News & Press

GASB Statement No. 101, Compensated Absences

Fri, 27 Jun 2025 15:58:00 GMT

GASB Statement No. 101, Compensated Absences

Professional Standards
Committee Highlights

GASB STATEMENT NO. 101, COMPENSATED ABSENCES

For local governments with a June 30 fiscal year-end, Governmental Accounting Standards Board (GASB) Statement No. 101, Compensated Absences, is required to be implemented for the year ended June 30, 2025. As compensated absences have been redefined to include items such as sick leave, local governments will need to include sick leave in the calculation of the compensated absence liability.

The Government Finance Officers Association (GFOA) has developed a tool to assist members in calculating sick leave as part of the compensated absence liability. The tool contains examples of two approaches to estimate sick leave for the compensated absence liability – the dollars paid approach and the days used approach. Each approach requires local governments to collect data on a representative sample of active employees to determine the number of sick leave dollars paid or sick leave days used in prior years.

GFOA membership is required in order to access the tool on the GFOA website at GASB 101 Compensated Absences Tool – Sick Leave.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at donna.lee@cityofconcord.org.

The Professional Standards Committee operates as a technical resource to CSMFO members. The Committee is comprised of municipal and commercial members whose mission is to keep members informed of emerging issues and best practices.

Disaster Relief Provided Under the SECURE 2.0 Act

Thu, 16 Jan 2025 13:45:00 GMT

The SECURE 2.0 Act of 2022 introduces new provisions offering special relief to retirement plan participants, including those in 457(b) plans, impacted by federally declared disasters. These provisions aim to provide financial flexibility and ease access to retirement savings during times of significant hardship.

Key elements of the disaster relief provisions include:

1. Qualified Disaster Distributions: Participants can withdraw up to $22,000 from retirement plans without incurring the 10% early withdrawal penalty typically applied to distributions before age 59½.

2. Loan Repayment Delays: Repayments for new or existing loans can be delayed for up to one year for individuals in disaster areas, offering additional financial relief.

These optional provisions apply to disasters occurring on or after January 26, 2021, and they provide critical flexibility to individuals facing financial challenges due to natural disasters. Plan sponsors are encouraged to amend their retirement plans to incorporate these provisions, ensuring participants can take advantage of the relief options. Participants should consult a financial advisor or tax professional to understand the implications and opportunities for their specific situations. If you have questions regarding this article, contact Javier Obando, Retirement Plan Consultant at Sage View Advisory Group.

Javier M. Obando |Retirement Plan Consultant | SageView Advisory Group

Phone: 415.385.8969; Email: jobando@sageviewadvisory.com

Javier Obando is a Director and Retirement Plan Consultant at SageView Advisory, specializing in the management of 457, 403(b), 401(k), and 401(a) governmental retirement plans. With over 28 years of experience in the field, Javier has focused on governmental retirement plans since 1997. He is an active member of the National Association of Government Defined Contribution Administrators (NAGDCA), where he serves on the NAGDCA Awards Committee. In this role, he evaluates submissions from over 60 cities, counties, states, and special districts, assessing plan design, administration, participant education, communication, and initiatives to promote financial wellness.

Additionally, Javier is a member of the California Society of Municipal Finance Officers (CSMFO) and serves on its Professional Standards Committee. He has also presented at various CSMFO chapter meetings on topics such as Financial Wellness and Fiduciary Responsibility in managing 457 and 401(a) plans.

Professional Standards Committee Highlights - Preparing for the Super Catch-Up Contribution

Wed, 18 Dec 2024 19:38:00 GMT

Starting January 1, 2025, a new optional provision under the SECURE 2.0 Act allows retirement plan participants to defer an additional 50% of the permissible Age 50 Catch-Up contribution, also referred to as the "super catch-up" contribution, during the calendar years when participants turn 60, 61, 62, or 63. This change is designed to help individuals nearing retirement maximize their savings during these critical years.

The super catch-up contribution applies to 401(k), 403(b), and 457(b) plans. Some deferred compensation plan providers are proactively incorporating this provision, while others are offering it on an opt-in basis.

Employers should coordinate with payroll departments to confirm whether their systems can accommodate the new contribution limits. Ensuring seamless implementation will help minimize administrative challenges and allow participants to fully benefit from the provision.

It is essential that finance officers determine their plan’s approach—whether to opt in or opt out—and promptly notify their deferred compensation plan provider.

By taking early action and collaborating with payroll, you can ensure compliance and support your employees’ retirement readiness.

The Internal Revenue Service has published guidance on this new provision, as well as other changes set to take effect in 2025, which can be found here: https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at standards.chair@csmfo.org.

GASB Makes Changes to the Financial Reporting Model with the Issuance of GASB 103

Tue, 19 Nov 2024 21:51:00 GMT

In April 2024, the Government Accounting Standards Board (GASB) issued Statement No. 103, Financial Reporting Model Improvements, which marks the first set of changes to the GASB Statement No. 34 financial reporting model. The Statement is applicable for periods beginning after June 15, 2025, and aims to enhance transparency and consistency in financial reporting.

The project, which began in 2016, was considering changes that would impact much of the financial statement presentation we see today, including changes to the measurement focus and basis of accounting, a revised statement of activities format, a possible cash flow statement for governmental activities, enhancements to the management’s discussion and analysis (MD&A), re-evaluation of permanent funds, possible additional disclosure information related to debt service funds….and much more.

Throughout the project, the GASB solicited feedback from the industry and ultimately, there were five key areas that were impacted.

Management’s Discussion and Analysis
There is a focus in the Statement on keeping the MD&A fact based and telling the story of what happened during the year. The focus should be on the primary government and include facts, decisions, or conditions that users may not be aware of. There are also enhancements to comparative information, long-term liabilities, and capital asset comparisons.

Unusual and Infrequent Items
In the past, there was confusion over whether a transaction qualified as a special item or an extraordinary item. This Statement eliminates the two classifications and creates one with a focus on determining if an item is unusual or infrequent. If it is, then it’s shown separately on the income statement. It’s important that each item be shown separately on the income statement and not netted together. The Statement also adds a footnote disclosure that details the impacts of the item and whether or not the transaction was within management’s control.

Proprietary Fund Statements
The Statement clearly defines nonoperating revenues and expenses as (1) subsidies received and provided, (2) contributions to permanent and term endowments, (3) revenues and expenses related to financing, (4) resources from the disposal of capital assets and inventory, and (5) investment income and expenses. Operating revenues and expenses include everything else not defined as nonoperating.

There is no longer discretion in determining operating and nonoperating revenues and expenses classifications. It does, however, allow for an alternative approach to show noncapital subsidies as a part of operating revenues or expenses if these subsidies are provided on a regular basis.

Major Component Unit Information
The Statement eliminates the option to present major component information using more than one method. If there are multiple major component units and readability is impacted, they may be presented in aggregate with a combining statement that shows each one after the fund financial statements as a part of the basic financial statements. This would be a new statement following the fiduciary fund statements.

Budgetary Comparison Information
The Statement provides for a single method of communicating budgetary comparison information - Required Supplementary Information (RSI). Budgetary comparison information is required to present (1) variances between original and final budget amounts and (2) variances between final budget and actual amounts. In addition, the notes to RSI should provide an explanation of significant variances.

In conclusion, these changes are manageable and significantly less extensive than what the GASB initially considered. While you have some time to prepare, don’t fall behind and wait to address these changes. For more details, you can view all GASB statements and access the full text on their website at https://gasb.org/standards-and-guidance/pronouncements, or use the new Governmental Accounting Research System (GARS) at https://gars.gasb.org/Login for comprehensive access.

Kelly Telford, CPA, is a partner in LSL’s consulting & advisory department and has over 20 years of experience in working in and with government agencies. Her background includes auditing, accounting, financial forecasting, budget development, public utilities, investment management, grant management, human resources, and information technology.
Kelly oversees engagements for a variety of non-profit and governmental clients, providing consulting services, often acting as an extension of their finance department.
Prior to returning to LSL in 2022, Kelly served as the Director of Finance and Treasurer for the cities of Seal Beach and Costa Mesa.

