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Playing by the Rules Ch. 2 Chapter 2 Financial Management Contents Page 2.1 Overview ...........................................................................................................................................................2-3 2.2 Internal Controls .............................................................................................................................................2-4 2.3 Accounting Records ......................................................................................................................................2-5 2.4 Allowable Costs ..............................................................................................................................................2-6 2.5 Source Documentation ................................................................................................................................2-9 2.6 Budget Controls ...........................................................................................................................................2-10 2.7 Cash Management ...................................................................................................................................... 2-10 2.8 Financial Reporting .................................................................................................................................... 2-11 2.9 Other Miscellaneous Requirements for Your Financial Management Systems .................................................................................................................................................................... 2-12 Exercise for Chapter 2—Financial Management Questions ................................................................. 2-13 Exercise for Chapter 2—Financial Management Answers .................................................................... 2-14 Playing by the Rules: CDBG Administrative Systems | Chapter 2-1 Playing by the Rules: CDBG Administrative Systems | Chapter 2-2 Notes Chapter 2: Financial Management When new subrecipients begin ofering a CDBG-funded program, many discover that they need to upgrade their fnancial systems to meet the applicable Federal requirements. Sometimes, making these necessary fnancial system changes happen as a matter of trial and error. Howev- er, this “ad hoc” approach is dangerous. For example, you may not fnd out about your system defects until you run into a major problem with an overspent budget or a serious audit fnding. This chapter summarizes the required elements of financial systems you will need for managing Federal funds. Your responses to questions in the following eight areas (detailed in subsequent sections of this guide) should help you identify any specifc areas that may need improvement: 1. Internal controls: • Does your agency have a written set of policies and procedures that describes staf qualifcations and duties, lines of authority, separation of duties, and access to assets and sensitive documents? • Does your agency have written accounting procedures for approving and recording transactions? • Do you periodically compare fnancial records to actual assets and liabilities, and check them for completeness and accuracy? 2. Accounting records: • Does your fnancial accounting system contain these basic elements: (a) a chart of accounts, (b) a general ledger, (c) a cash receipts journal, (d) a cash disbursements journal, (e) a payroll journal, (f) accounts payable and receivable ledgers, and (g) job cost journals (if involved in construction)? • Does your accounting system provide reliable, complete, and up-to-date information about the sources and uses of all funds? • Does your agency perform “trail balances” regularly (at least quarterly)? • Can your accountant confrm that your accounting system and records meet the re- quirements of OMB Uniform Guidance 2 CFR Part 200? 3. Allowable costs: • Does your agency have a defned set of standards and procedures for determining that costs charged are reasonable, allowable, and allocable expenditures that are consis- tent with the basic Federal rules (2 CFR 200, Subpart E)? • Do you know what types of expenditures are prohibited under the CDBG program? • Do you have an approved indirect cost allocation plan? 4. Source documentation: • Does your agency maintain up-to-date fles containing source documentation (receipts, invoices, canceled checks, etc.) for all fnancial transactions, including the obligation and use of CDBG program income? 5. Budget controls: • Does your agency maintain a current approved budget for all funded activities compar- ing budgeted and actual expenditures? • Does your agency periodically compare your progress on achieving your program or project goals with the expenditure rate of program funds? 6. Cash management: • Does your agency have a consistent process for projecting its cash needs, both to meet your cash needs and minimize the time between the receipt and disbursement of grant funds? • Can your agency certify that all CDBG program income is used in accordance with the subrecipient agreement – i.e., either returned to the grantee or used by your organiza- tion for permitted activities before making additional grantee drawdowns for the same activity? (See Section 2.6 below for more information on program income.) Playing by the Rules: CDBG Administrative Systems | Chapter 2-3 Notes - - Chapter 2: Financial Management 7. Financial reporting: • Can your agency provide accurate, current, and complete disclosure of the fnancial results of each Federally sponsored project or program that meets the CDBG reporting requirements? 