MRSC has joined with Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, Glenn Olson, Deputy County Administrator, Clark County, and Angie Sanchez, Principal, FCS GROUP, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
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Indirect Cost Allocation Basics
By Peter Moy, Principal, FCS GROUP
have overhead and administrative costs essential to operating the
government and providing services to the public. Examples include
costs incurred for a city council, a board of commissioners, a city
manager or county administrator, human resources, financial
management, government facilities, insurance, purchasing, records
management, and information technology. These costs are usually
funded by a jurisdiction’s general fund, but a jurisdiction has
many other types of funds that provide a variety of services that use
these administrative and overhead resources. These indirect services
are provided to the jurisdiction’s operating departments such
as police, fire, parks and recreation, development services, public
works, library, and utilities.
Over the past year a
number of cities and counties have focused on how they allocate their
general fund indirect costs or their administrative costs to other
funds and services. For some, their review of cost allocation
practices is a response to their audit by the State Auditor’s
Office. Over the years, we have encountered a variety of different
methods for allocating these general fund indirect costs to
enterprise funds, other funds, and services. For example, allocations
are limited only to enterprise funds; or administrative staff (e.g.
finance staff) are budgeted in and charged to different funds and
services based on time estimates of their efforts spent working in
those areas. These types of allocations are usually partial
allocations, use undocumented time estimates, are not related to
measurable factors, and are not updated annually. There are also
cities and counties that have formal and more complete indirect cost
allocation plans that are prepared every year and document their
allocation of costs.
So, why have a
formal indirect cost allocation plan? A formal indirect cost
allocation plan can help a jurisdiction do the following:
the actual cost of all services,
service providers for estimated or actual costs incurred to deliver
cost-based user fees for public services such as development review,
parks, administration, or any service where the user pays all or
part of the cost directly, and
central services costs through federal program reimbursement based
on the Office of Management and Budget A-87 guidelines.
prepare an indirect cost allocation plan there are six basic steps.
- Evaluate the
Categorize the departments and funds as direct or indirect services;
identify within indirect service departments any distinct program
areas of service (e.g. payroll, accounts payable, utility billing);
and identify any indirect services provided by direct service
departments and vice-versa (e.g. public works or parks providing
facilities and grounds maintenance activities for all buildings).
available budget or actual financial information:
Compile the total costs related to indirect services as described in
the most recent budget or actual expenditures.
Form the basis for allocating indirect service costs by gathering
the most recent available data sets or easily estimated workload
measures consistent with the expenditure year, such as square
footage or number of full time equivalent positions. (Key point:
Only use data sets that can be easily gathered in subsequent updates
to keep the allocation plan current.)
Adjust for any costs that should not be allocated, costs that can be
assigned directly, and any other agreed upon revisions that do not
diminish the “cost-basis” of the plan.
Allocate indirect costs using a one or two step methodology
depending on the complexity of the organization and the levels of
indirect services included in the plan and based on each
department’s proportionate share based on the workload
measures/allocation factor for each indirect cost pool.
full cost overhead: Identify
each direct service’s full share of indirect costs.
While preparing the
plan, consider the following principles concerning indirect cost
that cost allocation is, by definition, an estimate and can be
for a reasonable and equitable means to allocate costs,
real and current costs,
cost allocation measures that are real and current, and
allocation measures that reasonably link to the level of service
and/or benefit received, or at least represent an acceptable means
for apportioning the costs.
As local governments
continue to struggle with the challenge of limited general fund
resources, a formal and well documented indirect cost allocation plan
can help assure that all funds and services contribute their fair
share of a jurisdiction’s general fund administrative and
overhead costs. A jurisdiction without a formal plan or that
allocates costs without appropriate documentation does not know
whether it is recovering its fair share of costs and might also be
more susceptible to State Auditor findings related to its allocated
costs to other funds.
Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance
Officers Association and is the Vice Chair of the GFOA Budget
Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey
co-founded the annual Budget and Fiscal Management Workshops held
each summer. Mr. Bailey conducts numerous workshops and has authored
various articles on local government finance, including Effective
Budgeting in Washington State Cities published by the Association of
Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.
Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.
Angie Sanchez Virnoche is a principal and shareholder at FCS GROUP, a consulting firm specializing in public sector financial, economic and management consulting. Angie has provided financial utility business advisory services to municipalities since 1993 for water, sewer, solid waste, storm water and electric utilities. Her project work includes multi-year financial planning, cost of service studies, conservation based rate design development, capital/infrastructure planning, funding alternatives, cost benefit analysis, and community education and involvement. Angie has presented at numerous conferences and workshops throughout her career on topics related to financial management and rate-setting including WFOA, ERWOW, WAPUD, NWPPA, WOW, AWWA, PWC, WASWD.
*The Articles appearing in the "Finance
Advisor" column represent the opinions of the authors and do not
necessarily reflect those of the Municipal Research and Services Center.