Professional Standards Committee Highlights – GASB 103 Changes to Financial Reporting Model

Wed, 6 Nov 2024 21:58:00 GMT

In April 2024, the GASB issued Statement No. 103, Financial Reporting Model Improvements which marks the first set of changes to the GASB Statement No. 34 financial reporting model. The Statement is applicable for periods beginning after June 15, 2025, and aims to enhance transparency and consistency in financial reporting.

The project, which began in 2016, was considering changes that would impact much of the financial statement presentation we see today, including changes to the measurement focus and basis of accounting, a revised statement of activities format, a possible cash flow statement for governmental activities, enhancements to the MD&A, re-evaluation of permanent funds, possible additional disclosure information related to debt service funds…and much more.

Throughout the project, the GASB solicited feedback from the industry and ultimately, there were five key areas that were impacted.

Management’s Discussion and Analysis
There is a focus in the Statement on keeping the MD&A fact based and telling the story of what happened during the year. The focus should be on the primary government and include facts, decisions or conditions that users may not be aware of. There are also enhancements to comparative information, long-term liabilities and capital asset comparisons.

Unusual and Infrequent Items
In the past, there was confusion over whether a transaction qualified as a special item or an extraordinary item. This Statement eliminates the two classifications and creates one with a focus on determining if an item is unusual or infrequent. If it is, then it’s shown separately on the income statement. It’s important that each item be shown separately on the income statement and not netted together. The Statement also adds a footnote disclosure that details the impacts of the item and whether or not the transaction was within management’s control.

Proprietary Fund Statements
The Statement clearly defines nonoperating revenues and expenses as (1) subsidies received and provided, (2) contributions to permanent and term endowments, (3) revenues and expenses related to financing, (4) resources from the disposal of capital assets and inventory, and (5) investment income and expenses. Operating revenues and expenses include everything else not defined as nonoperating.

There is no longer discretion in determining operating and nonoperating revenues and expenses classifications. It does, however, allow for an alternative approach to show noncapital subsidies as a part of operating revenues or expenses if these subsidies are provided on a regular basis.

Major Component Unit Information
The Statement eliminates the option to present major component information using more than one method. If there are multiple major component units and readability is impacted, they may be presented in aggregate with a combining statement that shows each one after the fund financial statements as a part of the basic financial statements. This would be a new statement following the fiduciary fund statements.

Budgetary Comparison Information
The Statement provides for a single method of communicating budgetary comparison information—RSI. Budgetary comparison information is required to present (1) variances between original and final budget amounts and (2) variances between final budget and actual amounts. In addition, the notes to RSI should provide an explanation of significant variances.

In conclusion, these changes are manageable and significantly less extensive than what the GASB initially considered. While you have some time to prepare, don’t fall behind and wait to address these changes. For more details, you can view all GASB statements and access the full text on their website at https://gasb.org/standards-and-guidance/pronouncements, or use the new Governmental Accounting Research System (GARS) at https://gars.gasb.org/Login for comprehensive access.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at standards.chair@csmfo.org.

Navigating Federal Grant Compliance Changes: Uniform Guidance Revisions

Tue, 29 Oct 2024 22:03:00 GMT

On April 4, 2024, the Office of Management & Budget (OMB) issued revisions to the Uniform Guidance (2 C.F.R. Part 200). While this is not the first revision to Uniform Guidance, this is the first extensive revision since it went into effect a decade ago. The most impactful of the changes are included for consideration in this article, however there are many more changes that recipients of federal awards should be aware of.

What to Expect from October 1, 2024, and Beyond

Starting October 1, 2024, all newly issued federal awards must comply with the 2024 Uniform Guidance revisions. If your award was issued before this date, these revisions might still apply if the awarding agency decides it's suitable (e.g. award extends into your fiscal year following implementation of revisions, or beyond) or additional funding is provided. Generally, agencies cannot retroactively enforce new requirements and the 2024 Uniform Guidance revisions will typically only impact activities after the contract or amendment date. However, with written approval, some provisions that reduce your burden may apply to past activities—examples of an exception could be the application of the new de minimis indirect cost rate or the updated definition of modified total direct cost (MTDC).

If your award is amended to include the 2024 revisions, these changes will also apply to any subawards. As a pass-through entity, you must amend any subawards under the respective grant accordingly. If your federal agency hasn't applied the 2024 revisions to your award, you cannot apply them to subawards on your own, even if the subawards are issued after October 1, 2024, under a grant that was issued prior to that date.

Updates to Notices of Funding Opportunities (NOFOs)

Federal agencies must update NOFOs issued before October 1, 2024, if they lead to awards after that date, to notify applicants about the 2024 revisions. Agencies should also update active NOFOs on Grants.gov to reflect these changes. If an application period has closed, agencies need to inform selected recipients that the 2024 revisions will apply. Applicants may need to revise and resubmit their budgets to reflect the new changes, such as the increased de minimis indirect cost rate, if the award is going to be granted after October 1, 2024.

Key Definition Updates

Period of Performance: Now excludes estimated start and planned end dates. It now specifies that the period of performance means the time interval between the start and end date of a Federal award, which may include one or more budget periods. Notably, identifying the period of performance in the Federal award as per §200.211(b)(5) does not obligate the Federal agency to provide funding beyond the approved budget period.
Questioned Costs: These are costs auditors find potentially noncompliant, poorly documented, or unreasonable. These costs remain uncertain until reviewed and confirmed as improper based on OMB Circular A-123 Appendix C. They encompass both specifically identified and estimated costs. New audit reporting requirements now include explanations for questioned costs when the amount is unknown or not reported.

Clarification on Fixed Amount Awards and Contracts Section 200.201

Section 200.201 includes updates on fixed amount awards and contracts:

Negotiation and Budgeting: Budgets for fixed amount awards are negotiated between the Federal agency and the recipient or subrecipient based on proposals, pricing data, and subpart E adherence.
Accountability: Accountability is based on performance and results, communicated through performance reports or routine monitoring. No financial reporting is required, but record retention is mandatory as outlined in §§ 200.334 through 200.338.
Cost Sharing: Fixed amount awards must not be used in programs requiring cost sharing.
Program Income: Fixed amount awards may generate and use program income according to Federal award terms, but § 200.307 does not apply.
Certification: Recipients must certify project completion or identify incomplete activities, ensuring all expenditures align with § 200.403. Unexpended funds are retained by the recipient if activities are completed as agreed.
Reports and Approvals: Periodic reports may be required. Prior approval requirements include specific sections of § 200.308 and § 200.333.

New Section 200.217: Whistleblower Protections

Employees of recipients or subrecipients of Federal funds are protected from discharge, demotion, or discrimination for reporting evidence of:

Gross mismanagement of a Federal contract or grant
Gross waste of Federal funds
Abuse of authority related to a Federal contract or grant
Substantial and specific danger to public health or safety
Violations of law, rule, or regulation related to a Federal contract or grant

Recipients and subrecipients must inform their employees in writing about these whistleblower rights and protections under 41 U.S.C. 4712. Refer to the statutory requirements for details at 10 U.S.C. 4701, 41 U.S.C. 4712, 41 U.S.C. 4304, and 10 U.S.C. 4310.

Internal Controls and Cybersecurity Section 200.303

An important update to Section 200.303 focuses on internal controls. When the Uniform Guidance was first issued in 2013, it required organizations to establish, document, and maintain effective internal control over the Federal awards. Recipients and subrecipients are now required to include controls that address cybersecurity and other measures to protect sensitive information. As cyber threats continue to evolve, ensuring your organization has robust protections in place is essential for safeguarding federal funds and program data.

Take time to evaluate your current internal controls and consider enhancements related to data security, especially if you're handling sensitive information or managing large amounts of federal funds. Be sure to include these updates as part of your overall grant management strategy.

Clarification on Program Income Section 200.307

Recent updates to section 200.307 clarify that, unless stated otherwise in the Federal award's terms, or for certain institutions, the deduction method will be used. This reduces the total federal award by the amount of program income earned.

