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May 22, 2003
To:      Private Providers of Residential and Day Services
           CAN, CCPA, ARC-CT, FORConn
           DMR Assistant Regional Directors for Administration
           DMR Regional Contract Managers
FROM:  Caroll S. Stearns, Director Administrative Services
RE:      Update Number 2 on Private Agency Requests for Prior
             Approvals and Clarifications
The Department is providing its second update on agency requests for prior approvals and clarification of allowable costs applicable to DMR funded programs. Future updates will continue to be made on a periodic basis and will be put on the DMR Web Page for distribution to private agencies. The updates will no longer be sent out via individual mailings.

Since the November 4, 2002 update the Department has received 10 requests from private agencies for prior approvals or requests for clarification for 6 of the Cost Accounting Standard requirements. The topics were:
  1. Membership related costs:
    Five agencies requested prior approval requests for memberships to various organizations. Many of the organizations were applicable to local Chambers of Commerce. One agency submitted a list of memberships to AAMR, the Connecticut based trade organizations CAN, CCPA, ARC-Ct, FORConn, the Conference for Executives, Connecticut Down Syndrome Congress, various transportation organizations, Child Advocacy, a Regional Business Council, a social organization, and a professional accountant’s organization.

    The DMR Cost Accounting Standards, Attachment B, item 31, Memberships, subscriptions, and professional activity costs, subparagraph “a.” states:

         “Costs of the organization’s memberships in business, technical, and
          professional organizations are allowable, to the extent membership
          is relevant to the DMR funded award”.

    Membership to the Chambers of Commerce, the AAMR, the trade organizations, and membership to the other organizations that are relevant to an organization’s programs that are funded by the Department, and memberships to transportation organizations relevant to the operations of the various organizations that are funded by the Department were determined to be allowable. The standards and requirements contained in this section of the DMR Cost Accounting Standards do not require a prior approval for membership in business, technical, and professional organizations if the membership is relevant to the DMR funded award. Memberships to civic and community organizations located in Connecticut are allowable with prior approval. The criteria for determining allowability that is established by the standards is “relevance” to the DMR funded program.

    Our review of membership related costs submitted by one organization did not find membership to a social organization, and membership to an accounting organization to be relevant to the DMR funded awards. The membership to the social organization was in the name of an employee, and overall the social organization did not appear to be relevant to the DMR funded programs and the DMR awards. In addition, the membership to the accounting organization was also in the name of an employee, and was not determined to be relevant to DMR funded programs and the DMR awards. The primary purpose of the DMR funded awards is to fund programs to individuals with mental retardation, not to fund the professional development of accounting staff.

    We would like to emphasize the criteria for determining the allowability of memberships, subscriptions, and professional activity costs is based upon the relevance of that cost to the DMR funded award, and that the only memberships that are allowable but require prior approval are memberships to civic or community organization located in Connecticut. The Department’s determinations of allowability are based upon the ability to demonstrate relevance to DMR funded programs. To the extent an agency is uncertain of the relevance of a cost, the organization should seek a clarification from the DMR Operations Center.
  2. Training and education related costs:
    Three agencies submitted requests for prior approvals that the agencies identified as applicable to training and education costs. Review of each of these requests determined that based upon the DMR Cost Accounting Standards these costs did not require a prior approval.

    The Cost Accounting Standards in Attachment B, under cost item number 56 Training and education costs establish the criteria for determining the allowable costs applicable to a range of training and education programs for an organization’s employees. Training and program costs for individuals whose programs are funded by the DMR funded award are not applicable to this accounting standard. Additionally, the only requirement for a prior approval of training and education costs is training and education costs that are in excess of those otherwise allowable under this standard.

    One agency’s request for prior approval was applicable to the additional costs associated with a participant’s program costs for financial rewards to reinforce positive behaviors. Program and related training programs applicable to individual participants funded by DMR awards are not employee training and education related types of costs that are the subject of the Accounting Standards in Attachment B, cost item number 56 Training and education costs. The agency was advised to follow-up with Regional Contract Management staff to discuss funding this program cost.

    Another agency’s request for prior approval was applicable to tuition payments related to an employees postgraduate doctorate program. The agency was advised that this submission established the relevance of the doctorate program to the award funded by the Department, and appeared to meet the Cost Accounting Standards for allowable training and education costs and did not require prior approval. The next DMR update to the Cost Accounting Standards will add some clarifying language.

    The third request was applicable to the costs associated with a three day conference held out of state. The agency was advised the costs identified in the request did not require prior approval by the DMR Cost Accounting Standards.
  3. Severance payments:
    Two agencies submitted prior approval requests for severance payments. Additional follow-up with both of the agencies determined that while payments were being made to employees that were leaving these organizations, the payments were made based upon legal considerations around the reasons these employees were leaving these agencies.