8. Audits: • Does your agency conduct annual audits? • When was your last audit by an independent Certifed Public Accountant and what were the results? • Is your agency following any recommendations in the management letter? If you answered “yes” to all of these questions, your agency has established strong fnancial controls. If not, this chapter can help you understand the minimum Federal requirements for fnancial management and identify where your systems need strengthening. After identifying these areas, you can work with your fnancial staf or accountant, your auditor, and/or your grantee to develop the systems and expertise you need to ensure control of your agency’s fnancial afairs to meet the Federal requirements. AS YOU READ THIS CHAPTER… 1. Check your internal systems against the standards described here. 2. What are the capabilities of your current bookkeeping or accounting staf to fulfll their responsibilities under these requirements? Create a list noting any areas that may need support or new procedures created. 3. Talk to your present accountant and/or auditor. Are they familiar with the Federal require ments outlined here? Has he or she evaluated the adequacy of your systems? 4. Identify appropriate staf in your grantee’s agency (e.g., city or county Community Develop ment agency) who can answer your questions to help you strengthen your systems. 5. Note any warning signs indicating that you need fnancial management assistance (for example, unexplained expenditures, unrecorded program income, expenditures occurring faster than progress is attained). 2.1 Overview The requirements for fnancial management systems are found in 2 CFR Part 200.302.(b)(1-7)1. The scope and frequency of reporting for subrecipients are in 2 CFR 200.329. These require- ments specify standards to ensure that your organization (a recipient of Federal funds) has an adequate fnancial management system that: 1. Provides efective internal control over and accountability for all funds, property, and other assets; adequately safeguards these assets and confrms the assets are used for authorized purposes. 2. Identifes the source and application of funds for Federally-funded activities. You need to verify cost reasonableness, cost allowability, allocable costs, applicable credits, and the composition of costs as either direct or indirect, as noted in 2 CFR Part 200, Subpart E- Cost Principles. You also need verifcation that the funds used do not violate any appli- cable restrictions or prohibitions. 3. Documents the accurate, complete, and timely disclosure of fnancial results using gener- ally accepted accounting principles (GAAP) in accordance with the reporting requirements of the grantee or HUD. 4. Reduces the time elapsed between the transfer of funds from the U.S. Treasury drawn by the grantee and disbursed to the subrecipient. State fscal controls and accounting procedures are noted in 24 CFR 570.489(d). Cost principle exceptions in 24 CFR 570.489(p) and payment of planning and program administrative costs are noted in 24 CFR 570.489(a)(3)(iv). 1 Playing by the Rules: CDBG Administrative Systems | Chapter 2-4 Notes - Chapter 2: Financial Management The Federal regulations contain requirements in eight specifc areas noted earlier (internal controls, accounting records, allowable costs, source documentation, budget controls, cash management, fnancial reporting, and audits). The frst seven areas are discussed in Sections 2.2 to 2.8. Auditing standards are described separately in Chapter 7. 2.2 Internal Controls See 2 CFR 200.303. The soundness of any organization’s fnancial “Internal controls” are a combination ofmanagement structure is determined by its procedures, specifed job responsibilities, system of internal controls. Internal controls qualifed personnel, and records that togeth are management systems that help your er create accountability in an organization’s organization operate successfully and com-fnancial system and itssafeguard cash,petently to achieve its goals. Managers often property, and other assets. think of internal controls as the responsibility of accountants and auditors. The fact is that your management, at all levels, is responsible for confrming that internal controls are set up, followed, and reviewed regularly. Internal controls are meant to: • Protect assets. • Confrm that records are accurate. • Promote operational competence. • Achieve organizational mission and goals. • Confrm compliance with policies, rules, regulations, and laws. 2 CFR 200.303 requires your organization to follow one of two approved internal control structures. • The Government Accountability Ofce (GAO) Standards for Internal Control in the Federal Government (referred to as the “Green Book”), which is used by the Federal government. • The structure endorsed by the Committee of Sponsoring Organizations (COSO) used by publicly held companies. Both GAO and COSO provide a structure for designing, implementing, and operating an efec- tive internal control system. Using either will help achieve your goals related to operations, reporting, and compliance. Through your system of internal controls, your executive management should confrm that: • Resources are used for authorized purposes and in a manner consistent with applicable laws, regulations, and policies. • All local and Federal resources are protected against waste, mismanagement, or loss. • Reliable documented information on the source, amount, and use of resources is secured, up-to-date, and recorded. Accordingly, some of the basic elements that you should consider in