Program income earned after the performance period typically has no handling requirements, unless agency regulations or the award's terms specify otherwise. However, Federal agencies may negotiate the use of post-performance income during the closeout process, providing some flexibility based on the recipient's situation.

Equipment Threshold Increased Section 200.313

The equipment threshold has been raised from $5,000 to $10,000. This change provides more flexibility in how recipients handle smaller assets. When equipment purchased with federal funds is no longer needed for the project, terms of the Federal award may require you to see disposition instructions from the Federal agency or pass-through entity. Here’s what you need to know:

For equipment valued at $10,000 or less: You can keep, sell, or dispose of the equipment with no further obligations to the federal government.
For equipment valued over $10,000: You may still keep or sell the equipment (if certain stipulations are met), but the federal agency is entitled to a share of the proceeds or its current market value, based on their contribution to the purchase. You can also retain up to $1,000 from the federal share to cover selling or handling expenses.

Additionally, if the equipment is lost, damaged, or stolen, and this impacts the program, you must notify the federal agency or pass-through entity.

This doesn’t change the threshold an agency uses to determine capitalization of costs as a capital asset as this would still follow the agency’s capitalization policy. It only impacts the need to flag those assets as being funded with federal awards.

Supplies Threshold Increased Section 200.314

The threshold for supplies has also been increased from $5,000 to $10,000. Like equipment, any unused supplies valued over this amount may require compensation to the federal agency. This change applies to all types of supplies, not just similar items, so be sure to account for them in your grant management.

Procurement Updates Sections 200.318, 200.319, and 200.320

200.318, General Procurement Standards - has been updated to include allowable provisions for contracts to reflect labor-related goals.

200.319, Competition - has removed the restriction on using geographic preferences, and offered clarification on incorporating a scoring mechanism that rewards bidders committing to specific performance metrics.

200.320, Procurement Methods - revised to streamline processes and clarify terminology:

Local and tribal governments are no longer required to publicly open sealed bids.
"Small purchases" is now referred to as "simplified acquisitions."
Both "micro-purchases" and "simplified acquisitions" are classified as informal procurement methods, simplifying the process for smaller purchases.

Subrecipient and Subaward Updates Sections 200.332 & 200.333

Pass-through entities now have a requirement to ensure that potential subrecipients are not suspended or debarred from receiving federal funds.
The threshold for fixed amount subawards has increased from $250,000 to $500,000, with written approval from the federal agency, and compliance with Section 200.201.
Similarly, the threshold of subawards for modified total direct costs has been raised from $25,000 to $50,000.

Indirect Costs: What’s New?

If you’re managing indirect costs, here are some important updates:

NICRAs (Negotiated Indirect Cost Rate Agreements) in place before October 1, 2024, must be honored, but they can be renegotiated to reflect the new Modified Total Direct Costs (MTDC) base. OMB supports requests to renegotiate NICRAs that will be effective beyond October 1, 2025.
For provisional, predetermined, or fixed rates:
Rates in effect before October 1, 2024, must be finalized with the approved MTDC base.

Future provisional rates must use the new MTDC base starting October 1, 2024.

New De Minimis Rate

As a recipient of a federal award, beginning October 1, 2024, you have the option to use the new 15 percent de minimis indirect cost rate for any award executed on or after this date. All Federal agencies are required to honor this updated de minimis rate unless a different rate is specified by law (such as Federal statute or regulation) or permitted by 2 CFR part 200. If you are submitting proposals to Federal agencies before October 1, 2024, for programs anticipating awards on or after October 1, 2024, you may incorporate the 15 percent de minimis rate into your budget calculations, even if the NOFO has not yet indicated that the 2024 revisions will apply.

For your existing awards, in line with the guidelines under Federal Agency Adoption and Implementation of 2 CFR, Federal agencies may permit you to apply the 15 percent de minimis rate to current awards, provided there are adequate funds available to support this rate. In such instances, you must only apply the 15 percent de minimis rate to costs incurred after the amendment's effective date implementing this rate. You are prohibited from retroactively applying the de minimis rate to costs incurred before the effective date of the amendment.

Updated Guidelines for Organization Costs Section 200.455

Section 200.455 on Organization Costs has been revised to include new allowable costs concerning data and evaluation. Data-related expenditures can include data systems, personnel, cybersecurity, and other essential items for managing and enhancing programs. Evaluation expenses may encompass evidence reviews, planning evaluations, conducting evaluations, and sharing results to improve program design and administration. Moreover, this section now specifies that costs related to persuading or dissuading employees from collective bargaining and associated activities are unallowable.

Single Audit Requirements: What’s Changing?

Single Audit Threshold
Significant updates to Single Audit requirements in Subpart F will take effect on October 1, 2024. The audit threshold will rise to $1,000,000 for fiscal years starting on or after this date. Federal agencies were permitted to implement these changes earlier for new or amended awards beginning June 21, 2024. Compliance requirements from the 2024 revisions must not be applied to your awards issued prior to October 1, 2024, unless the Federal agency has implemented these revisions.

Single Audit Reporting Extension
If meeting the nine-month submission deadline for Single Audit reports imposes an undue burden on you, you can request an extension from the cognizant or oversight agency. The agency will consider whether the delay is due to significant and unavoidable circumstances and how it impacts other project activities. Extensions aren’t granted solely to maintain a low-risk auditee designation, though that could be an incidental result of the extension. Additional guidance on this process is provided in OMB Memorandum M-24-11.

Agencies authorizing extensions must inform all relevant Federal agencies and the OMB. In cases of significant events affecting many recipients, OMB will ensure consistent extensions across cognizant agencies. Agencies must also notify the recipient of their decision regarding the extension request.

What You Need to Do as the Recipient of Federal Awards

As a recipient of federal awards, you may need to manage both awards pre-2024 revisions and new awards under the 2024 revisions simultaneously. It is crucial to note that while it may be necessary for you to implement organizational changes to accommodate the new awards incorporating the revisions, certain flexibilities granted by the new revisions will not apply to Federal awards issued before these revisions became effective.

Collaborate closely with your Federal agency during this period to clearly outline the requirements specific to each Federal award. Additionally, these agencies can assist you in addressing any questions about how systematic changes (e.g., internal controls, mandatory disclosure procedures) could impact your compliance with the terms and conditions of your existing Federal awards.

It's also important to note that these changes do not represent all changes to the Uniform Guidance. To stay compliant with all changes, here are some actionable steps:

Review the Uniform Guidance document and COFFA crosswalk for changes that may impact your agency.
Review your existing grants for potential amendments under the 2024 revisions, and discuss with granting agencies as appropriate.
Revisit grant applications that are pending award for the need to submit additional or updated information.
Review and update policies as appropriate:

a. Include the new whistleblower protections related to Federal funds, and inform your employees in writing.

b. Incorporate changes to equipment and supplies thresholds, and evaluate inclusion of applicable disposition activities.

c. Review subaward activity for applicable changes and incorporate suspension and debarment requirements.

d. Evaluate overall management of the grant with changes per the 2024 revisions.
Review Indirect Cost and Direct Costs under each grant to ensure allowability.
Review Indirect Cost Rate to ensure compliance with 2024 revisions for existing, amended, and new grants.
Prepare for Single Audit Reporting requirements with the new threshold, in line with your entities fiscal year.

Resources

For more detailed information, check out the following resources:

Council on Federal Financial Assistance (COFFA) Resources: A helpful tool offering a crosswalk of the revisions.
Uniform Guidance Document: Full text of the Uniform Guidance for federal awards.
Contact your audit partner for tailored support in implementing these changes, updating your internal controls, or preparing for upcoming audits.

Christian Townes is a Partner at LSL CPAs in the Assurance and Advisory department. She is a dedicated CPA who thrives on problem-solving, working closely with clients to troubleshoot difficulties and develop tailored processes that fit their needs. With a career in public accounting since 2012, Christian has specialized in governmental services and auditing, including federal grant compliance. She collaborates with government agencies, assisting with Financial Statement Audits and Single Audits (Uniform Grant Compliance Audits), ensuring precise reconciliations, and addressing specific client needs.

