Olympia reviews indirect cost allocation plan updates for managing parts of budget and grants planning

The Olympia Finance Committee received a briefing on the latest updates of its indirect cost allocation plan at a meeting last September 20.

The City engaged the FCS Group to help Olympia’s Finance Committee update the city’s current indirect cost allocation plan to ensure that it complies with these standards and is 2 CFR 225 compliant to apply for a federally compliant indirect cost rate.

“We were asked to prepare an Indirect Cost Allocation Plan, and the two parts of this--  one is for internal budgeting purposes. We refer to that as a full-cost cost allocation plan. And then the second is a cost allocation plan that meets federal reimbursement guidelines,” FCS Group Senior Project Manager Martin Chaw said.

According to the Washington State Auditor, a cost allocation plan outlines indirect costs across programs, activities, funds, departments, grants, and other cost objectives. The term “allocation” is used because the entity is using an approximate method for doing so.

A cost allocation plan also allows the city to assess an overhead charge for administering a grant it receives from a federal agency. However, specific requirements, as part of the federal regulations, govern what types of costs are allowable and not allowable.

“The indirect cost allocation plan is recognizing that there are certain functions that we support [for] the delivery of services to the public, and this one is to determine, what is that full cost of delivering those services to the public,” Chaw added.

The plan also calculates the cost of support activities and functions to serve direct service programs to reimburse the General Fund for services provided.

Olympia’s support activities include daily operations of the Council/Mayor, City Manager, Legal, Strategic Communications, OSI, OCV, Finance, and CPD Mail / Front Desk activities, while direct service programs include the Police, Fire, CPD, Public Works, Parks, Special Revenue Funds, Utility Funds, and Internal Service Funds.

Chaw shared that they follow a standardized method with eight metrics to allocate the city’s costs across all departments in all funds within the city.

The eight allocation factors (metrics) are Actual Expenditures, Full-Time Equivalents (FTEs)/ Number of Union Contracted FTEs, Legal work requests, Agenda Items, Number of Information Technology devices, Percentage of time - Visual Design, 
Percentage of time - Utility Billing, and Percentage of time – Communications.

This is the allocable costs on the draft plans totaling $12.7 million.

JOLT Staff photo via Zoom

“We have about $12.7 million of overhead cost that we wish to allocate. In terms of allocating that, we go through what's called a two-step allocation method. This is considered best practice,” said Chaw.

Under a two-step method, it is assumed that there is an interplay between overhead functions and services being provided externally.

The first step is to take all the expenses received under the “primary allocation”, where, in this case, $12.7 million is allocated across and not just to overhead functions. The secondary allocation, which is the second step, allocates $1.7 million to the overhead functions.

“In the end, when we add the allocations from the primary as well as a secondary step, we come back to what we call a final allocated cost, which is also the last step at $1.7 million,” said Chaw.

After the study, Chaw’s team will send the city an electronic copy of the plan.

The updated indirect cost allocation plan is incorporated into the 2024 budget process.

“In working with your finance department, we use five years of historical data for each of the metrics. And the reason why we do this is we recognize that these metrics change from year to year,” Chaw said.