developing your system of internal controls include: • An organizational chart that clearly indicates the individuals involved in approving or re- cording fnancial transactions and their responsibility. • A written description of the functions of key employees. • A formal system of authorization and supervision sufcient to provide accounting con- trol over assets, liabilities, receipts, and expenditures. This should include: • An updated policy manual identifying approval authority for fnancial transactions and detailed guidelines for controlling expenditures. • A written accounting manual outlining procedures for recording deposits and expen- ditures that includes a chart of accounts for posting all transactions and written pro- cedures indicating the requirements for payments in 2 CFR 200.305 (see Accounting Records, in the following section). Playing by the Rules: CDBG Administrative Systems | Chapter 2-5 Notes Chapter 2: Financial Management Your authorization system needs to provide enough clarity for management to track and un- derstand various transactions and to ensure proper supervisory authority approving trans- actions. A system of authorizations can be general, as in a procedures manual that explains how accounting functions are to be performed, or very specifc, as in identifying who has the authority to sign a contract on behalf of the organization or to sell a piece of equipment. For example, you could accomplish this by creating a step-by-step guide for each of your fnancial and program management procedures, specifying the steps in the procedure, the position responsible, the action to be taken, and the standard of prompt action for each step. • An adequate separation of duties, whereby no one individual has authority over an entire fnancial transaction. Separation of duties specifcally involves the separation of three types of functional responsibilities: (a) authorization to execute a transaction, (b) recording of the transaction, and (c) custody of the assets involved in the transaction. No one person should have control of more than one of these functional responsibilities.2 • Control over access to assets, blank forms, and confidential documents. Physical access to records, blank forms, cash, and other assets should be limited to authorized personnel only. For example, access to accounting records should be limited to only those individuals having record-keeping or supervisory responsibility for them. • Periodic evaluations of financial records comparing actual assets and liabilities (rec-onciliation) and taking corrective action in response to any discrepancies. As with separa- tion of duties, this is a crucial task to uncover and correct inadvertent record-keeping errors in a timely manner. It is also essential for identifying likely weaknesses in your organization’s system for safeguarding resources and uncovering instances of fraud or misuse of assets. 2.3 Accounting Records See 2 CFR 200.302(b)(1-7) and Chapter 5, Records Retention. Your accounting records must adequately identify the source and application of CDBG funds. (2 CFR 200.302(b)(3)). To meet this requirement, your system should provide for the following elements: • A chart of accounts. This is a list of names, classifcations, and the numbering system for your individual accounts containing basic information about specifc fnancial transactions for the organization. Accounts are created and, in turn, used to summarize the fnancial transaction data, according to some common characteristics. For example, a typical chart of accounts might have separate account categories for describing assets (cash in a checking account, accounts receivable, prepaid insurance, etc.); liabilities (loans, accounts payable, obligated funds, etc.); revenue (drawdowns from CDBG awards, cash contributions, pro- ceeds from sales, other program income, etc.); and expenses (rent, wages, heat, telephone, etc.). • A cash receipts journal.3 This journal documents chronologically the date funds are re- ceived, in what amounts, and from what sources. • A cash disbursements journal. This journal documents chronologically your organization’s expenditures (e.g., when the expense was incurred, how much was spent, and to whom funds were paid and for what purpose). 2 It is often benefcial to have diferent individuals or even diferent departments handle the various steps in the processing of transactions. First, separation of functional responsibility results in cross-checking by the individuals involved, increasing the likelihood that errors will be discovered and corrected. Second, fraud is more difcult to carry out if it requires the collusion of two persons or more. In organizations with very limited staf, however, it may be difcult to achieve optimal separation of duties. In such instances, the most critical functional areas are separation between custody for cash, record keeping for cash, and control of assets easily converted to cash. 3 A journal is a chronological record of transactions showing the charges to be recorded as a result of each trans- action. Every transaction is initially recorded in a journal. Therefore, a journal is called a record or book of original entry. Each entry in the journal states the names of the individual accounts to be debited and credited, the dollar amount of each debit and credit, the date of the transaction, and any other necessary explanation of the transaction. The act of entering a transaction in a journal is called “journalizing.” Information for a journal entry can originate from a variety of sources, such as checks issued or received, invoices, cash register