Professional Standards Committee Highlights – New Uniform Guidance Requirements

Tue, 22 Oct 2024 18:28:00 GMT

In April 2024, the Office of Management and Budget announced significant changes to the Uniform Guidance, now called the Guidance for Federal Financial Assistance, which provides guidelines for compliance with federal grant programs. The new guidance is effective for federal awards made on or after October 1, 2024. Below are some of the significant changes that affect non-federal entities.

Single Audit Requirements – The Single Audit threshold has been increased from $750,000 to $1,000,000. Local governments that annually expend $1 million or more of federal funds in a fiscal year will be subject to a Single Audit. The new audit threshold applies to fiscal years starting on or after October 1, 2024.
Whistleblower Protections – New provisions were added to recognize certain legal protections for whistleblowers. The recipients and subrecipients must inform their employees in writing about these whistleblower rights and protections.
Cybersecurity – Added a requirement that recipient and sub-recipient internal controls include cybersecurity and other measures to safeguard information.
Equipment – Revised the threshold value for equipment from $5,000 to $10,000. Therefore, when equipment is purchased at a cost of $10,000 or less, it can be expensed rather than capitalized.
Requirements for Pass-Through Entities – Added a requirement for pass-through entities to confirm that potential sub-recipients are not suspended or debarred from receiving federal funds.
Indirect Costs – Raised the de minimus rate non-federal entities can use for indirect costs from 10% to 15%. Recipients and sub-recipients that do not have a current federal negotiated indirect cost rate may elect to charge the de minimus rate.

This listing is not a comprehensive listing of all changes to the guidance. Refer to the new guidance at Federal Register :: Guidance for Federal Financial Assistance for more details.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at standards.chair@csmfo.org.

Navigating the Changing Landscape of Development Impact Fees

Thu, 26 Sep 2024 19:52:00 GMT

Executive Summary: The CSMFO North Coast Chapter meeting on August 9, 2024, in Lakeport provided critical insights into the evolving legal and legislative landscape of Development Impact Fees (DIFs). Featuring presentations by Andrea Roess of DTA and Lutfi Kharuf of Best Best & Krieger LLP (BBK), the session explored the implications of the U.S. Supreme Court's Sheetz v. County of El Dorado decision, the impact of California's AB 1600 and related legislative updates, and best practices for public agencies to ensure compliance and defend their DIF programs. This article summarizes the key points from the meeting and offers practical guidance for public finance professionals in California communities.

Understanding the Legal Framework: Traditionally, the Mitigation Fee Act (also known as AB 1600 and set forth in Government Code § 66000 et seq.) governed the imposition of DIFs in California. The Mitigation Fee Act mandates that local agencies imposing fees to mitigate the impacts of new development (i.e. development impact fees, or DIFs) demonstrate a reasonable relationship between the DIFs imposed on development projects and the public facilities related to those projects (both in terms of nature and cost). However, the landscape shifted a bit after the U.S. Supreme Court's decision in Sheetz v. County of El Dorado, which now requires that all DIFs, regardless of whether they are imposed legislatively or administratively, be evaluated under the Nollan/Dolan Test. This test demands that there is an "essential nexus" between the government's interest and the permit condition and that there is "rough proportionality" between the impact of the development and the required mitigation or fee amount.

Implications of the Sheetz Decision: The Sheetz decision introduces some uncertainty for public agencies now, and perhaps more in the future. DIFs in California were previously thought not to be subject to the Nollan/Dolan Test as a result of the Mitigation Fee Act. This ruling challenges agencies to ensure that their DIF programs are defensible under this new scrutiny, raising the stakes for compliance and legal defensibility. The practical impacts of this decision are as yet unknown, however. The Supreme Court pushed the issue back down to the lower courts to examine the DIFs in light of the Nollan/Dolan test, meaning that future case law will help to explain how application of the Nollan/Dolan test will change imposition of DIFs in California, if at all.

AB 1600 and Legislative Updates: The presenters emphasized the importance of complying with the strict reporting requirements in the Mitigation Fee Act. Agencies are required to provide detailed annual and five-year reports, including the identification of fee categories, beginning and ending fund balances, and the specific public improvements funded by these fees. Failure to do so may result in costly audits, fee reductions, and in some instances, refunds of all unexpended DIF proceeds. Further, recent legislative changes, including AB 516, AB 602, and AB 2536, expand these requirements. AB 516, effective January 1, 2024, adds new obligations for tracking public improvements, responding to audit requests, and providing transparency in how fees are collected and used. Agencies must be diligent in maintaining accurate records and ensuring that their nexus studies are up to date, as these are critical in demonstrating compliance and avoiding potential refunds for non-compliance.

Best Practices for Agencies:

In light of recent judicial and legislative changes, California agencies should adopt several best practices to safeguard their DIF programs. While the full extent of Sheetz’s impacts will not be known until future cases interpret its holdings, agencies should still proceed with caution and consider the following strategies to ensure compliance and legal defensibility:

Nexus Studies: Ensure that all DIF programs are supported by comprehensive nexus studies, which must be updated at least every eight years as mandated by law. These studies should clearly demonstrate that DIFs not only meet the substantive requirements of the Mitigation Fee Act, but also show an essential nexus and rough proportionality between the DIF and the impacts to be mitigated.

Documentation and Transparency: Meticulously document the rationale behind fee calculations, including how the fees relate to the impacts of specific projects. Create and maintain capital planning documents, and spend the capital in a timely manner. Transparent communication with stakeholders, including developers, is essential to maintaining trust and avoiding legal challenges. The emphasis on documentation and transparency remains a best practice that reinforces the defensibility of these programs regardless of the impacts of Sheetz.

Annual and Five-Year Reporting: Stay up to date with the stringent reporting requirements under AB 1600. This includes providing detailed annual reports and comprehensive five-year reports that cover the identification of fee categories, fund balances, and planned public improvements. Regular and accurate reporting is essential to maintaining compliance and avoiding potential penalties or refunds. The Sheetz decision does not fundamentally change these requirements, but it does underscore the importance of rigorous reporting as a way to demonstrate compliance with both state law and new judicial interpretations.

Proactive Legal Involvement: Engage legal counsel early in the process of updating impact fee programs to ensure that all aspects comply with the latest legal standards and that the agency is prepared for any potential litigation. Ongoing legal review and advice remain crucial to navigating any potential challenges that could arise as the decision is interpreted in future cases.

Agencies with existing, well-documented nexus studies and transparent reporting practices may already be positioned to comply with the heightened scrutiny imposed by the decision. Nonetheless, it is critical for agencies to continue following best practices, keeping their programs aligned with the evolving legal landscape to mitigate any risks and ensure the continued defensibility of their DIFs.

Case Law Considerations: The session also highlighted the implications of recent case law, such as Hamilton & High LLC v. City of Palo Alto, which reinforces the requirement that in-lieu fees be treated as DIFs under AB 1600. This means they must be included in both annual and five-year reports, and agencies must be prepared for the possibility of refunds if reporting is inadequate.

Contact Information: For further information or to discuss the topics covered in this session, you can contact the presenters:

Andrea Roess
Email: Andrea@FinanceDTA.com
Phone: 800-969-4382
Firm: David Taussig and Associates, Inc. dba DTA

Lutfi Kharuf
Email: Lutfi.Kharuf@bbklaw.com
Phone: 619-525-1302
Firm: Best Best & Krieger LLP

Dan Buffalo serves as the Finance Director for the City of Ukiah, California. He started with the City in July of 2016 after serving as Finance Director for the City of Lakeport, California. Dan has over 18 years of professional local government experience in finance and municipal management, including debt management, continuing disclosure, financial and managerial reporting, and budgeting. He holds degrees from the University of California, Davis and the University of Southern California, as well as certificates in governmental accounting from the University of Georgia, Carl Vinson Institute of Government, and the Advanced Government Finance Institute offered by GFOA and the University of Wisconsin, Madison, School of Business. Additionally, Dan is a Certified Public Accountant, licensed in the State of California. Since 2010, he has taught accounting and business management courses as an adjunct professor at Mendocino College. He currently serves on the CSMFO Board of Directors and chairs the North Coast Chapter. Dan and his wife Megan have three children and enjoy traveling together, spending time as a family, and watching USC and Wisconsin football. In his spare time, he enjoys sleeping.

