[Federal Register Volume 59, Number 185 (Monday, September 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23697]
[[Page Unknown]]
[Federal Register: September 26, 1994]
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OFFICE OF MANAGEMENT AND BUDGET
Cost Principles for Non-Profit Organizations
AGENCY: Office of Management and Budget.
ACTION: Proposed Revision to OMB Circular A-122.
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SUMMARY: This Notice is a corrected version of the Notice previously
printed on September 16, 1994 (59 FR 47657). This corrected version
contains additional text under ``Supplementary Information.'' This
Notice offers interested parties an opportunity to comment on a
proposed revision to Office of Management and Budget (OMB) Circular A-
122, ``Cost Principles for Non-Profit Organizations.'' The revision
will allow Federal agencies to reimburse non-profit organizations for
interest on debt used to finance the purchase of buildings and
equipment, when purchasing using debt financing is less costly than
leasing.
DATES: All comments on this proposal should be in writing and must be
received by November 25, 1994.
ADDRESSES: Office of Management and Budget, Office of Federal Financial
Management, Financial Standards and Reporting Branch, Room 6025, New
Executive Office Building, Washington, DC 20503. Telephone (202) 395-
3993, Facsimile (202) 395-3952.
FOR FURTHER INFORMATION CONTACT: Linda Hoogeveen, Financial Standards
and Reporting Branch, Office of Federal Financial Management. Telephone
(202) 395-3993.
SUPPLEMENTARY INFORMATION: The purpose of this revision is to: (1)
Encourage non-profit organizations to acquire building space and
equipment necessary for administering Federal programs at the lowest
possible cost to the Federal Government, and (2) bring greater
consistency to Federal policies covering the allowability of interest
by organizations receiving Federal awards.
As the Office of Management and Budget (OMB) stated in 1980, it had
been ``a longstanding policy not to recognize interest as a cost'' (45
FR 46022, 46023, July 8, 1980). Accordingly, the OMB circulars setting
forth the cost principles for State and local governments, educational
institutions, and non-profit organizations did not originally allow
interest as an expense. Over time, however, OMB has gradually expanded
the allowability of interest.
The first change was made with respect to State and local
governments. In 1980, Circular 74-4, ``Cost Principles for Grants to
States and Local Governments,'' was revised to allow interest on
buildings, but not on equipment (45 FR 27363, April 22, 1980). This
policy was retained when Circular 74-4 was reissued the following year
as revised OMB Circular A-87 (46 FR 9548, January 28, 1981).
OMB then revised the policy with respect to educational
institutions. In 1982, Circular A-21, ``Cost Principles for Educational
Institutions,'' was revised to allow interest for both buildings and
equipment (47 FR 33658, August 3, 1982).
OMB has since revisited the policy with respect to State and local
governments. In 1988 and 1993, OMB proposed to revise Circular A-87 to
allow interest on equipment, as well as on buildings (53 FR 40352,
October 14, 1988; 58 FR 44212, August 19, 1993). OMB expects to issue a
notice shortly that would make final revisions to Circular A-87.
OMB is now proposing to change the policy with respect to non-
profit organizations. In this notice, OMB proposes to revise Circular
A-122, ``Cost Principles for Non-Profit Organizations,'' so that
interest would be allowed for both buildings and equipment. Based on
OMB's experience under the three cost principles circulars, OMB
believes that the proposal would result in lower costs to the Federal
Government. In addition, this proposal would result in greater
consistency on the allowability of interest across the three cost
principles circulars.
During the last few years, OMB has received a number of requests
for waivers from Circular A-122's prohibition on the allowability of
interest. As a result of reviewing the individual waiver requests, and
based on the general experience gained under Circulars A-87, A-21, and
A-122, OMB believes that allowing interest should encourage non-profit
organizations to purchase rather than lease facilities in those
situations where purchasing would result in lower costs than leasing.
Consequently, OMB has decided to propose revising Circular A-122's
interest policy.
This proposed revision to Circular A-122 would establish four
criteria that must be met for interest to be an allowable cost. These
criteria are intended to encourage decisions beneficial to the non-
profit organization and the Federal Government. First, the non-profit
organization must perform a lease/purchase analysis which shows that
purchasing through debt financing is less costly to the Federal
Government than leasing. Second, financing is provided at an interest
rate no higher than the fair market rate. Third, investment earnings
are used to offset allowable interest cost. Fourth, when it is expected
that the Federal Government will reimburse 51 percent or more of an
asset's cost, the non-profit organization must demonstrate the need for
the asset in the conduct of federally sponsored activities. The fourth
criterion is in addition to that which applies to State and local
governments (Circular A-87) and educational institutions (Circular A-
21).