tapes, and time sheets. Playing by the Rules: CDBG Administrative Systems | Chapter 2-6 Notes Chapter 2: Financial Management • A payroll journal. This journal documents your organization’s expenses on salaries and benefts and distinguishes diferent categories for regulatory purposes. • A general ledger. After a transaction is entered in a journal, that information also should be transferred to the proper accounts contained in the general ledger. The general ledger summarizes chronologically the activity and fnancial status of all the accounts of your or- ganization. The process of transferring transaction information from a journal to a ledger is known as “posting.” Cross-indexing entries in the journal and ledger permits tracking of any recorded transaction (i.e., an “audit trail”). Periodically, a “trial balance” is performed, to test the mathematical accuracy of the ledger and to prepare a statement of your organization’s fnancial position as of a specifc date. Sources and Uses of Funds For the CDBG program, these accounting records must contain reliable and up-to-date information about the sources and uses of funds, including: • Your Federal grant awards (or subgrant allocations) received. • Current authorizations and obligations of CDBG funds. • Unobligated balances (funds remaining available for distribution). • Assets and liabilities. • Program income earned (24 CFR 570.500) and disbursed (24 CFR 570.504). • Actual outlays or expenditures, with further breakdowns by: • The grant program from which the funds are derived.4 • The “eligible activity” classifcations specifed in 24 CFR 570.201-2045 (housing rehabili- tation, economic development, public facilities, public services, etc.) or similar classif- cations that clearly indicate the use of program funds for eligible activities. Maintenance of Records See 2 CFR 200.334-3386 and 24 CFR 570.502(a)(7)(ii) regarding record retention. The internal control requirements provide for the separation of duties and the secure stor-age of accounting records in limited access areas. In maintaining these accounting records, you should also certify that: • Journal entries are properly approved, explained, and supported. • Posting and trial balances are performed regularly. • Fidelity bond coverage is obtained for responsible ofcials of the organization, if required by HUD. The grantee may require you to purchase additional fdelity bond coverage in cases where they believe the normal policy coverage is not enough to protect the interest of the government (2 CFR 200.304, 2 CFR 200.326, and 2 CFR 200.427). 2.4 Allowable Costs See 2 CFR 200.402-406 and 2 CFR 200.83. 2 CFR Part 200, Subpart E—Cost Principles list the standards for determining whether your project costs are reasonable (2 CFR 200.404 (a-e)), allowable (2 CFR 200.403 (a-g)), allocable (2 CFR 200.405 (a-e)) or have an applicable credit (2 CFR 200.406 (a-c)) incurred as part of CDBG-f- nanced activities. 4 Subrecipients are encouraged, but not required by HUD, to identify expenditures by the specifc grant. 5 24 CFR 570.204 is only applicable to Community Based Development Organizations (CBDO) that have been designat- ed as subrecipients. 6 For the record retention requirements, the requirements identifed at 24 CFR 570.502 are ALSO applicable. Playing by the Rules: CDBG Administrative Systems | Chapter 2-7 Notes Chapter 2: Financial Management According to basic regulations in the Omnibus Circular, a cost is allowable (2 CFR 200.403 (a-g)) under the CDBG program if the expenditure is: • Necessary, reasonable, and directly related to the grant. • Authorized by the grantee. • Not prohibited under federal, state, or local laws or regulations. • Consistently treated. • Allocable to the CDBG program. • Net of all applicable credits. Each of these requirements is addressed in more detail below: Necessary, reasonable, and directly related to the grant. This standard applies equally to: • Salaries and administrative services contracts. • Real property and equipment purchase or leases. • Publication costs for electronic and print media, including distribution, and promotion (2 CFR 200.461). • Travel and other administrative expenditures. In determining the reasonableness of a given cost, pay attention to the following: • Is the cost commonly recognized as ordinary and necessary for the operation of your orga- nization or the performance of the award? • Are the restrictions or requirements imposed by generally accepted sound business prac- tices, arms-length bargaining, Federal and state laws and regulations, and terms and condi- tions of the award? • Are the individuals performing their duties with good judgment under the circumstances, considering their responsibilities to the organization, its members, employees, clients, the public-at-large, and the government? • Have there been signifcant changes from the established practices of the organization that have unreasonably increased costs? Authorized by the grantee The grantee that provides the CDBG funds to the subrecipient authorizes the expenditure by approving the budget for the activity. For example, in its agreement with a subrecipient, the grantee may stipulate that all funded home repairs meet the local building code. To ensure that the expense is allowable, you need to maintain the necessary records documenting the contractor obtained building permits and inspection approvals as required for code compliance; otherwise, any expenditures on such activities may be disallowed by the grantee based upon the provisions of the Subrecipient Agreement. Not prohibited under Federal, state, or local laws or regulations. For example, 2 CFR Part 200.420, "General Provisions for Selected Items of Cost," explicitly prohibits the expenditure of Federal funds for entertainment (24 CFR 200.438); contributions and donations (2 CFR 200.434); fnes and penalties, damages, and other settlements (2 CFR 200.441); and bad debts (2 CFR 200.426).7 Uniform Guidelines also prohibit expenditures on interest (2 CFR 200.449) and other fnancial costs (2 CFR 200.451) except where authorized by legislation as is the case under Section 105(a)(13) of Title I of the Housing and Com- munity Development Act of 1974, as amended, which specifcally identifes “reasonable ... carrying charges related to the planning and execution of community development and housing activities” as eligible costs under the CDBG program. 