Tim Seufert is a CSMFO Board Member as well as Managing Director of NBS, a consulting firm working for local government agencies. He has over two decades of experience with local revenues and is often involved with funding and financing projects from their inception and feasibility stage to their completion. This includes significant consulting and administration for Special Financing Districts (SFDs). Tim has addressed the League of California Cities, CSDA, CSMFO and other such audiences. He has a Master of Public Administration from SFSU and a Bachelor of Science in Finance from USC and is a registered Municipal Advisor.

Preparing for Action by the Federal Reserve

Mon, 9 Sep 2024 19:00:00 GMT

At its July 31 meeting, the Federal Reserve (Fed) voted to hold rates steady and left the federal funds target rate unchanged at 5.25% to 5.5%. The monetary policymaking body emphasized that “the risks to achieving its employment and inflation goals continue to move into better balance” and that the incoming data was providing confidence that inflation was moving towards the Fed’s 2 percent target¹. Current market expectations reflect three or four cuts for the remainder of the year, with a first cut in September². (We invite you to read the June 2024 Special Report issued by PFM Asset Management LLC on the Federal Reserve and Rates.)

Here are some considerations for California local government agencies as they position their short-term cash and medium-term fixed income portfolios to navigate a potential decline in interest rates.

Treasury Yields Are Still Above 20-Year Averages. Even though Treasury yields have fallen off of 2023 and 2024 highs, they still may present compelling opportunities for certain agencies and governments to reposition excess liquidity, including checking, money market and local agency investment fund (LAIF) money in fixed income assets to lock in longer-term yields that could be beneficial for cash flows.

Avoid “Chasing the Tail” of Attractive Overnight Rates. Now may not be an appropriate time to abandon longer-term investment strategies in favor of shorter-term options. Although overnight yields in local government investment pools (LGIP) continue to benefit investors’ liquidity needs with monthly interest, diversification potential and useful overnight liquidity, a shift from longer duration investment strategies to shorter term duration benchmarks may not benefit an agency’s long term cash flows in a falling yield environment. Timing the market to reposition portfolios as the yield curve is expected to fall can be difficult, may introduce greater interest rate risk and might be costly to one’s long-term investment strategy.

Maintain Investment Strategy Discipline with Commitment to Cash Flows. We believe in remaining disciplined to your agency’s mandate and benchmark selection. Despite the benefit of hindsight in evaluating the largely impressive performance of LGIP and money market assets, it can be difficult to predict the tops and bottoms of markets. As some market participants anticipate that yields may fall and the treasury curve may steepen, it is important to remain committed to your agency’s investment philosophy and to revisit cash flows to help ensure that the size of your invested assets is appropriate to meet budgetary outflows and unexpected disbursements that are needed throughout the fiscal year.

Contact Information:
Justin Resuello
Client Relations Manager
PFM Asset Management LLC
415.854.7852
resuelloj@pfmam.com

¹ FOMC Minutes July 30 – 31, 2024 (federalreserve.gov)

² Source: Bloomberg Finance LLC, as of August 22, 2024.

PFM Asset Management LLC (“PFMAM”) is an investment adviser registered with the U.S. Securities and Exchange Commission and a subsidiary of U.S. Bancorp Asset Management, Inc. (“USBAM”). USBAM is a subsidiary of U.S. Bank National Association (“U.S. Bank”). U.S. Bank is a separate entity and subsidiary of U.S. Bancorp. U.S. Bank is not responsible for and does not guarantee the products, services, or performance of PFMAM.
NOT FDIC INSURED : NO BANK GUARANTEE : MAY LOSE VALUE

Justin joined PFM Asset Management in 2023 after overseeing municipal bonds and public sector banking relationships beginning in 2007. As a relationship manager, he serves public finance and mission-driven organizations' cash and liquidity management, as well as investment policy and management strategies.

Justin was previously responsible for government and not-for-profit commercial banking relationships at JP Morgan Chase; non-profit healthcare underwriting at Wells Fargo; municipal bond investments at Sterne Agee, First Republic Bank and Mechanics Bank; local government credit ratings at Moody's Ratings (previously known as Moody's Investors Service); and featured articles about credit cards, travel rewards, business loans and investing at Forbes. He has presented at the Washington Financial Officers Association (WFOA) and Arizona Association of School Business Officials (AASBO) conferences. Justin earned a Bachelor of Arts degree in Business Management Economics from UC Santa Cruz, a Master of Public Administration from the Maxwell School of Syracuse University and a PPIA Fellowship from Heinz College of Carnegie Mellon University.

Preparing for the Year End Audit

Thu, 15 Aug 2024 17:42:00 GMT

Last September several Partners at various audit firms throughout California shared tips to help CSMFO members achieve a smooth year-end close for the annual audit process. This year, another one of our commercial partners, whose experience include roles as a Finance and Administrative Services Director, offers a helpful summary and checklist for your reference.

The new fiscal year has begun for most agencies, unless you are one of the few agencies in California who has a September 30th year end. For most agencies, July 1st is the beginning of the new fiscal year, and these tasks would apply to any public agency, regardless of their fiscal year end. The first audit to be completed by the independent auditor is the “interim audit.” This consists of an audit of internal controls such as a review of your agency’s policies and procedures along with preliminary sample testing. Subsequent to the interim audit is the “final audit,” or year end. To prepare for the final audit, which normally occurs around October-November, you will need to do several tasks, including but not limited to the following:

Obtain PBC (Prepared by Client) list from the independent auditor.
Meet with finance department staff to distribute PBC items with deadlines. This could include AP technicians, payroll technician, accountant, senior accountant, utility billing supervisor (if applicable), accounting manager and assistant finance director. However, assign the review of all PBC schedules to the accounting manager or above. The same person should also be the liaison with the auditor
Clear any findings or recommendations from the “interim audit.”
Perform any physical inventory count for stores inventory, vehicle and equipment at or around June 30th.
Prepare aging lists for Utility Billing accounts (30, 60, 90, 120 days, etc), if applicable.
Verify beginning fund balances for all funds tie to the previous year audited financial statements. If they do not tie, you may need to roll forward your previous fiscal year ending balances in your accounting system.
Verify beginning asset and liability accounts tie to the previous year audited financial statements when preparing PBC schedules.
Complete all bank reconciliations for all cash accounts through June 30th.
Verify all budget amounts are entered in the accounting system or ERP system for the fiscal year being audited (should have been done in the new fiscal year prior).
Obtain reports from outside consultants such as OPEB actuarial report and PERS report.
Perform GASB 87 lease accounting and GASB 96 subscription-based information technology journal entries.
Send an Accounts Payable email to the departments reminding them of the 60-day accrual period to obtain invoices for goods received and services rendered by June 30th.
Prepare purchase orders or change orders for any encumbered funds (adopted previously by council action) for the purpose of paying for services rendered or goods received prior to June 30th.
Determine if encumbered funds (adopted previously by council action) for multi-year projects are valid and necessary and prepare purchase order or change order as such for the new fiscal year. This is not for audit preparation.
Determine an appropriate cutoff date for purchases before June 30th to avoid timing issue of when the goods are to arrive vs. the fiscal year the goods were budgeted.
Organize and prepare all grant paperwork for local, state, or federal grants. If federal monies of $750K are spent in a single fiscal year, then a “single audit” is required.
Gather all the necessary information for the statistical section of the ACFR (Annual Comprehensive Financial Report) including ordering the ACFR package from the outside vendor.

