[Federal Register Volume 65, Number 198 (Thursday, October 12, 2000)]
[Proposed Rules]
[Pages 60796-60814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25964]



[[Page 60795]]

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Part IV





Department of the Treasury





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Fiscal Service



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31 CFR Part 205



Rules and Procedures for Efficient Federal-State Funds Transfers; 
Proposed Rule

  Federal Register / Vol. 65, No. 198 / Thursday, October 12, 2000 / 
Proposed Rules  

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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 205

RIN 1510-AA38


Rules and Procedures for Efficient Federal-State Funds Transfers

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Financial Management Service (FMS) proposes to revise the 
regulations implementing the Cash Management Improvement Act of 1990, 
as amended (CMIA). These regulations govern the transfer of funds 
between the Federal Government and States for certain Federal 
assistance programs. The revisions will provide greater flexibility in 
funding techniques; ensure that Treasury-State Agreements are 
unambiguous and auditable; address concerns raised by States, Federal 
agencies, and the General Accounting Office (GAO); delete obsolete 
provisions; incorporate FMS policy statements as appropriate; reflect 
new legislation and directives; and make the regulation clearer and, 
where possible, more concise.

DATES: Send your comments to reach us on or before January 10, 2001; we 
may not consider comments received after the above date in making our 
decision.

ADDRESSES: For information about filing comments electronically, see 
the SUPPLEMENTARY INFORMATION section under ``Electronic access and 
filing address.'' You may also mail comments to Cynthia L. Johnson, 
Director, Cash Management Policy and Planning Division, Financial 
Management Service, 401 14th Street, S.W., Room 420, Washington, D.C. 
20227. You may hand deliver comments to us at that same location.

FOR FURTHER INFORMATION CONTACT: Sally Phillips, Senior Financial 
Program Specialist, at (202) 874-7106, or Stephen K. Kenneally, 
Financial Program Specialist, at (202) 874-6966, or Matthew Helfrich, 
Financial Program Specialist, at (202) 874-6754, or Oscar Ona, 
Financial Program Specialist, at (202) 874-6799, or Adam Martin, 
Financial Program Specialist, at (202) 874-6881, or Cynthia L. Johnson, 
Director, Cash Management Policy and Planning Division, at (202) 874-
6657, or Ellen Neubauer, Senior Attorney, at (202) 874-6680. 
Individuals who use a telecommunications device for the deaf (TDD) may 
call the Federal Information Relay Service at 1-800-877-8339 between 
8:00 a.m. and 4:00 p.m. Eastern time, Monday through Friday, excluding 
Federal holidays.

SUPPLEMENTARY INFORMATION:

I. Public Comment Procedures
II. Background
III. Discussion of Proposed Rule
IV. Procedural Matters

I. Public Comment Procedures

Electronic Access and Filing Address

    You may view an electronic version of this proposed rule at http://www.fms.treas.gov/policycmia and submit comments to FMS via the web 
site. You may also comment via e-mail to: [email protected]. Please 
also include ``Attention: RIN--1510-AA38'' and your name, address, and 
phone number in your Internet message. If you do not receive a 
confirmation from the system that we have received your Internet 
message, contact us directly at (202) 874-6590.

Written Comments

    Written comments on the Notice of Proposed Rulemaking (NPRM) should 
be specific, should be confined to issues pertinent to the proposed 
rule, and should explain the reason for any change you recommend. Where 
possible, you should reference the specific section or paragraph of the 
proposal you are addressing. We may not consider or include in the 
Administrative Record for the final rule comments which we receive 
after the close of the comment period.
    Comments, including names, street addresses, and other information 
of respondents, will be available for public review at the Department 
of the Treasury Public Reading Room during regular business hours (8:00 
a.m. to 4:00 p.m.), Monday through Friday, except Federal holidays. We 
will also post all comments on the CMIA policy website at http://www.fms.treas.gov/policycmia at the end of the comment period. 
Individual respondents may request confidentiality. If you wish to 
request that we consider withholding your name, street address, or 
other contact information (such as Internet address, FAX or phone 
number) from public review or from disclosure under the Freedom of 
Information Act, you must state this prominently at the beginning of 
your comment. We will honor requests for confidentiality on a case-by-
case basis to the extent allowed by law. We will make available for 
public inspection in their entirety all submissions from organizations 
or businesses, and from individuals identifying themselves as 
representatives or officials of organizations or businesses.