7 Playing by the Rules: CDBG Administrative Systems | Chapter 2-8 Notes Chapter 2: Financial Management In addition, the CDBG regulations (24 CFR 570.207) prohibit the use of program funds for: • Buildings used for the general conduct of government (24 CFR 570.207(a)(1)). • General governmental expenses (24 CFR 570.207(a)(2)). • Political activities (2 CFR 200.450). Program regulations also specify that the following activities may not be assisted with CDBG funds unless (a) authorized as a special economic development activity under 24 CFR 570.203 or (b) when carried out by CBDOs under the provisions of 24 CFR 570.204: • Purchase of construction equipment unless purchased for use as part of a solid waste disposal facility, which is eligible under 24 CFR 570.201(c). • Personal property, furnishings, fixtures, or motor vehicles unless these items consti- tute part or all of a public service activity under 24 CFR 570.201(e), are eligible as frefghting equipment under 24 CFR 570.201(c), or are necessary in the administration of activities assisted with CDBG funds. • Operating and maintenance expenses except for expenses associated with public service interim assistance activities, In Rem, carried out under the authority of Section 105(a)(23) of the Housing and Community Development Act of 1974, or ofce space for program staf employed in carrying out the CDBG program. • New housing construction8 unless performed in accordance with the “last resort” housing provisions of 24 CFR Part 42 or carried out by a CBDO under 24 CFR 570.204. • Income payments except for emergency grant payments made over a period of up to 3 consecutive months directly to the service provider of such items as food, clothing, housing, or utilities (24 CFR 570.207(b)(4)). Consistently treated Expenditures are consistently treated when your organization applies generally accepted ac- counting principles (GAAP) in computing the cost and uses the same procedures in calculating costs for its non-Federally assisted activities. Allocable to the CDBG program A cost is allocable to a specifc cost objective (e.g., grant, program, or activity) in part to the relative benefts received by that objective (2 CFR 200.405 (a-e)). This means that: • If an ofce is used by two programs during the same hours, the costs of the ofce should be allocated between the two programs equitably. • The same expense cannot be claimed against more than one grant (i.e., double billing is prohibited). In addition: • A cost originally allocable to a specifc Federal grant program cannot be shifted to another Federal grant program to overcome funding shortages, avoid restrictions imposed by the grant or by law, or any other reasons. • In accordance with the guidance found in 2 CFR Part 200, Subpart E, the structure of direct and indirect costs must be clear. There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. Therefore, it is essen- tial that each item of cost incurred for the same purpose be treated consistently either as a direct or indirect cost. • Direct costs are directly related to a specifc cost activity, as noted in 2 CFR 200.413 (a-f ). • Indirect costs are for common objectives that beneft more than one activity (e.g., salaries of executive ofcers, accounting and auditing, other costs of general ad- ministration (2 CFR 200.414 (a-g)). The Neighborhood Stabilization Program allows new construction activities under eligible use E 8 Playing by the Rules: CDBG Administrative Systems | Chapter 2-9 Notes Chapter 2: Financial Management • For major nonproft organizations,9 indirect costs must be classifed within two broad categories: Facilities and Administration (F & A) as noted in 2 CFR 200.414 (a). For such organizations, indirect costs must be supported by an indirect cost proposal/cost allocation plan approved by the Cognizant Agen- cy, on behalf of all Federal agencies (see 2 CFR 200.1). Net of all applicable credits Any credits such as purchase discounts or price adjustments must be deducted from the total costs charged. You are not allowed to make a proft from any costs charged to CDBG funds (2 CFR 200.406 (a-c)). 