies having an interest.
h. Disputes and disagreements. Where the cognizant agency is unable
to reach agreement with an institution with regard to facilities and
administrative cost rates or audit resolution, the appeals system of
the cognizant agency will be followed for resolution of the
disagreement.
(2) Amend Section A., ``Purpose and scope'' by adding a new
paragraph A.4. as follows:
4. Interagency Working Group. A Federal interagency working group
will be responsible for coordination of cost policy development for
sponsored agreements. The group will meet at least semi-annually. The
Office of Management and Budget (OMB) and the Office of Science and
Technology Policy (OSTP) will serve as Co-Chairs. Federal agencies
represented will be the Office of Science and Technology Policy of the
Executive Office of the President, the Department of Health and Human
Services, the Office of Naval Research of the Department of Defense,
the National Science Foundation, the Department of Education, the
Department of Energy, and such other agencies as OMB designates. The
responsibilities of the [[Page 7109]] group will be to recommend
changes to OMB Circular A-21 and other OMB circulars based upon
recommendations of Federal agencies and non-Federal organizations. The
group will also recommend pilot projects designed to test ways to
streamline the operations of sponsored agreements, reduce costs, or
improve program delivery.
(3) Amend Section E, paragraph 2.d by adding a new subparagraph
(5):
(5) Notwithstanding subparagraph (3), a cost analysis study or base
other than that in section F shall not be used to distribute utility,
library and student services costs.
(4) Amend Section G by inserting a new paragraph 7 and renumbering
all subsequent paragraphs:
7. Fixed rates for the life of the sponsored agreement. Federal
funding agencies shall use the rates for facilities and administrative
costs in effect at the time of the initial award throughout the life of
the sponsored agreement. If negotiated rate agreements do not extend
through the life of the sponsored agreement at the time of the initial
award, then the negotiated rate for the last year of the sponsored
agreement shall be extended through the end of the life of the
sponsored agreement. Award levels for sponsored agreements may not be
adjusted in future years as a result of changes in negotiated rates.
(5) Replace Section J 12, paragraph b. (3), as follows:
(3) Where the depreciation method is introduced for application to
assets for which use allowance was previously charged, depreciation on
each asset will be computed as if the asset had been depreciated over
its entire life (i.e., from the date the asset as acquired and ready
for use to the date the asset is expected to be disposed of or
otherwise withdrawn from use). The aggregate amount of use allowances
and depreciation applicable to the asset (including imputed
depreciation applicable to the period prior to the charging of use
allowances as well as depreciation after the conversion) may be less
than but in no case may exceed the total acquisition cost of the asset.
And add a new subparagraph J 12 c. (4):
(4) Notwithstanding c.(3), once an institution converts from one
cost recovery methodology to another, acquisition costs not recovered
may not be used in the calculation of the use allowance in c.(3).
(6) Amend Section J, paragraph 22.e. to read as follows:
e. Interest on debt issued to acquire capital assets used in
support of sponsored agreements is unallowable unless:
(1) The educational institution performs a lease/purchase analysis
in accordance with the provisions of OMB Circular A-110, ``Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals and Other Non-Profit Organizations,''
and sections 5a, 8(c)(2), and 13 of OMB Circular A-94, ``Guidelines and
Discount Rates for Benefit-Cost Analysis of Federal Programs,'' which
shows that purchasing through debt financing is less costly to the
Federal Government than leasing. Discount rates used should be equal to
the grantee's borrowing rates. The financial analysis must include a
comparison of the present value of the projected total cash flows of
both alternatives over the period the asset is expected to be used by
the educational institution in carrying out federally-sponsored
activities. The cash flows associated with purchasing the asset must
include the purchase price, anticipated operating and maintenance costs
(including property taxes, if applicable) not included in the debt
financing, less any estimated asset salvage value at the end of the
defined period. Projected rental costs should be based on the
anticipated cost of renting comparable facilities or equipment at fair
market rates over the defined period, and any expected maintenance
costs and property taxes to be borne by the educational institution
directly or as part of the lease arrangement.
(2) Financing is provided at an interest rate no higher than the
fair market rate available to the educational institution from an
unrelated third party.
(3) Investment earnings, including interest, on bond or loan
principal, pending payment of the construction or acquisition costs,
are used to offset allowable interest cost. Arbitrage earnings
reportable to the Internal Revenue Service are not required to be
offset against allowable interest costs.
(4) Educational institutions are also subject to the following
conditions:
(a) Interest on debt issued to finance or refinance assets acquired
before July 1, 1982, is not allowable.
(b) Federal cognizant agencies shall require educational
institutions to compute interest on the excess of the Federal
Government's depreciation and interest reimbursement payments over the
educational institution's principal and interest payments, and that the
educational institution treat the computed interest as a reduction in
the interest expense to be reimbursed by the Federal Government. This
provision is not applicable in instances where the educational
institution makes an initial equity contribution of 25 percent or more
to purchase the asset.
(c) Substantial relocation of federally-sponsored activities from a
facility financed by indebtedness, the cost of which was funded in
whole or part through Federal reimbursements, to another facility prior
to the expiration of a period of 20 years requires Federal cognizant
agency approval. The extent of the relocation, the amount of the
Federal participation in the financing, and the depreciation charged to
date may require negotiation of space charges for Federal programs.
(7) Amend Section J by adding a new paragraph 51:
51. Tuition benefits for family members. For educational
institution's fiscal years beginning after September 30, 1997, charges
for tuition benefits for any person other than the employee are no
longer allowable.
(8) Amend the entire Circular by changing all references to
``indirect costs'' to ``facilities and administrative costs.''
Circular A-88 is proposed to be rescinded in its entirety.
[FR Doc. 95-2871 Filed 2-3-95; 8:45 am]
BILLING CODE 3110-01-P