Public Hearings

    In addition, Treasury will hold two public hearings on the proposed 
rule that will provide individuals with the opportunity to publicly 
present their comments. The dates, times, and locations of these public 
hearings will be announced in a document that will be published in the 
Federal Register and made available on the CMIA Policy website at 
http://www.fms.treas.gov/policycmia.

II. Background

    We are proposing to revise our regulations at 31 CFR Part 205 (Part 
205). Part 205 implements the Cash Management Improvement Act of 1990 
(CMIA), Public Law 101-453, and the Cash Management Improvement Act 
Amendments of 1992, Public Law 102-589, codified at 31 U.S.C. 3335, 
6501, and 6503.
    CMIA was enacted in order to create greater efficiency and equity 
in the exchange of funds between the Federal Government and the States. 
Prior to the enactment of CMIA, Federal agencies expressed concerns 
that States were drawing down Federal funds well in advance of the time 
those funds were needed by States. States, on the other hand, expressed 
concerns about having to pay out their own funds in advance of 
receiving funds from the Federal Government.
    CMIA, which requires the heads of executive agencies to provide for 
the timely disbursement of Federal funds in accordance with regulations 
prescribed by the Secretary of the Treasury, has three major provisions 
designed to address these issues:

     States and Federal agencies must minimize the time 
between the transfer of funds from the U.S. Treasury and the 
clearance of funds out of the accounts of a State.
     The Secretary of the Treasury shall enter into a 
Treasury-State Agreement with each State which specifies the funds 
transfer procedures for Federal assistance programs.
     In general, States and the Federal Government are 
respectively entitled to interest when the other fails to make funds 
transfers in a timely fashion. States owe the Federal Government 
interest for the time Federal funds are in State accounts before 
they are spent for Federal assistance program purposes. A Federal 
agency owes a State interest if the State disburses its own funds 
with obligational authority to support the Federal portion of a 
program before receiving Federal funds.

    We issued Part 205 in 1992. The Final Rule was published on 
September 24, 1992 (57 FR 44272). The foundation of

[[Page 60797]]

the regulation was the use of recognized, sound cash management 
principles in order to increase certainty in the timeliness of payments 
between Federal agencies and States. Since 1992, we have issued a 
number of CMIA Policy Statements (Policy Statements) that address 
various issues relevant to Part 205.
    One of the purposes of the proposed rulemaking is to update the 
current regulation by deleting obsolete provisions and incorporating 
FMS Policy Statements. Another purpose is to address various concerns 
that States, Federal agencies, and the General Accounting Office \1\ 
have raised since the issuance of Part 205. Specifically, the proposed 
regulation:
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    \1\ See Financial Management: ``Implementation of the Cash 
Management Improvement Act'' (Letter Report, 01/08/96, GAO/AIMD-96-
4).

    (1) Provides greater flexibility in funding techniques;
    (2) Ensures that Treasury-State Agreements are unambiguous and 
auditable;
    (3) Reflects new legislation and directives, including the 
Single Audit Act Amendments of 1996, 31 U.S.C. Chapter 75; and 
Executive Order 12866 of September 30, 1993, Regulatory Planning and 
Review; and,
    (4) Makes the regulation clearer and, where possible, more 
concise.

    FMS provided an earlier draft of this proposed rule to the National 
Association of State Auditors, Comptrollers and Treasurers, the 
National Governors' Association, the National Conference of State 
Legislatures, the Council of State Governments, and the National League 
of Cities and solicited comments from their membership. We also 
provided the draft proposed rule to the state of Colorado. We received 
several comments which have been considered in the formulation of this 
rule.

