New Rulemaking on Direct Grants

On Thursday, the U.S. Department of Education (ED) released a notice of proposed rulemaking (NPRM) regarding the determination and recovery of indirect costs in direct grant programs. The proposed regulations would amend sections 75.560 (dealing with temporary indirect cost rates), 75.562 (dealing with indirect costs in training grants) and 75.564 (dealing with group awards under training grants) of the Education Department General Administration Regulations (EDGAR).

Temporary indirect cost rates: Under current regulations, grantees must have negotiated indirect cost plans in place in order to charge indirect costs to federal grants. ED has the authority to approve a temporary rate for grantees who do not have existing indirect cost plans in place; however, as a practical matter this is rare. The proposed regulations would make it easier to obtain a temporary rate.
Under the proposed rule, grantees must submit indirect cost plans to their cognizant agencies (the agency responsible for approving indirect cost plans) within ninety days after receiving a direct grant from ED. During that time, ED can authorize the grantee to charge a temporary rate of 10% of the direct salaries and wages included in the grantee’s approved budget. If the grantee submits a plan to its cognizant agency within the first ninety days of the grant award, then it may continue to use the temporary rate until the plan is approved. If the grantee does not submit a plan to its cognizant agency by the ninetieth day, the temporary rate expires and the grantee must discontinue charging indirect costs to the grant.
Once a final rate is approved, the grantee must make adjustments to ensure its total recovery does not exceed the approved rate.
Training grants: Part 75 of EDGAR provides special rules for indirect costs in educational training grants. Training grants generally support instructional activities such as summer institutes, training programs for selected participants, or the introduction of new or expanded courses, as opposed to activities simply related to the development or dissemination of educational materials. Grantees under training grants may recover their actual indirect costs (as determined under a negotiated indirect cost plan); however, the recovery of non-governmental grantees is capped at eight percent.
Indirect cost plans generally determine the ratio of a pool of indirect costs (numerator) to a base of direct costs (denominator). The base consists of “modified total direct costs.” Current regulations define modified total direct costs as all total direct costs minus stipends, tuition and related fees, and capital expenditures of $5,000 or more. The proposed regulations would remove the reference to “capital expenditures of $5,000 or more” and replace it with “equipment.” They would also clarify that any amount of a sub-award exceeding $25,000 must be excluded from the base as well.
The NPRM addresses two somewhat controversial issues. Regarding equipment, ED’s Office of the Chief Financial Officer (OCFO) has been somewhat inconsistent in how it treats items purchased with federal funds. EDGAR defines equipment as all tangible personal property with a useful life of more than one year and an acquisition cost of $5,000 or more unless the state sets a lower threshold. EDGAR then requires grantees and subgrantees to track equipment as part of an inventory management system. Notwithstanding EDGAR’s clear definition of equipment, OCFO monitors have cited state and local education agencies for failing to track items below the $5,000 threshold – items that legally constitute supplies and do not need to be tracked. At the same time, the preamble to the proposed indirect cost regulations make clear the OCFO will follow the EDGAR definition for purposes of indirect costs. Thus, the OCFO seems to apply different criteria for “equipment” in different contexts.
Regarding sub-awards of more than $25,000, OMB Circular A-87 requires state and local education agencies to exclude “major” contracts from their indirect cost calculations. Neither A-87 nor EDGAR currently defines what constitutes a “major” contract; however, OMB Circulars A-21 and A-122 do set the threshold at $25,000. In order to be consistent, federal agencies have generally agreed that a major contract is a contract exceeding $25,000. The proposed regulations would finally clarify this rule in the context of direct training grants. It is important to note, however, that ED applies the same limitations in state-administered programs as well.
Group Grants: The proposed regulations would clarify that when a training grant is provided to a group of eligible recipients, the grant funds allocated between group members do not constitute sub-awards for purposes of calculating and applying indirect cost rates.
Interested parties can comment through June 25, 2007.
Author: SLK