2.5 Source Documentation The general standard is that all accounting records must be supported by source docu-mentation (see 2 CFR 200.302(b)(3)). Supporting records are necessary to prove that your organization incurred the costs during the efective period of your agreement with the grantee, actually paid or properly accrued the costs, spent the funds on items that are allowable, and confrmed that the responsible ofcial(s) in your organization approved the payment. The source documentation must explain the basis of the costs incurred as well as show the actual dates and amount of expenditures. For example: • For payrolls, source documentation should include employment letters and all authoriza- tions for rates of pay, benefts, and employee withholdings. Documentation might include union agreements or minutes from the board of directors’ meetings where salary schedules and benefts packages are established, copies of written personnel policies, W-4 forms, etc. For staf time charged to the CDBG program activity, time and attendance records should be retained in the file. If an employee’s time is split between CDBG and another funding source, there must be time distribution records supporting the allocation of charges among the sources. CPD Notice 13-07 discusses allocating staf costs between Program Adminis- trative Costs (PAC) versus Activity Delivery Costs (ADC). Documentation of the payment of payroll may include records indicating payroll deposit, payroll summary, timesheets, bank statements, and/or evidence of direct deposits showing payments to employees, or insur- ance providers, etc. • You can use rental or lease documents to support space costs. Utility bills serve as docu- mentation for utility costs. Both types of expenses may be supported by bank statements. If the cost of space or utilities is split between the CDBG program and other sources, costs must be allocated fairly among the sources, consistent with the guidelines covering alloca- ble costs in Section 2.4. • For supplies (2 CFR 200.314), documentation includes purchase orders or requisition forms initiated by an authorized representative of your organization, an invoice from the vendor (which has been signed-of on by your appropriate and authorized personnel to indicate the goods were received), bank statements or other evidence of payment, and information re- garding where the supplies are being stored and for what cost objective(s) you are using them. Some additional requirements related to source documentation include: • All source documentation does not have to be in the CDBG project fles, but it must be readily available for review by the grantee, HUD, or other authorized representatives at all times (2 CFR 200.337 (a-c)). For example, you may maintain employment letters and salary schedules in the organization’s central personnel fles. The subrecipient agreement should establish the grantee’s requirements for the documentation to be kept in your records (24 CFR 570.503(b)(2)). Documentation of the receipt of payment by vendors may be kept on fle with the fnancial institution holding the account as long as (a) the grantee allows this practice in your agreement and (b) the documentation is readily available on request for review by the grantee or by HUD. Major non-proft organizations are those receiving more than $10 million in Federal funding. 9 Playing by the Rules: CDBG Administrative Systems | Chapter 2-10 Notes Chapter 2: Financial Management • You must confrm that either (a) an encumbrance/obligation is recorded whenever a con- tract is signed or a purchase order is issued or (b) up-to-date information on the status of all obligations is otherwise readily accessible. • You must maintain a complete, accurate, and up-to-date record of the receipt and use of CDBG-generated program income (see Chapter 6). 2.6 Budget Controls You must have procedures to monitor obligations and expenditures against their approved budget(s) for CDBG-funded activities. Depending on the language in your Subrecipient Agree- ment, the grantee may be under no obligation to reimburse you for expenditures that exceed approved budget line items or the overall budget for CDBG-assisted activities. As a result, you need to have an ongoing system to compare actual receipts, encumbrances, and expenditures with the CDBG budget to determine whether it will be necessary to initiate a formal budget revision. Since the budget refects your best estimate of the resources necessary to accomplish the CDBG project, any pattern of cost overruns should prompt a careful review of the budget. To compare and control expenditures to approved budgets, you must: • Maintain in your accounting records the amounts budgeted for eligible activities. • Include unexpended/unobligated balances for budgeted categories, as well as obliga- tions and expenditures. • Periodically compare actual obligations and expenditures to date against planned obli- gations and expenditures, and against projected accomplishments from such outlays. You will need to review these comparisons on an ongoing basis before most of the funds have been committed or spent. It is critical that you maintain a close watch over your project or program progress and the amount of funds spent. It does no good to stay within the budget line if the actual accomplishments are lagging. 2.7 Cash Management You are required to have procedures in place to minimize the time between receipt of funds from the grantee and disbursement to your vendor. This requirement will reduce the cost to the U. S. Treasury fnancing the CDBG program. Grantees have two general methods available to transfer CDBG grant funds to subrecipients: the reimbursement method and the cash advance method (2 CFR 200.305). • The reimbursement method is a transfer of grant funds to your organization based on actual expenditures paid before the request for funds. • The cash advance method is the transfer of CDBG funds from the grantee based upon your organization’s request (and information on obligations) before the actual cash dis-bursements have been made. Both methods must be implemented in compliance with the cash management requirements. In accordance with 2 CFR 200.30510 as applicable, and 31 CFR Part 20511 these requirements include: • You must include accurate information in your drawdown request to a grantee. This requirement will address the intentional falsifcation of drawdown information. The Federal Government is also concerned that you have adequate systems in place to be able to deter- mine your cash on hand and your immediate cash needs. 