III. Discussion of Proposed Rule

    General. We are proposing to reorganize subpart A of Part 205 by 
presenting general information on Treasury-State Agreements first, 
followed by specific information related to the various sections of a 
Treasury-State Agreement. The proposal consolidates requirements 
related to specific programs into one section. In addition, the 
proposed reorganization puts State oversight and compliance 
requirements in one section, and Federal agency requirements in 
another. Proposed subpart B combines the existing two subsections on 
the consequences of Federal and State noncompliance since the result of 
noncompliance by either party is the same for the noncomplying party. 
Subpart C continues to be reserved.
    Although the format is different due to recently enacted plain 
language requirements, the proposed rule is consistent with the 
existing rule except where specifically noted. Incorporating existing 
Policy Statements into the regulation has also altered the rule's 
appearance. The proposed changes have been made based on input received 
from key program stakeholders: States and Federal program agencies.
    Disallowances. Section 205.2 of the proposed rule defines 
disallowances as costs incurred by a State which the Federal program 
agency determines to be costs which should not be charged to the 
Federal Government either because the funds were used for other than 
Federal assistance program purposes or the amount of the funds used for 
Federal assistance program purposes was improper. Section 205.15 of the 
proposed rule adds a provision expressly recognizing that disallowances 
are subject to the CMIA's interest provisions.
    Generally, disallowances occur when a Federal agency determines 
that a request for funds submitted by a State is invalid because the 
funds are not used for legitimate Federal assistance program purposes 
or the amount of funds used or requested for Federal assistance 
purposes was improper. A Federal agency may disallow a funds transfer 
prior to it being made to a State or after it is made to a State. In 
some cases, the statutes governing a specific program address 
disallowances and assess interest penalties. The CMIA allows Treasury 
to consider such statutory provisions when determining whether the CMIA 
interest provisions apply to particular disallowances.
    This rule does not change the way an expenditure is determined to 
be a disallowance. Whether or not funds expended by a State should be 
properly charged to the Federal government is a determination to be 
made by the Federal program agency responsible for the Federal 
assistance program under which the expenditure arose. As in the past, 
this determination will be made in accordance with the statutes, 
regulations, and policies applicable to that program.
    We are specifically seeking comment from States, Federal agencies, 
and the public on the implementation of the disallowance provisions.

Section-by-Section Analysis

Section 205.1  What Federal Assistance Programs Are Covered by This 
Part?

    Proposed Sec. 205.1 replaces current Sec. 205.1, Purpose, and 
current Sec. 205.2, Scope. Proposed Sec. 205.1 states that the rule 
applies to all States and Federal program agencies (except the 
Tennessee Valley Authority) and covers programs listed in the Catalogue 
of Domestic Federal Assistance.

Section 205.2  What Definitions Apply to This Part?

    Proposed Sec. 205.2 replaces current Sec. 205.3, titled 
Definitions. Based on input from Federal agencies and States during 
several years of CMIA implementation, we're proposing certain 
deletions, additions, and modifications to the definitions. Three 
definitions are deleted: equivalent rate, issue checks, and program. 
Twenty-three definitions are added: administrative costs, business day, 
Catalog of Federal Domestic Assistance, compensating balance, default 
procedures, direct cost, disallowances, dollar-weighted average day of 
clearance, drawdown as a verb, estimate, Federal assistance program, 
Financial Management Service, grant, indirect cost, indirect cost rate, 
maintenance-of-effort, rebate, refund transaction, reverse flow 
program, revolving loan fund, Treasury-State Agreement, vendor payment, 
and we and us. Additionally, the table describing the applicable dollar 
thresholds for major Federal assistance programs found in Appendix A of 
current subpart A is moved to proposed Sec. 205.5, What are the 
thresholds for major Federal assistance programs? since the proposed 
rule addresses program eligibility in that section.

Subpart A: Rules Applicable to Federal Assistance Programs Included in 
a Treasury-State Agreement

Section 205.3  What Federal Assistance Programs Are Subject to Subpart 
A?

    Proposed Sec. 205.3 replaces portions of current Sec. 205.4, Scope 
of subpart. This section provides criteria by which States and Federal 
agencies determine which programs are covered by this Part in general, 
and by subpart A in particular.
    Proposed Sec. 205.3 clarifies that, at the discretion of the State, 
the number of programs included in a Treasury-State Agreement can be 
increased by lowering the funding thresholds. Lowering the funding 
threshold as a means of expanding permissible program coverage avoids 
disputes over individual programs. Federal agencies were concerned that 
States would try to add individual programs under which the Federal 
Government would likely incur interest liabilities to the States. 
States, on the other hand, were concerned that the Federal Government 
would oppose adding specific programs

[[Page 60798]]

with likely Federal interest liabilities and instead move to cover 
programs under which the States would likely incur interest 
obligations.
    Since they are no longer applicable, the subsections in current 
Part 205 on initial program coverage and the grace period for colleges 
and universities are deleted in the proposed rule.
    These sections applied only to the first year of CMIA 
implementation.
    We are seeking comment from Federal program agencies and States on 
reducing the administrative burden associated with the requirements of 
subpart A. In particular, we seek input on methods granting relief, 
consistent with the CMIA, to States and Federal program agencies that 
practice good cash management.

