The House Cut: Understanding
Cost Allocation and User Fees
Presentation to the Louisiana Government
Finance Officers Association
by
Sherra Montz, Sr. Consultant, MGT of America
Bret Schlyer, Sr. Consultant, MGT of America
1
October 6, 2011
What is Cost Allocation?
Cost Allocation is a comprehensive distribution
of agency-wide administrative costs to all
departments that benefit or receive benefits.
Costs of central service departments such as
General Administration, Human Resources ,
Payroll , and Purchasing are distributed to all
departments that benefit from their services by
unique, fair, and equitable allocation bases.
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Definitions

Plan
A document which identifies the equitable
distribution of central service administration and
support costs to benefiting entities.
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Central Services
Central costs which are incurred for a common
or joint purpose benefiting more than one cost
objective, and not readily assignable to entities
specifically benefited, without effort
disproportionate to results achieved.
Why Do Cost Allocation?
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Revenue
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Management Information
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Full program cost identification
Resource utilization analysis
Taxpayer Fairness
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General fund cost recovery
Matching federal funds
Offsetting federal audit findings
•Federal & State Funded Programs
•Special Revenue Funds
•Capital Project Funds
•Enterprise Funds
•Internal Service Funds
•User Fees
Elimination of subsidies where appropriate
Types of Plans Prepared
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Federal 2 CFR 225 (OMB A-87) Plan
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In accordance with Federal cost recovery principles
In accordance with GAAP
Cost recovery on Federal and State programs
Applicable to Government Agencies
Schools use A-21, Non Profits use A-122
GAAP (Full Cost) Plan
– In accordance with GAAP
– Cost recovery on non-Federal/State programs
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Enterprise funds
Internal Service Funds
User Fee charges
Cost Allocation Plan
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Federal (A-87) Approval
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GAAP (Full Cost) Plan
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CAP must be prepared annually
Only required to submit to State/Federal
cognizant agency for approval if requested.
No official approval required
Must maintain CAP and supporting
documentation for audit
Approval Not Required
Allocable Central Services
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Mayor and Council
City Manager
Information Tech
City Attorney
Budget and
Research
Internal Audit
Human Resources
Finance
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Building Maintenance
Community Relations
Intergovernmental Relations
Asset Management
Non-Departmental Costs
Building Use/Depreciation
Equipment Use/Depreciation
More…
Basic A-87 Cost Allowability
Guidelines
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Necessary and reasonable
Allocable
Authorized under state or local laws
Not otherwise restricted by statute
All activities charged uniformly
Consistent treatment
In accordance with GAAP
Not included as a cost of another Federal award
Net of all applicable credits
Adequately documented
Common A-87 Unallowable Costs
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Lobbying
Advertising (except for hiring) and public relations
Contingencies/reserves
Investment management
Idle facilities
Self-assessed taxes
Capital Outlays
Unallowable Central Services in an
OMB A-87 Plan
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General government - Mayor/Council
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May be portions allowable
City/Parish Clerk
Revenue and Taxation - tax collection
services
Intergovernmental Relations
Community Relations
Public Information Office
Departmental administrative cost centers*
Plan Methods
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Simplified Method
– Easy, but imprecise for most organizations
– Assumes uniform central service support to all
departments
– Susceptible to audit exceptions by Federal
cognizant agencies
Multiple Allocation Base Method
– Complex, but accurate (double step-down)
– Reflects differences in central services provided
to departments
Plan Development Tasks
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Review and analyze City/Parish organization
structure
Identify central service departments
Obtain and analyze detail financial data
Reconcile detail financial data to CAFR
Plan Development Tasks (Continued)
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Interview Central Service Department Staff
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Identify activities performed
Identify department/entities served by each
activity
Identify staff and operating for each activity
Identify an appropriate allocation base
(statistic) for each activity
 Equitable
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 Available
Plan Development Tasks (Continued)
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Obtain allocation base data (statistics)
Enter/Import data into CAP software
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Central service expenditures
Activity allocation bases
Process calculations
Review for accuracy/reasonableness
Develop summary schedules
Complete Plan
Reviewing a Cost Allocation Plan: Cost
Plans should be a “Road Map” of Costs: Where they came
from; how they are being distributed; results of distribution
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Reviewing a Cost Allocation Plan
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Reviewing a Cost Allocation Plan
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Reviewing a Cost Allocation Plan
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Reviewing a Cost Allocation Plan
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Reviewing a Cost Allocation Plan
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Who Prepares Cost Allocation
Plans?
Cost Allocation Plans (CAPs) are prepared by:
•Professional firms specializing in CAP preparation
•In-house employee of governmental entity
•Not at all
•Often requires special software
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Common CAP Pitfalls
•Over/under identifying allocable central service costs
•Under identification is more common
•Plan structure doesn’t match organization structure
•Plan structure stagnates over time
•Methodology established years ago, not updated to match
changes in organizational service delivery
•Information Technology & Purchasing
•Utilizing estimates in expenditure distributions or allocation statistics
•Charging Full Cost Allocation Plan results (instead of A-87) to a
department with federal funds (they can’t pass them on)
•Missed opportunities in application of results
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Common CAP Pitfalls
•MGT has found that a majority of the CAPs prepared in-house or by
consultants that have not conducted departmental interviews on a
regular basis have unidentified allocable costs, and plan structures
that don’t match the actual organization
•Lower recoveries
•Increased audit risk
•Example City, Massachusetts – In-house full cost plan designed in
late-1990’s. In 2000, employee benefits were moved out of individual
department budgets, and into their own fund.
• Methodology was never updated to capture the benefits
• Over $1 million dollars of un-reimbursed costs as a result
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Creating Indirect Cost Rates
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Indirect Cost Rate Proposal
The document required by OMB A-87 to be prepared by
a governmental unit or subdivision thereof to
substantiate its request for the establishment of an
indirect cost rate.
