December 11, 1997
 
 
MEMORANDUM FOR:         STEPHEN E. GARFINKEL
                                                  Director, Office of Cost Determination
 

                                                        / s /
FROM:                                     JOHN J. GETEK
                                                   Assistant Inspector General for Audit

SUBJECT:                             AARP'S INDIRECT COST RATES
                                                 CONSULTATION REPORT NO. 18-98-001-07-735

This memorandum recommends you establish final indirect cost rates for AARP for CYs 1990 through 1995. It also makes recommendations on final/provisional rates for the newly- established AARP Foundation for CYs 1996 through 1999. We believe this memorandum will help avoid the lengthy/costly process of audit reporting and audit resolution for both of us.

 
During CYs 1990 through 1992, AARP administered Federal grants awarded by several Federal agencies. The most significant, in terms of dollar value, were DOL grants (about $50 million a year) for the part-time employment and training of about 8,000 enrollees under the Senior Community Service Employment Program (SCSEP). Until recently, AARP also administered a similar program for EPA with about 900 enrollees and $20 million a year. AARP also administered Government grants for IRS, HHS and HUD. (The recently established AARP Foundation now administers the DOL SCSEP grant, as well as IRS, HHS and HUD grants.)

The grants provided, subject to any prescribed costs limitations, that AARP would be reimbursed for the "allocable share" of its allowable Overhead and G&A costs. In accordance with the terms of these grants, AARP has submitted statements of its incurred costs for CYs 1990, 1991 and 1992 and proposed final Overhead and G&A indirect cost rates for its Government grants. The submissions were made to your office, which is the cognizant office for the negotiation of AARP's provisional and final Overhead and G&A indirect cost rates.

The provisional billing rates closely approximate the "OIG-recommended" final indirect cost rates (based on the "OIG-recommended" Overhead and G&A allocation bases and pool amounts). (See Attachment A.)

Regarding cost limitations, there is a 15 percent ceiling on administration costs for two grants involving enrollee wages -- the DOL SCSEP and the former EPA SEE program. This limitation protects these programs from incurring excessive administration costs and helps to ensure that
 
 

 
AARP's indirect cost rate submissions were reviewed by the OIG-assigned auditors (Myint & Buntua, CPAs), who prepared two discussion drafts setting forth the tentative questioned costs of: (1) CY 1990, and (2) CYs 1991 and 1992. The two discussion drafts questioned substantial amounts of Overhead and G&A costs which AARP proposed to allocate to its Government grants. The auditors concluded that certain costs proposed for "allocation" were an integral part of, or wholly pertained to, AARP's membership activities which did not relate to or benefit its Government grant activities. Thus, these costs should have been charged as direct costs to the membership services cost center rather than as indirect costs, a portion of which were allocated to the Government grants. The final determination on the "allocability" of some of these costs is not entirely clear and the exact amounts are difficult to specifically quantify because of the "complexity" of AARP's operations.

Because of the complexity of the issues and the amount of costs tentatively questioned, we prepared "discussion" drafts before issuing draft reports for official written comments. In this way, we had the opportunity to evaluate AARP's tentative position and review any additional supporting documentation before issuing formal draft reports for official written comment.

Although the two discussion drafts (one covering CY 1990 and the other covering CYs 1991 and 1992) had not been formally submitted to AARP as "official" draft reports, we discussed these matters in detail with AARP. AARP, in turn, provided us with lengthy "unofficial" written comments. (AARP's written comments did not go through top management or AARP's legal counsel.)

Subsequently, Myint & Buntua auditors held additional meetings with AARP and its external auditors to discuss the "differences" of opinion on the acceptability/allowability of the questioned costs. AARP representatives and Myint & Buntua auditors exchanged Position Papers to help define, narrow and clearly focus on the reasons for the differences. In the course of these discussions, AARP was provided free access to and, in fact, was given copies of relevant working papers, so that the different items could be researched.

As a result of these meetings and discussions, AARP agreed to certain adjustments to its indirect cost pool and allocation bases for both its Overhead and G&A costs. The OIG and AARP generally were able to reach a compromise on all but the following two significant issues; however, for indirect cost negotiation purposes, AARP and OIG agreed to the following in arriving at the "OIG-recommended" final indirect cost rates:

• Twenty-five percent of the enrollee wages and fringe benefits would be included in the G&A allocation base (compared to the auditors position that none of these costs be included).

 
• Only 25 percent of the Accounting Service Department and the Management and Budgeting Department costs be included in the G&A pool (compared to AARP's 100 percent).

 

TWENTY-FIVE PERCENT OF THE ENROLLEE WAGES
AND FRINGE BENEFITS WERE INCLUDED IN AARP'S
G&A BASE

AARP has agreed to eliminate all enrollee wages and fringe benefits from the AARP G&A base beginning with the CY 1996 submission.