The final audit fieldwork is typically completed by the auditors in 1-2 weeks, with the single audit sometimes being completed by the auditors in December or January. After reviewing the draft financial statements and notes and comparing it to the financial system for any unposted audit entries, the Annual Comprehensive Financial Report (ACFR) will be ready to be issued by the auditors. Upon completion of the ACFR, your agency can apply for the Government Finance Officers’ Association (GFOA) Certificate of Achievement of Excellence in Financial Reporting. This is a nationally recognized award for municipalities who adhere to a high level of generally accepted accounting principles and standards for completing ACFR. Lastly, the results of the audit can be presented to the governing body. The Finance Director or auditor should present an overview of the audit process, a high-level view of the General Fund’s fund balance, the auditor’s management letter comments, and other worthwhile items. The staff report or agenda report to the governing body only needs to be a “receive and file” action and does not require a vote of approval, but the action of presenting it allows for the ACFR to become part of the public record and available for your community to review.

Misty V. Cheng is the President & CEO of MV Cheng & Associates, a consulting firm specializing in municipal finance, human resources, and information technology staffing. The company provides consultants at all levels and specializes in year end close and audit preparation. Prior to starting the company, Misty was a finance and administrative services director for several Southern California cities. She holds a Bachelor of Science degree in Accounting from Saint Mary’s College of California and a Master’s degree in Public Administration from Cal State Northridge. She spends her free time remodeling homes and taking care of many animals.

Proposition 172 – Why are these revenues changing so much?

Tue, 16 Jul 2024 17:03:00 GMT

Proposition 172 is the byproduct of past California budget deficits and the resulting Education Revenue Augmentation Fund (ERAF). Simply put, ERAF shifted property tax dollars away from local governments to shore up school funding. As a backfill measure, voters approved a half-cent sales tax in 1993 dedicated to maintain local public safety…and P-172 was born (view presentation).

In recent years, a number of different events have influenced P-172 allocations, causing big swings in funding levels and making forecasting/budgeting extremely challenging.

P-172 Distribution and the Math.

Per state law, the California Department of Tax & Fee Administration (CDTFA) collects the Public Safety half-cent sales tax, and the State Controller’s Office (SCO) apportions it to each of the state’s 58 counties. Counties then distribute to eligible agencies within the county, retaining about 90% of the revenues.

The P-172 funding methodology relies on two elements:

Pro-rata factor derived from the most recent calendar year 1% Bradley-Burns sales tax results (countywide Bradley-Burns/statewide total = factor), and
Statewide Public Safety Sales Tax revenues (50% of the Bradley-Burns).

pro-rata factor * statewide public safety revenues = monthly P-172 allocation

Why the Revenue Fluctuations?
As a part of the above equation, any changes in statewide sales tax revenues will affect P-172 results. Additionally, as the multiplier against statewide public safety revenues, the county pro-rata factors play a critical role. Because pro-rata factors represent an agency’s proportional share of the total statewide Bradley-Burns, large increases or decreases in countywide Bradley-Burns revenues over a calendar year period will influence the statewide P-172 results. Here are several recent examples:

Pandemic pendulum (primarily one-time change). Changes in sales tax revenues during calendar year 2020 and into 2021, fueled by the intensity of the pandemic, demonstrably affected statewide P-172 allocations. Coastal, urban, metropolitan, and tourist-dependent regions saw their Bradley-Burns sales tax revenues decrease dramatically – and many inland and rural communities experienced the opposite, enjoying unexpected growth. This shift caused a temporary redistribution in the overall Bradley-Burns sales tax and resultant P-172 allocations. As the pandemic influence ebbed, those counties that experienced significant losses largely recovered, and the ratio of statewide sales swung back.

Online sales & fulfillment centers (recurring change). Where a retailer is located and how it operates its business dictates the allocation of the local Bradley-Burns 1% per current State law. California fulfillment centers owned and operated by a retailer which fill in-state orders, are places of sale – and agencies with these fulfillment centers receive direct sales tax allocations. Commencing with the fourth quarter of 2020, California experienced a significant movement of sales tax revenues out of the countywide use tax pools (indirect) into direct allocation. This was due to some retailers modifying their fulfillment center operations and/or enlarging their California in-state sales footprint. At this point, we assume this is a permanent shift of sales tax, which greatly affected the statewide Bradley-Burns and resultant pro-rata factors – and P-172 allocations.

CDTFA audit adjustments & taxpayer changes (one-time & recurring). The CDTFA has been active in several large taxpayer audits, causing redistribution of sales tax. One-time corrections (both positive and negative) and the ongoing change in reporting can greatly affect statewide Bradley-Burns sales tax allocations. Separately, large taxpayers that open/close/move their operations will have a similar impact on sales tax.

Will P-172 change again?

Statewide public safety revenues will grow in line with the overall Bradley-Burns. However, any significant changes in Bradley-Burns sales tax, whether from the economy, audits, or taxpayer changes, will influence pro-rata factors and likely cause P-172 revenue fluctuations.

Tracy Vesely has held leadership positions in California local government for over 30 years, serving as Finance Director and Administrative Services Director for several cities in California, as well as holding senior positions at the county and state level. Ms. Vesely has been an active member of several public-sector organizations, including the League of California Cities and the Government Finance Officers Association (GFOA). Ms. Vesely holds a B.A. from Arizona State University and has participated in many leadership programs, including the Harvard Kennedy School – Senior Executives in State & Local Government program.

Professional Standards Committee Highlights - CA Supreme Court Blocks Anti-Tax Measure

Mon, 24 Jun 2024 16:41:00 GMT

On June 20, 2024, the California Supreme Court ruled the Taxpayer Protection and Government Accountability Act initiative backed by the California Business Roundtable cannot appear on the November ballot as the measure constituted a revision of the State Constitution. The measure would have required voter approval for almost any increase in state or local taxes and fees as well as changing the threshold for local tax initiatives introduced by citizens from a simple majority to a two-thirds vote. Over 250 California cities and governmental agencies passed resolutions opposing the measure, working with Cal Cities to mount an aggressive campaign to ensure the measure would be stopped. The CSMFO Board also was ready to support the campaign and had appropriated $50,000 in August 2023 to help defeat the measure. Had this measure made it to the November ballot and passed, it would have threatened the ability of many local governments to continue providing essential services to the public. This is a major win for governmental agencies in California.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at standards.chair@csmfo.org.

A Deeper Dive into the November 2023 Obligation Interim Final Rule for SLFRF Funds

Thu, 20 Jun 2024 22:04:00 GMT

In November 2023, the U.S. Department of Treasury issued an important Interim Final Rule (IFR) clarifying the definition of "obligation" in relation to the State and Local Fiscal Recovery Funds (SLFRF). This rule provides critical clarifications for state and local governments grappling with how to properly allocate and utilize these funds provided under the American Rescue Plan Act (ARPA). This article provides an overview of the IFR, addressing its context, content, and the implications for SLFRF recipients.

Background

The SLFRF was established under the ARPA to support state and local governments in responding to the economic and public health impacts of COVID-19. A significant challenge for recipients has been understanding how to properly "obligate" the funds by the deadline set for December 31, 2024, with all expenditures completed by December 31, 2026. Prior to this rule, ambiguity around the definition of "obligation" led to confusion and inconsistent application across jurisdictions.

The original definition of an “obligation” under the previously adopted at 31 CFR 35.3 is an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment. An obligation also means a requirement under federal law or regulation or provision of the award terms and conditions to which a recipient becomes subject as a result of receiving or expending funds.

Revised Definition of an Obligation

The updated definition still maintains the traditional views of obligation (e.g., contracts and orders placed) as defined in 31 CFR 35.3 but now explicitly includes costs related to requirements that recipients automatically assume upon accepting SLFRF funds. The primary focus of the revised definition is to allow agencies to capture the payroll and benefit related costs of personnel responsible for compliance and reporting and expenses of maintaining records which are likely to be incurred after between January 1, 2025, and December 31, 2026, but still related to the management of the overall SLFRF program.

These include:

Reporting and Compliance Requirements: Costs associated with time spent adhering to SLFRF reporting standards, such as the preparation and submission of required reports, subrecipient monitoring, maintaining data and reporting tools, and handling invoices.
Single Audit Costs: Costs related to the Recipient’s Single Audit, including time spent on audit preparations, the audit itself, and resolving audit findings, including funds spent by pass-through entities to carry out their responsibilities related to audit resolution of subawards.
Record Retention and Internal Controls: Costs to meet records retention mandates and to support internal controls that ensure program integrity up to the award's closeout.
Property Standards Compliance: Costs related to insurance, inventory, recordkeeping, and maintenance of equipment to adhere to the property standards outlined in the Uniform Guidance (2 CFR 200.310 - 200.316).
Environmental Compliance: Costs incurred to meet environmental obligations, such as renewing environmental permits necessary due to SLFRF-funded initiatives.
Civil Rights and Nondiscrimination: Costs linked to ensuring civil rights and nondiscrimination requirements are met for projects financed by SLFRF, including costs to investigate any complaints received.