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Indirect Cost Rate
A device for determining in a reasonable manner the
proportion of indirect costs each program should bear. It
is the ratio (expressed as a percentage) of the indirect
costs to a direct cost base.
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Indirect Cost Rates
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Approval
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Rates must be prepared annually
Only required to submit to State/Federal
cognizant agency for approval if requested.
No official approval required
Must maintain supporting documentation for audit
Indirect Cost Rates
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Components needed to calculate an indirect cost
rate
– Indirect costs
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Rate base
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From cost allocation plan
Salaries & Wages
Total Direct Modified Costs
Divide the rate base by the indirect costs to
determine indirect rate (percentage)
Indirect Cost Rates
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Application of Rates
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Rate is a maximum
Not required to charge all federal programs
Not required to charge same rate but can not
exceed approved or maximum rate
Typically must be included in award budget to be
reimbursed
Changes based on City/Parish fiscal year, not
Federal fiscal year
Applied and claimed as direct costs are incurred
and reported
Applications & Extensions of Full
Cost Allocation Plans
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Full Cost Plans are not restricted by A-87, reflect
total operating costs
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Management Information
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Can be based on budgeted costs
Can utilize estimates
More accurate reflection of total cost of operation
Full program cost identification
Unit cost information to compare with market for outsourcing
decisions (must also evaluate fixed vs variable costs)
Resource utilization analysis
Recovery of costs from Enterprise/Utility funds
Use in costs calculated for User Fees
User Fees
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User Fees Defined
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User fees are charges for the cost of goods or
services provided directly to the user rather
than the general taxpayer.
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When local governments impose taxes, there is typically no
direct relationship between the amount paid for government
services and the benefit received by an individual taxpayer.
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With a user fee there is a reasonable connection between
the activity or service and the benefit received by the
individual paying a fee.
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Local governments impose user or regulatory fees to pay for
the cost of providing a service or regulating an activity.
Reasons for User Fees
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Tax Relief
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Equity
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Matches cost recovery with service users (pay
for what you get)
Efficiency
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Relieves pressure on tax based revenues,
particularly in the General Fund.
Encourages more prudent use of the service
Reasons for User Fees
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Services provided for a specific individual or
group should not be paid from general taxes
Services provided to non-residents should
not be paid from general taxes
Beneficiaries of a service should pay for the
service
Comparison of Taxes and User Fees
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TAXES
USER FEES
Benefits the community
Benefits specific individuals or groups
Service cannot be withheld if
beneficiaries refuse to pay
Service can be withheld if
beneficiaries refuse to pay
Utilization is difficult to measure
Utilization can be measured
Use of service is mandatory
Use of service is discretionary
Unable to impact usage of service
Able to ration or balance usage of service
Private sector unlikely to
provide similar services
Private sector may
provide the service
Same level of service is available
to all users
Selective level of service for users
based on ability or desire to pay
Components of User Fees
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Direct Costs
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Indirect Costs
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Departmental Overhead
City/Parish-wide Overhead
Other Costs
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Salaries, Benefits, direct Operating Expenses
Cross over support costs
Multiple departments directly involved in single
service
Calculating Full Cost
Direct costs
1.
A.
B.
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Salaries and Benefits
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Who provides the activity or service?
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How long does it take?
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How many are provided?
Services and Supplies
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Directly identified or
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Allocated proportionately
Calculating Full Cost
Indirect costs
2.
A.
B.
C.
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City/Parish-wide
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Full Cost Allocation Plan
Department admin
Crossover support
Example – Use Permit
1A+1B+2A+2B+2C = Full Costs
Direct – Salaries & Benefits
Direct – Services & Supplies
Admin & Indirect
Full Cost – Annual
(100 per yr)
Full Cost – Per Unit
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$ 17,500
$ 5,000
$ 10,000
$ 32,500
$
325
Labor Rate Service Hours
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Available hours (100%)
Less non service hours (20%)
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Paid Holiday
Personal Leave/Vacation
Training
Administrative
2080
(80)
(176)
(40)
(120)
Service Hours (80%)
1664
Using service hours instead of available
hours makes sure your rates reflect your
cost, not the employees rate of pay
Application of Full Cost Productive
Hourly Rate
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Determine How Much Time is Spent of Each Activity?
ACTIVITY
HOURS
Intake
Interagency Review
Staff Report
Plan. Comm. Prop.
Filing/Archiving
Data Review
Plan Check/Inspection
Subtotal
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Blended Hour Rate
(Hour rate indiv. calc.)
Fee @ Full cost
0.50
3.50
4.00
3.00
1.50
2.50
12.00
27.00
$
95.75
$ 2,585.25
User Fee Pricing Decisions
Who
Benefits
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Type of
Service
Tax vs. Fees
Policy
Example
Services
Community
Public
100% taxes
Police patrol services
Primarily the individual
with some community
benefits
Public / Private
Mostly taxes
& some fees
Code enforcement
services
Primarily the individual
with some communitywide benefits
Private / Public
Mostly fees
& some taxes
Youth sports
Individual benefit only
Private
100% fees
Development services
The Acid Test - Implementation
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There is no Free Lunch. Services that are subsidized
means less funding for other services
The Sin is not in Knowingly Subsidizing a Service:
The Sin is Unknowingly Subsidizing a Service
Designed Subsidization can be an Effective Tool in
Community Enhancement
Work with Stakeholders for Conceptual
Understanding
Conclusion
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Questions
Contact Information
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Sherra Montz – smontz@mgtamer.com
Phone: (504) 482-7280
Bret Schlyer – bschlyer@mgtamer.com
Phone: (316) 214-3163