G&A COST POOL FOR THE ACCOUNTING SERVICE DEPARTMENT
AND THE MANAGEMENT AND BUDGETING DEPARTMENT

Based on the Myint & Buntua auditors' calculations, the indirect cost provisional billing rates recommended for acceptance as final negotiated rates closely approximate the "OIG-recommended" final indirect cost rates using the "OIG-recommended" Overhead and G&A allocation bases and pool amounts (including 25 percent of the enrollee wages and fringe benefits costs in the G&A base and 25 percent of the Accounting Service Department and Management and Budgeting Department costs in the G&A pool). The total difference between applying:

(a) the provisional billing rates, and
 

(b) the "OIG-recommended" final indirect cost rates for the 3 years combined is less than $15,000, which is not significant. (See Attachment A.)

CONCLUSION

RECOMMENDATION

                                                                                            Calendar Year
 

As you know, OCD granted AARP a waiver so it would not have to submit indirect cost rate proposals until after the CYs 1990, 1991 and 1992 audits are resolved. OCD extended the CYs 1991-1992 provisional billing rates through CY 1995. Thus, proposed final indirect cost rate proposals, based on actual costs, have not been prepared/submitted for CYs 1993, 1994 and 1995.

AARP and its auditors have informed us that AARP's operations have not significantly changed in CYs 1993-1995 as compared to CYs 1991-1992. As such, the indirect costs rates, if developed based on actual costs, should remain relatively the same. Moreover, based on our limited audit resources, coupled with our criteria for the selection of significant and high-risk entities to audit, we do not plan to perform indirect costs audits of CYs 1993, 1994 and 1995.

RECOMMENDATION

As a result of recent legislation on lobbying activities conducted by nonprofit organizations, effective January 1, 1996, all of AARP's Federal grant programs were transferred to the newly-established AARP Foundation (an affiliated 501(c)(3) entity). The transfer of the administration of all Federal Government grants from AARP to its subordinate AARP Foundation will require some revisions in AARP's methodology for determining indirect costs and indirect cost rates for Government grants.

AARP continues to provide certain support functions to the AARP Foundation. Some support functions (e.g., office space rent) are billed by AARP to the AARP Foundation as direct charges. Other AARP support functions (e.g., overall management activities) are allocated to the Foundation using an allocation base which consists of costs related to AARP membership activities as well as to AARP Foundation activities. In this later connection, AARP agrees that no enrollee salaries or fringe benefits will be included in the AARP G&A base.
 

Certain indirect costs applicable to Government grants will be incurred by the Foundation. Thus, the Foundation's indirect costs will consist of: (1) direct charges from AARP, (2) indirect rate charges from AARP, and (3) indirect costs recorded by the Foundation. These costs will be combined into a single AARP Foundation indirect cost pool for allocation to Government grants/contracts using an appropriate allocation base.

In December 1996, AARP submitted a proposed indirect cost allocation plan to your office requesting that OCD negotiate/establish provisional indirect cost billing rates for CYs 1996 and 1997. This submission was based on actual Overhead and G&A costs for only the first 10 months of the year. OCD returned the proposal requesting, among other things, that it be based on actual costs for the entire year.

In June 1997, the Foundation submitted indirect cost allocation plans for final rates for

CY 1996, and provisional billing rates for CYs 1997 and 1998. Your office has deferred action on those plans pending resolution of the indirect cost rates for the prior years. As a result, the Foundation is currently operating without a provisional indirect cost billing rate.

AARP's submission made to OCD includes 25 percent of the enrollee wages and fringe benefits in the AARP G&A base, but this no longer is appropriate because of the "organizational split." Accordingly, the submission must be modified and resubmitted to eliminate enrollee wages and fringe benefits from the AARP G&A base. (As previously noted, AARP has agreed to eliminate all enrollee wages and fringe benefits from the AARP G&A base beginning with the submission for CY 1996.)

CONCLUSION

(AARP had not, for the most part, been billing the DOL SCSEP grant for indirect costs; under the organizational split, some of these costs will now be direct costs (charges) of the Foundation.)

DOL funding represents about two-thirds of the $30 million of AARP's G&A allocation base and an $8 million Overhead allocation base for the Government programs; therefore, the recommendation would have but a minimal financial impact on the other Federally-funded programs. Furthermore, AARP has agreed not to claim any additional indirect costs for any prior periods, resulting in a cost savings to DOL. (See Attachment C.)
 

RECOMMENDATIONS

(1) Require the AARP Foundation to modify and resubmit an indirect cost plan, proposing final indirect cost rates for CY 1996. The revised plan needs to: (a) delete enrollee wages and fringe benefits from the AARP G&A base, and (b) be based on actual costs.

(2) Adopt the proposed final indirect cost rates for CY 1996 as provisional billing rates for CYs 1997 and 1998 (so that the AARP Foundation can start billing its indirect costs).

(3) After a joint OCD/OIG review of the indirect cost proposal (and, if warranted, an audit by the OIG), OCD negotiate/establish final indirect cost rates for CY 1996.

(4) Require the AARP Foundation, as soon as possible after calender year-end, to submit an indirect cost plan, based on actual costs, proposing final indirect cost rates for CY 1997.

(5) After a joint OCD/OIG review of the indirect cost proposal (and, if warranted, an audit by the OIG), OCD negotiate/establish final indirect cost rates for CY 1997.

(6) Adopt the final indirect cost rates for CY 1997 as "revised" provisional billing rates for CY 1998 and provisional billing rates for CY 1999.

Attachments