In order to claim these costs as “obligations”, the costs would need to be calculated in compliance with the rules for compensation charged to federal awards. To take advantage of this additional flexibility and to ensure compliance with these new rules, we recommend the following:

Estimate the amount of costs that will be incurred to meet the requirements listed above.

Personnel related costs should be calculated by estimating the number of hours for each activity above and multiplying that by the total cost for the employee.
Non-personnel related costs should be calculated based on historical information. For instance, if you are calculating the cost to store hard copies for the required number of years, estimate the number of boxes it will require and multiply that by the cost per year and number of years to derive total estimated cost.

Document a reasonable justification for this estimate.

Consider drafting a memo for each item above documenting the reason these costs will be necessary and include your estimate calculations so they can be tested during the Single Audit.

Report that amount to Treasury by April 30, 2024, with an explanation of how the amount was determined
Report at award closeout the final amount expended for these costs

Reconcile the amounts estimated in (1) above to the actual costs incurred for these activities and note any variances above or below estimates.

Treasury will update the SLFRF Compliance and Reporting Guidance to reflect recipients’ additional reporting regarding these estimated amounts.

It is important to note that these estimates may not include any costs that are expected to be made after December 31, 2026, other than administrative expenditures necessary to close out the SLFRF award in accordance with the Uniform Guidance.

If the reconciliation in (4a) above shows that the estimates exceeded the actual costs incurred, the excess SLFRF funds are required to be returned to Treasury.

Application of “Obligation” to the Negotiated Indirect Cost Rate Agreement

Treasury also clarified that recipients are allowed to continue charging their current negotiated indirect costs rate agreement established with their federal cognizant agency or the de minimis rate of 10 percent of modified total direct costs pursuant to 2 CFR 200.414(f), after December 31, 2024 through December 31, 2026.

Application of “Obligation” Definition to Subawards

It was unclear if subrecipients had the same “obligation” deadline as recipients. If recipients had to obligate the funds by December 31, 2024, did subrecipients have to do the same with the funds they received? Treasury defined obligation to include entry into a subaward agreement. This means that when a recipient obligates the funds to a subrecipient, the deadline is met and the subrecipient does not have to obligate the subaward funds by December 31, 2024. This clarification applies to contractors as well. However, it should be noted that both subrecipients and contractors are required to expend all SLFRF funds by December 31, 2026, except for Title I projects and Surface Transportation projects which must be expended by September 30, 2026. This requirement remains unchanged. Replacement or Amendment of Contracts and Subawards The Treasury was asked to consider the allowability of replacing contracts or subawards after December 31, 2024, so long as the original agreement was entered into prior to the December 31, 2024 obligation deadline. Treasury is clarifying that after December 31, 2024, recipients are permitted to replace a contract or subaward entered into prior to December 31, 2024, if:

The recipient terminates the contract or subaward because of the contractor or subawardee’s default, because the contractor or subawardee goes out of business, or because the recipient otherwise determines that the contractor or subawardee will not be able to perform under the contract or carry out the subaward; or
The recipient and contractor or subrecipient mutually agree to terminate the contract or subaward for convenience
The recipient terminates the contract or subaward for convenience if the contract or subaward was not properly awarded (such as if the contractor was not eligible to receive the contract), there is clear evidence that the contract or subaward was improper, the recipient documents its determination that the contract or subaward was not properly awarded, and the original contract or subaward was entered into by the recipient in good faith. Good faith is defined as:

The contract of subaward followed standard procurement or subaward practices.
The contract or subaward was not entered into for the purpose of evading the obligation deadline.

Treasury will provide a mechanism for recipients to report contract or subaward replacements after the obligation deadline. Recipients should maintain documentation to justify their determinations.

Again, if a recipient enters into a replacement contract or subaward, the recipient still must expend all funds by the expenditure deadlines noted above.

Conclusion
The November 2023 Obligation Interim Final Rule issued by the U.S. Department of Treasury represents a significant step in clarifying the operational aspects of the SLFRF program. By addressing common questions and concerns regarding the definition of "obligation," the rule aims to facilitate more effective and compliant use of the funds and provide greater flexibility in use of SLFRF funds. As state and local governments continue to navigate the challenges posed by the pandemic, such guidance is crucial to ensuring that these vital resources are utilized in a timely and efficient manner.

Additional Resources from Treasury

The US Department of Treasury has a website with all of the resources you need to stay up to date on changes. https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments/state-and-local-fiscal-recovery-funds

Under News and Events, you can see a list of documents and events by date so you can look historically or for the most recent information available.

In May 2024, the US Department of Treasury release webinars to help answer questions related to the Obligation Interim Final Rule. You can access the slides from these webinars at the link above and view the recordings on YouTube at https://www.youtube.com/watch?v=Tf9IZZHvjAA.

Further down in the November 2024 section, you can access all of the relevant documents such as the Obligation Interim Final Rule PDF and the Obligation Interim Final Rule Quick Reference Guide PDF.

Kelly Telford, CPA, is a partner in LSL’s consulting & advisory department and has over 20 years of experience in working in and with government agencies. Her background includes auditing, accounting, financial forecasting, budget development, public utilities, investment management, grant management, human resources, and information technology. Kelly oversees engagements for a variety of non-profit and governmental clients, providing consulting services, often acting as an extension of their finance department. Prior to returning to LSL in 2022, Kelly served as the Director of Finance and Treasurer for the cities of Seal Beach and Costa Mesa.

Leave Cashout Programs’ Exposure to Constructive Receipt Risk

Wed, 12 Jun 2024 20:19:00 GMT

One of the hot topics in local government is “constructive receipt.” Constructive receipt can be a complex topic and daunting to tackle because of how complex the IRS rules are and because it can involve changing an agency’s pre-existing process that has been around for decades. So, what is “constructive receipt?” How do you know if your agency has “constructive receipt risk?” Read on for some resources and for help getting started in your review.

What is constructive receipt?
For public agencies, constructive receipt generally relates to an agency’s process for cashing out leave accruals. Does your agency allow leave cashouts for vacation, sick, personal, or floating holiday accruals? If so, constructive receipt is in play with your process on how you have employees request the cashouts.

Under section 1.451-2(a) of the Code of Federal Regulations, income is constructively received—and, as such, taxable—in the taxable year during which it is credited to a taxpayer's account, set apart, or otherwise made available so that the taxpayer may draw on it at any time.

A key aspect of constructive receipt is the taxpayer’s control of the income. Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. Without a limitation or restriction on a taxpayer’s ability to take cash payments of accrued leave (in lieu of using the amount for leave time), the Internal Revenue Service (IRS) considers the entire leave amount available for such cashouts as taxable wages—even if the employee doesn’t elect or receive any cashout.

This IRS position is articulated in several private letter rulings and 2014 Federal State and Local Government (FSLG) guidance. Links and summaries of this information can be found at the end of this article.

Fortunately, the private letter rulings also carve a path for avoiding the application of constructive receipt to accrued leave cashout programs. Specifically, the IRS has ruled that leave cashouts aren’t subject to constructive receipt if:

To receive a cashout, an employee must irrevocably elect the cashout by December 31st of the year BEFORE the cash out payment, and
the cashout is limited to the amount of leave earned by the employee in the year of the payment.

What’s the risk?
If the IRS audited an agency not in compliance with constructive receipt, current and former employees and/or the agency may be liable for unpaid state and federal income taxes, Social Security taxes, and Medicare taxes for the statute of limitations where accrued leave balances should have been reported as gross wages on a W2.

