[Federal Register Volume 59, Number 179 (Friday, September 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22997]


[[Page Unknown]]

[Federal Register: September 16, 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 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 15, 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, and (2) bring consistency to Federal policies covering 
the allowability of interest by organizations receiving Federal awards.
    The revision will apply only to assets acquired after its final 
issuance.
John B. Arthur,
Assistant 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. 94-22997 Filed 9-15-94; 8:45 am]
BILLING CODE 3110-01-P