    Both requests for prior approval were approved. The determination to approve these requests was based upon the payments being made because of legal considerations, and not as additional compensation paid for past performance of the employees. The payments ranged from $20,000 to $25,000.
  4. Annual meeting costs:
    An agency submitted a request for the prior approval of costs related to the organization’s Annual Meeting. The costs included a TV rental for a presentation, recognition gifts, and the costs of meals for the attendees.

    The DMR Cost Accounting Standards, Attachment B, in cost item 30, Meetings and conferences requires an Advanced Understanding for amounts $500 or greater. In addition, the standards also establish that costs associated with the conduct of meetings and conferences include the cost of renting facilities, meals, speakers’ fees, and the like. The standards also references paragraph 14 Entertainment costs for additional guidance.

    The Department’s determination for this request was the TV rental and the recognition gifts were allowable meeting costs. However, the meal costs of $25 per person with an expected attendance of 50 was not a necessary cost of the operations, and was determined to be an entertainment cost that is unallowable.
  5. Rearrangement and alteration costs:
    An agency requested a clarification on Rearrangement and alteration costs. The agency’s letter indicated their understanding that costs in excess of the DMR capitalization policy of $2,500 required prior approval, and that costs such as replacement or upgrading major mechanical systems such as heating or air conditioning, major upgrading of information technology infrastructure such as telephones, accounting software, or a file sever, and major work and/or replacement of existing building components such as roofing or windows, did not fall under rearrangement and alteration costs.

    The DMR Cost Accounting Standards Attachment B, cost item 43, Rearrangement and alteration costs establishes that:

    “Costs incurred in the ordinary or normal rearrangement of facilities are allowable. Special arrangement and alteration costs incurred specifically for the project are allowable with the prior approval of the Department of Mental Retardation.”

    Normal roofing repairs and projects, the replacement of the major mechanical systems, upgrading of computer systems and telephones are depending on the circumstances typically capital expenditures and not rearrangement or alteration costs. In rendering a response and a clarification to this agency’s letter, the Department indicated it considers facility to mean the building, the building structure, and the major systems that support the building. This would include roofing, windows, exterior siding, and the major mechanical systems such as electrical, water, sewer, heating and ventilation. The Department considers information technology systems such as telephone systems, computer systems, and their software to fall under the classification of equipment, not facilities.

    The DMR Cost Accounting Standards do not establish threshold amounts when this standard applies, i.e. costs equal to or in excess of $2,500. In addition, prior approval is not applicable to normal rearrangement and alteration costs. Prior approval is required only when there are “special arrangement and alteration costs incurred specifically for the project”, i.e. the DMR award. The Department’s response reminded this agency that the DMR Cost Accounting Standards are applicable to awards from the Department of Mental Retardation. They are not applicable to awards funded by the Department of Social Services.
  6. Specialized facility costs:
    An agency submitted a request for a clarification of Specialized Facility costs. The organization indicated that it operated a Behavioral Health Clinic. The Clinic was licensed by the Connecticut Department of Public Health, and had been approved by the Office of Healthcare Access. The agency indicates that costs for this clinic are recovered from billings to Medicare, Medicaid, other community provider organizations, and that these costs are included in the DMR OP-Plans and CORs for both day and residential programs funded by the Department. The agency made a proposal that costs of the clinic in excess of the revenues collected would be allocated as an indirect cost.

    The Department’s response to this clarification was that while the Behavioral Health Clinic meets the definition of a Specialized facility based upon the license it holds, and the facility has the approval from the Office of Healthcare Access, the Department’s Cost Accounting Standards require an Advanced Understanding for this cost item. Follow-up with the DMR Region that funds this agency disclosed the Region directly funded these clinic services through the awards with this agency that recognized the clinic services that were needed for some of the participants of the programs funded by the Region. Therefore, since the Region funded these costs through the contract, the allocation to DMR funded programs for the unbilled costs was not necessary.

    In addition to the response provided this agency, the manner in which the agency proposed to bill these services directly, and then allocate the balance of the costs not billed out indirectly, conflicts with the accounting standards established in the Departments Cost Accounting Standards, Attachment A, subparagraphs B. Direct Costs and subparagraph C. Indirect Costs. The standards for Direct Costs establish that “a cost may not be assigned to an award as a direct cost if any other cost incurred for the same purpose, in like circumstances, has been allocated to an award as in indirect cost”. In addition subparagraph C. Indirect Costs establishes the standard that “a cost may not be allocated to an award as an indirect costs if any other costs incurred for the same purpose, in like circumstances, has been assigned to an award as a direct cost.” The indirect allocation method proposed by the agency would be in conflict with these Cost Accounting Standards. The Department has already funded these costs directly. In accordance with these Standards, the “unbilled costs” cannot be allocated to programs as an indirect cost.
To reiterate, additional periodic updates will be provided on the Department’s Web page.