[Federal Register Volume 59, Number 185 (Monday, September 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23697]


[[Page Unknown]]

[Federal Register: September 26, 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 is a corrected version of the Notice previously 
printed on September 16, 1994 (59 FR 47657). This corrected version 
contains additional text under ``Supplementary Information.'' 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 25, 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 to the Federal Government, and (2) bring greater 
consistency to Federal policies covering the allowability of interest 
by organizations receiving Federal awards.
    As the Office of Management and Budget (OMB) stated in 1980, it had 
been ``a longstanding policy not to recognize interest as a cost'' (45 
FR 46022, 46023, July 8, 1980). Accordingly, the OMB circulars setting 
forth the cost principles for State and local governments, educational 
institutions, and non-profit organizations did not originally allow 
interest as an expense. Over time, however, OMB has gradually expanded 
the allowability of interest.
    The first change was made with respect to State and local 
governments. In 1980, Circular 74-4, ``Cost Principles for Grants to 
States and Local Governments,'' was revised to allow interest on 
buildings, but not on equipment (45 FR 27363, April 22, 1980). This 
policy was retained when Circular 74-4 was reissued the following year 
as revised OMB Circular A-87 (46 FR 9548, January 28, 1981).
    OMB then revised the policy with respect to educational 
institutions. In 1982, Circular A-21, ``Cost Principles for Educational 
Institutions,'' was revised to allow interest for both buildings and 
equipment (47 FR 33658, August 3, 1982).
    OMB has since revisited the policy with respect to State and local 
governments. In 1988 and 1993, OMB proposed to revise Circular A-87 to 
allow interest on equipment, as well as on buildings (53 FR 40352, 
October 14, 1988; 58 FR 44212, August 19, 1993). OMB expects to issue a 
notice shortly that would make final revisions to Circular A-87.
    OMB is now proposing to change the policy with respect to non-
profit organizations. In this notice, OMB proposes to revise Circular 
A-122, ``Cost Principles for Non-Profit Organizations,'' so that 
interest would be allowed for both buildings and equipment. Based on 
OMB's experience under the three cost principles circulars, OMB 
believes that the proposal would result in lower costs to the Federal 
Government. In addition, this proposal would result in greater 
consistency on the allowability of interest across the three cost 
principles circulars.
    During the last few years, OMB has received a number of requests 
for waivers from Circular A-122's prohibition on the allowability of 
interest. As a result of reviewing the individual waiver requests, and 
based on the general experience gained under Circulars A-87, A-21, and 
A-122, OMB believes that allowing interest should encourage non-profit 
organizations to purchase rather than lease facilities in those 
situations where purchasing would result in lower costs than leasing. 
Consequently, OMB has decided to propose revising Circular A-122's 
interest policy.
    This proposed revision to Circular A-122 would establish four 
criteria that must be met for interest to be an allowable cost. These 
criteria are intended to encourage decisions beneficial to the non-
profit organization and the Federal Government. First, the non-profit 
organization must perform a lease/purchase analysis which shows that 
purchasing through debt financing is less costly to the Federal 
Government than leasing. Second, financing is provided at an interest 
rate no higher than the fair market rate. Third, investment earnings 
are used to offset allowable interest cost. Fourth, when it is expected 
that the Federal Government will reimburse 51 percent or more of an 
asset's cost, the non-profit organization must demonstrate the need for 
the asset in the conduct of federally sponsored activities. The fourth 
criterion is in addition to that which applies to State and local 
governments (Circular A-87) and educational institutions (Circular A-
21).
    OMB believes that the first and fourth criteria are especially 
important in the context of grants to non-profit organizations. As a 
general rule, the Federal Government contributes a small share of the 
costs of assets purchased by State and local governments and 
educational institutions. Since those entities must themselves fund the 
majority of the costs associated with acquiring an asset, they have an 
incentive to make the most economical lease/purchase decision. In 
contrast, for non-profit organizations covered by Circular A-122, the 
Federal share of costs is often substantial. Since this greater Federal 
share could decrease the incentive for non-profit organizations to make 
the most economical lease/purchase decisions, these additional criteria 
are designed to ensure that a non-profit's decision to purchase rather 
than lease is based on an assessment of the relative costs of leasing 
versus purchasing, and a demonstrated need for the asset (where the 
Federal Government will reimburse over half the asset's cost).
    The revised policy would apply only to assets acquired after its 
final issuance.
    OMB requests comments on all aspects of this proposal.
John B. Arthur,
Associate 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. 94-23697 Filed 9-23-94; 8:45 am]
BILLING CODE 3110-01-P