10 See also 24 CFR 570.502(a)(1) for lump sum drawdowns. 11 These are the regulations of the U.S. Department of the Treasury governing withdrawal of cash from the Treasury for an advance under a Federal grant program. Playing by the Rules: CDBG Administrative Systems | Chapter 2-11 Notes Chapter 2: Financial Management • Although there is no explicit regulation for cash advances, the general standard is that you should disburse the funds to pay for CDBG program costs within 3 business days of the receipt of those funds from the grantee. You should also maintain written justifcation in your fles each time a disbursement of an advance takes longer than 3-days. • You must return erroneously drawn funds to the grantee in a timely fashion. This applies to both advances and reimbursement payments when it is determined that the transfer resulted in more funds being drawn down than what was required by your organi- zation’s immediate disbursement needs. For example, if you drew down CDBG funds in anticipation of the start of a public facilities project, and the project’s commencement was delayed, HUD requires that you return the CDBG funds to the grantee and re-initiate the drawdown process at a later point. • If CDBG advances are placed in an interest-bearing account by your organization, you must return this interest income to the Department of Health and Human Services Payment Management System (PMS) via the grantee annually (per 2 CFR 200.305, 2 CFR 200.449, or 24 CFR 570.502(b)(3)(i), as applicable, and 24 CFR 570.500(a)(2)). Such interest income is not considered program income. Similarly, if you use a “revolving loan fund account” under the CDBG program, the funds must be deposited in an interest-bearing account, and all interest earned on funds on deposit must be returned to the Treasury via the grantee no less frequently than annually (24 CFR 570.500(b)). • You must disburse program income, as defned in 24 CFR 570.500 (a) (1-3) (other than program income deposited in a revolving fund) for program costs before requesting further drawdowns from the grantee (see 24 CFR 570.504(b)(2)(ii), 570.504(c) and 2 CFR 200.305(b) (5)). • If you put program income in an approved revolving fund, you must disburse this pro- gram income for the same activity for which the revolving fund was established before making any cash drawdown requests to the grantee for the activity. The account must be interest-bearing, and interest earned or funds held in the account must be remitted to the grantee at least annually (24 CFR 570.504(b)(2)(i) and 24 CFR 570.500 (b)). • For lumpsum drawdowns for property rehabilitation, the requirements in 2 CFR 200.305 are modifed by 24 CFR 570.513 (see 2 CFR 570.502(a)(1)). • Funds held in an escrow account for rehabilitation activities generally must be disbursed within 10 days (24 CFR 570.511(a)(4)). While avoiding excessive drawdowns, you need to determine and document that the legitimate cash needs of your CDBG activities are being met. As noted in the preceding section, your or- ganization needs to forecast accurately what its project expenses are going to be. If your CDBG activities are relatively stable (the same type and level of activities from month to month), you can review the previous month’s fnancial activity as a starting point to estimate your current period cash needs. But remember to modify this estimate: • For periodic expenses or seasonal variations in costs, such as for heating and electricity; • If your activities are expanding; or • If your programs have irregular fuctuations in expenses. A “cash requirements report” is a good tool for anticipating the monthly (or even weekly) cash fow needs. If you encounter large fuctuations in your disbursement obligations (as can happen, for example, in construction activities), you may be tempted either to invade other non-CDBG funds or to borrow CDBG funds for non-CDBG purposes. Such inter-fund transfers that result in using CDBG funds for non-CDBG purposes are not allowed and may result in program sanctions or termination of the CDBG contract by the grantee. 2.8 Financial Reporting All organizations’ fnancial reports must be accurate, timely, current, and represent a complete disclosure of the fnancial activity and status in each Federal grant program under which assis- tance is received (2 CFR 200.328-330 and 24 CFR 570.502(a)(1-7)). Playing by the Rules: CDBG Administrative Systems | Chapter 2-12 Notes Chapter 2: Financial Management Your organization must have the capacity to provide the following information for each CDBG activity: • Amount budgeted. • Advances/reimbursements received to date. • Program income and other miscellaneous receipts in the current period and to date. • Actual expenditures/disbursements in the current period and cumulatively to date, for both program income and regular CDBG grant funds. • Current obligations in addition to disbursements. • Unpaid requests for payment previously submitted at the time of the latest drawdown. Your accounting and recordkeeping system must support the data included in (a) its drawdown requests, (b) its other fnancial and progress reports, and (c) the grantee’s Consolidated Annual Performance and Evaluation Report (CAPER) submitted to HUD. 2.9 Other Miscellaneous Requirements for Your Financial Management Systems • Loan servicing: You must have a system for properly servicing all