Let’s say an agency is audited and forced to bring payroll practices into compliance with constructive receipt. The agency did not comply with constructive receipt rules regarding 40 hours of vacation leave that should have been reported as wages on a W2. For an agency where the average rate of pay is $40 per hour, the liability could look like this:

$40 per hour x 40 hours of reportable vacation leave = $1,600

Federal Taxes (assume 22%) = $352
State Taxes (assume 10.23%) = $164
Social Security (if applicable, 12.40%) = $198
Medicare (2.90%) = $46
Total tax liability¹ = $760

Now, let’s say this applies to 200 employees at the organization. The one-year tax liability is $152,000. Assuming a three-year statute of limitations, the total tax liability is $456,000, plus interest and possible penalties. The agency would be responsible for amending three years of W2’s, putting employees on the hook for repaying past taxes due or deciding to cover the tax liability as an agency. Both scenarios would be difficult to discuss with agency staff, leadership, and governing bodies.

Scenarios of constructive receipt risk and correction

Scenario 1 – Vacation Leave

Leave type: Vacation
Leave accrual per year: 80 hours
Cashout process: Employees may cashout up to 50% (40 hours max) of accrued vacation leave each calendar year. Employees request the amount of vacation leave to be cashed out in December, it is paid in January. For example, in December 2025 the employees will elect their unused vacation leave to be cashed out in January 2026.
Constructive receipt risk: Although there is a “restriction or limitation” in place and the cashout is limited to the amount of leave earned by the employee in a calendar year, the request for cashouts isn’t confined to accruals earned in the next calendar year, but rather applies to already accrued amounts. This does not follow IRS guidelines.
Correcting the constructive receipt risk: Adjust the election and payment period. For example, allow the employees to make an irrevocable election in 2024 to cashout hours they will accrue in 2025.
Tip from an agency that has implemented constructive receipt: Communicate to employees that there is no “use” penalty for making the irrevocable election. If employees make an irrevocable election in 2024 to cashout the max hours that they could accrue in 2025 (40 hours), it doesn’t mean they can’t use all their leave during calendar year 2025 before the scheduled cashout date.

For example, assume that in December 2024, an employee who has 40 hours in her leave bank irrevocably elects to cashout all 40 vacation hours that the employee is scheduled to earn in 2025, and in 2025, the employee uses 70 hours, leaving only 10 hours of vacation leave in her bank when the cashout date arrives. With these facts, the 10 hours would be cashed out.

Now assume the same facts, except that the employee uses only 20 hours of leave in 2025, leaving a balance of 60 hours. Here, her full elected amount of 40 hours would be cashed out, and 20 hours would carry over to the next year.

Scenario 2 – Personal Leave

Leave type: Personal
Leave accrual per year: 40 hours
Cashout process: Employees may cashout personal leave at any time by providing a form to payroll.
Constructive receipt risk: There is no irrevocable election or other “restriction or limitation” in place. Employees’ cashout requests from their personal leave balance may be a mix of current-year and prior-year accruals (not limited to the amount of leave earned by the employee in the year of payment per IRS guidelines).
How to correct the constructive receipt risk: Implement an irrevocable election prior to December 31st of the year before the cashout payment. The cashout election would be limited to 40 hours, which is the amount of leave earned by the employee in the year of the payment.
Tip from an agency that has implemented constructive receipt: If the agency’s employees are used to a process where they can request leave any time, understand the personal financial burden a change in the process may create. To minimize the burden, your agency could allow immediate cashouts of accrued leave for financial emergencies. Such cashout programs don’t trigger constructive receipt because the IRS considers the “emergency” condition for the cashout to be a substantial limitation or restriction.

Conclusion

Note that outside the private letter rulings and FSLG guidance, the IRS has not provided any formal guidance on constructive receipt’s application to leave cashout programs. No policy or procedure is guaranteed to eliminate risk, but patterning policies after the private letter rulings may significantly reduce risk.

Communication is key when an agency pursues changes in leave cashout processes to comply with constructive receipt. IRS guidelines and rulings are difficult to understand, and changing processes involving employee cashouts is a sensitive issue. Materials and presentations to employees and bargaining groups should be simplified and as easy to understand as possible. Communicate the risks of non-compliance for the agency and staff and collaborate to develop solutions that will reduce the risk.

Resources and References:

¹The employer is liable for both its share of Social Security and Medicare taxes, and its employees’ share if not properly withheld from their wages.

James Russell-Field is the Director of Administrative Services for the Fairfield-Suisun Sewer District. James has served on various committees and roles supporting CSMFO. Before the District, he worked with the Department of Interior, the City of Thousand Oaks, and the City of Benicia. On weekends, you can find James mountain biking through Northern California.

Contributing Editors:

Kim Kraft, Human Resources Manager, Fairfield-Suisun Sewer District
Marcus Wu, Partner, Pillsbury Winthrop Shaw Pittman LLP

Professional Standards Committee Highlights - New Guidance for Federal Financial Assistance

Thu, 16 May 2024 21:26:00 GMT

In April 2024, the Office of Management and Budget announced significant changes to the Uniform Guidance, now called the Guidance for Federal Financial Assistance, which provides guidelines for compliance with federal grant programs. The new guidance will become effective on October 1, 2024. The Single Audit threshold has been increased from $750,000 to $1,000,000. Local governments that annually expend $1 million or more of federal funds in a fiscal year will be subject to a Single Audit.

Below are some of the significant changes that affect non-federal entities.

Section 2 CFR 200.303 – Internal Controls
Added a requirement that recipient and sub-recipient internal controls include cybersecurity and other measures to safeguard information.

Section 2 CFR 200.313 – Equipment
Revised the threshold value for equipment from $5,000 to $10,000. Therefore, when equipment is purchased at a cost of $10,000 or less, it can be expensed rather than capitalized.

Section 2 CFR 200.332 – Requirements for Pass-Through Entities
Added a requirement for pass-through entities to confirm that potential sub-recipients are not suspended or debarred from receiving federal funds.

Section 2 CFR 200.414 – Indirect Costs
Raised the de minimus rate non-federal entities can use for indirect costs from 10% to 15%. Recipients and sub-recipients that do not have a current federal negotiated indirect cost rate may elect to charge the de minimus rate.

This listing is not a comprehensive listing of all changes to the guidance. Refer to the new guidance at Federal Register :: Guidance for Federal Financial Assistance for more details.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at standards.chair@csmfo.org.

Professional Standards Committee Highlights - New Guidance for American Rescue Plan Act (ARPA) Funds

Wed, 10 Apr 2024 23:15:00 GMT

On March 29, 2024, the U.S. Department of the Treasury released an update to Frequently Asked Questions (FAQs) related to Coronavirus State and Local Fiscal Recovery Funds (SLFRF) authorized under the American Rescue Plan Act of 2021 (ARPA), which can be found here. The updated FAQs guidance addresses questions related to the Obligation Interim Final Rule (Obligation IFR) that was released in November 2023, which clarified the definition of an “obligation” means “an order placed for property and services and entry into contracts, subawards, and similar transactions that require payment.”

The Treasury recognized that recipients may obligate funds through means other than contracts or subawards. For example, in the case of payroll costs, a recipient may have incurred an obligation even though the recipient and its employee may have not entered into an employment contract. The Treasury also provided further guidance on several ways that recipients may consider payroll costs to be obligated, including for purposes of using SLFRF funds to cover personnel costs between January 1, 2025, and December 31, 2026 to the extent the employee is serving in a position that was established and filled prior to December 31, 2024. However, it is important to note that recipients must follow state or local law and their own established practices and policies regarding when they are considered to have incurred an obligation and how those obligations are documented. Please refer to the FAQs for the specific guidance governing obligations.

The Treasury is hosting webinars on May 8th and 9th to further explain the updates to the FAQs. SLFRF recipients are encouraged to attend either one as the same material will be presented in both webinars. Click here to register for the May 8th webinar from 7:00am – 8:30am PDT, and click here for the May 9th webinar from 10:00am – 11:30am PDT.

If you have questions regarding this topic, contact Donna K. Lee, Chair of the Professional Standards Committee at standards.chair@csmfo.org.