OMB believes that the first and fourth criteria are especially
important in the context of grants to non-profit organizations. As a
general rule, the Federal Government contributes a small share of the
costs of assets purchased by State and local governments and
educational institutions. Since those entities must themselves fund the
majority of the costs associated with acquiring an asset, they have an
incentive to make the most economical lease/purchase decision. In
contrast, for non-profit organizations covered by Circular A-122, the
Federal share of costs is often substantial. Since this greater Federal
share could decrease the incentive for non-profit organizations to make
the most economical lease/purchase decisions, these additional criteria
are designed to ensure that a non-profit's decision to purchase rather
than lease is based on an assessment of the relative costs of leasing
versus purchasing, and a demonstrated need for the asset (where the
Federal Government will reimburse over half the asset's cost).
The revised policy would apply only to assets acquired after its
final issuance.
OMB requests comments on all aspects of this proposal.
John B. Arthur,
Associate Director for Administration.
The following paragraph is proposed to replace paragraph 19.a of
Attachment A to Circular A-122:
19. Interest, fund raising, and investment management costs.
a. Interest.
(1) Interest on debt is unallowable unless:
(a) The non-profit organization performs a lease/purchase analysis
in accordance with the provisions of OMB Circular A-110, ``Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals and Other Non-Profit Organizations,''
and OMB Circular A-94, ``Guidelines and Discount Rates for Benefit-Cost
Analysis of Federal Programs,'' sections 5a, 8(c)(2), and 13, which
shows that purchasing through debt financing is less costly to the
Federal Government than leasing. Discount rates used should be equal to
the grantee's borrowing rates, to be consistent with Circular A-94's
intent to reflect the entity's cost of financing. The financial
analysis must include a comparison of the present value of the
projected total cash flows of both alternatives over the period the
asset is expected to be used by the non-profit organization in carrying
out federally sponsored activities. The cash flows associated with
purchasing the asset must include the purchase price, anticipated
operating and maintenance costs (including property taxes, if
applicable) not included in the debt financing, less any estimated
asset salvage value at the end of the period defined above. Projected
rental costs should be based on the anticipated cost of renting
comparable facilities or equipment at fair market rates over the period
defined above, and any expected maintenance costs and property taxes to
be borne by the non-profit organization directly or as part of the
lease arrangement.
(b) Financing is provided at an interest rate no higher than the
fair market rate.
(c) Investment earnings, including interest, on bond or loan
principal, pending payment of the construction or acquisition costs,
are used to offset allowable interest cost. Arbitrage earnings
reportable to the Internal Revenue Service are not required to be
offset against allowable interest costs.
(d) Where the Federal Government's reimbursement is expected to
equal or exceed 51 percent of an asset's cost, the non-profit
organization conducts an assessment that demonstrates the need for the
asset in the conduct of federally sponsored activities. For assets
costing in excess of $10 million, the needs assessment must be approved
in advance by the cognizant Federal agency as a prerequisite to the
allowability of depreciation and interest on debt related to the
facility. For assets costing less than $10 million, the needs
assessment must be maintained on file for review by the Federal
Government.
(2) Interest on debt issued to finance or refinance assets acquired
before or reacquired after the effective date of this policy is not
allowable.
(3) Federal cognizant agencies shall require non-profit
organizations to compute interest on the excess of the depreciation and
interest reimbursement over the bond principal and interest payments,
and that the organizations treat the computed interest as a reduction
in the interest expense to be reimbursed by the Federal Government.
This provision is not applicable in instances where the non-profit
organization makes an initial equity contribution of 25 percent or more
to purchase the asset(s).
(4) Substantial relocation of federally sponsored activities from a
facility financed by indebtedness, the cost of which was funded in
whole or part through Federal reimbursements, to another facility prior
to the expiration of the useful life of the facility requires Federal
cognizant agency approval. The extent of the relocation, the amount of
the Federal participation in the financing, and the depreciation
charged to date may require negotiation of space charges for Federal
programs.
[FR Doc. 94-23697 Filed 9-23-94; 8:45 am]
BILLING CODE 3110-01-P