CDBG-funded loans, where applicable, including: • Loan agreements with clear repayment terms and default defnitions, descriptions of how defaults can be resolved, actions to be taken if a loan is in default, and security for each loan. • Collection procedures that recognize current amounts due and when past payments were received, notify borrowers when payments are overdue, provide a procedure to collect overdue amounts, and establish criteria for writing of bad debts. • Cash depositories: You may follow regular banking procedures without any separate bank account or special bank eligibility requirements. You should obtain information on bank ratings before depositing CDBG funds with a fnancial institution.12 HUD encourages using minority-owned fnancial institutions in conjunction with their CDBG activities whenever possible. (for example, see 24 CFR 570.904(d)) • Real property: You must: • Keep track of CDBG-acquired real property to ensure that program income from sales or rental of such property or assets is properly recorded and reported (24 CFR 570.503(b)(3)). • Have procedures for ensuring ongoing compliance with the National Objectives re- quirements associated with real property acquired or improved with CDBG funds in excess of $25,000 (24 CFR 570.503(b)(7)). • Report on the status of property acquired with CDBG funds annually or as required by HUD (2 CFR 200.330). • Ensure that the property is used for an eligible activity that meets a national objective. Guidelines and Objectives for Evaluating Project Costs and Financial Requirements (Appendix A to Part 570). Appendix A provides recommendations for developing underwriting criteria for use in assessing risk, using CDBG to support economic development projects. 12 Bank rating and research frms which provide information on the comparative fnancial strength of local banks and other fnancial institutions are found in most regions of the country. Frequently the local city or county treasurer’s ofce subscribes to a bank rating service and may be able to provide subrecipients with useful information on the ratings of local fnancial institutions. Playing by the Rules: CDBG Administrative Systems | Chapter 2-13 Notes Chapter 2: Financial Management Exercise for Chapter 2—Financial Management Questions Circle the correct answer. 1. Which of the following are components of an organization’s system of internal controls for fnancial management? a. Written procedures and policies. b. Specifed job responsibilities. c. Job qualifcations. d. Accounting records. e. All of the above. 2. The sole purpose of accounting records is to provide reliable and up-to-date information on the cash controlled by an organization or agency. TRUE FALSE 3. An expenditure by a subrecipient will be considered an allowable CDBG expense if it is necessary to carry out an approved activity and is not explicitly prohibited by Federal, state, or local regulations. TRUE FALSE 4. Source documentation does not have to be located in the CDBG project fles. TRUE FALSE 5. An efective system of budget controls requires a periodic comparison of actual obliga- tions and expenditures to planned obligations and expenditures, and to projected accom- plishments for such outlays. TRUE FALSE 6. You may retain interest income from CDBG advances and revolving loan accounts as pro- gram income. TRUE FALSE The answers are on the next page. Playing by the Rules: CDBG Administrative Systems | Chapter 2-14 Notes Chapter 2: Financial Management Exercise for Chapter 2—Financial Management Answers 1. (e) All of the above. 2. FALSE. The purpose of accounting records is to provide information not only on cash but also on all the assets and liabilities of an organization, including property, receivables, payables, and other obligations. 3. FALSE. The fact that an expenditure is both necessary and not explicitly prohibited by law and program regulations is only part of the criteria that must be met for it to be consid- ered an allowable CDBG expense. In addition, the expenditure must: a. Have been authorized by the grantee (through an approved budget or other mech- anisms). b. Be reasonable. c. Have been treated by the subrecipient in a manner consistent with its normal pro- cedures for computing costs. d. Be allocable to an approved-CDBG cost objective. e. Be net of all applicable credits. 4. TRUE. Source documentation does not have to be stored in the CDBG project fles if it is readily available to be reviewed by the grantee, HUD, or other authorized representatives. In general, however, subrecipients will fnd that it is more efcient in the long run to main- tain as much project information as possible in fles specifcally dedicated to their CDBG activities. 5. TRUE. 6. FALSE. One of the primary purposes of a subrecipient’s cash management system is to minimize the time between receipt of CDBG funds and their disbursement; therefore, if the subrecipient’s system is working efciently, there shouldn’t be any interest income generated on cash advances. In fact, 24 CFR 570.500(a)(2) makes explicit that the defni- tion of program income does not include interest earned on the investment of the initial proceeds of a grant advance, including funds advanced from a grantee to a subrecipient, and any such funds must be promptly remitted to the U.S. Treasury. Moreover, 24 CFR 570.500(b) makes it clear that cash balances held in a revolving fund must be held in an in- terest-bearing account and that any interest earned on funds held in such an account will be considered to be interest income generated on a cash advance and must be remitted to the Treasury at least annually.