Section 205.4  Are There Any Circumstances Where a Federal Assistance 
Program That Meets the Criteria of 205.3 Would Not Be Subject to 
Subpart A?

    Proposed Sec. 205.4 replaces portions of existing Sec. 205.4, Scope 
of Subpart. Proposed Sec. 205.4 outlines a few exceptions to the 
regulation regarding the applicability of subpart A to some Federal 
assistance programs. Although the section heading is new, these 
exemptions are not new and exist in the current rule or are included in 
Policy Statements. Some examples of exempted programs are those that 
have been discontinued and whose remaining funding is below the major 
program threshold and those administered through several State agencies 
provided certain other requirements are met.
    Proposed Sec. 205.4 includes a provision integrating Policy 
Statement 8 (``Materiality Exemptions,'' April 19, 1993). Proposed 
Sec. 205.4 describes exemptions for components of certain Federal 
programs that are spread over several agencies within a State. If a 
State agency's portion of the funding does not exceed 5% of the State's 
major Federal assistance threshold or 10% of total program 
expenditures, the regulation allows us and a State to exclude that 
portion of the funding from subpart A of Part 205. For example, a State 
Human Services agency and a State Agriculture Agency may share 
responsibility for a Federally funded nutrition program. If the share 
of funding received by the State Agriculture Agency falls within the 
limits given above, funds received are not subject to subpart A of Part 
205. However, if interest liability is found in the State Human 
Services agency's portion of the program that is subject to this Part, 
the interest liabilities should be pro-rated to reflect interest on 
100% of the program's funding.
    Proposed Sec. 205.4 also includes a provision integrating Policy 
Statement 17 (``Exclusion of Major Federal Assistance Programs Based on 
Funding Changes'', June 21, 1995), which describes exemptions for 
discontinued programs. Specifically, we and a State may agree to exempt 
a program from being subject to Part 205 if the program has been 
discontinued and the remaining funding does not exceed the existing 
major program threshold. We may also agree with a State to exempt from 
subpart A of Part 205 multi-year programs that have remaining funds 
totaling less than that of a State's threshold. For example, assume a 
five-year program has spent all but $100,000 of its authorized funds in 
its first four years. If the major program threshold for that State is 
$900,000, we and a State can agree to exempt the program from subpart A 
of Part 205 program for its one remaining year.

Section 205.5  What Are the Thresholds for Major Federal Assistance 
Programs?

    In the current rule, Sec. 205.5 is reserved. In the proposed rule, 
this section is used to state the threshold determination levels and 
incorporate Appendix A from the current rule.
    A small number of Federal programs are responsible for the majority 
of interest exchanged each year. In general, these are the largest 
Federal assistance programs, based on funding levels. The proposed rule 
increases the existing thresholds, thereby reducing the number of 
programs covered.
    As with the current rule, the proposed rule requires States to 
determine the major program thresholds based on a percentage of the 
total expenditure of Federal assistance by a State. Different 
percentages are applied based on the amount of Federal assistance 
received by a State. The proposed rule doubles the percentages used in 
the existing rule. For example, States that receive $100 million or 
less would apply a 6.00 percent standard under the proposed rule 
instead of the 3.00 percent standard currently in effect. States that 
receive between $100 million and $10 billion would apply a 0.60 percent 
standard instead of 0.30 percent standard. States receiving in excess 
of $10 billion in Federal assistance must apply a 0.30 percent standard 
instead of the 0.15 percent standard. However, States in this largest 
category are subject to a default threshold level of $60 million or 
greater. This is to ensure that the threshold is at least as great as 
for those States in the middle category. Under the proposed rule, 
States do not have the option of selecting a fixed dollar amount 
instead of the percentage. This reduces the number of applicable 
threshold levels from ten to three.
    The higher thresholds allow States, Federal program agencies, and 
FMS to focus their resources on large dollar programs and eliminate the 
administrative burden of tracking interest liabilities for numerous, 
but relatively small, Federal assistance programs. A review of the 
potential effect of approximately doubling the major program threshold 
indicates that the eliminated programs represent a very small 
percentage of the program funds that would remain subject to this Part. 
This is because the eliminated programs represent the smallest 
programs, measured by dollar amount, covered by CMIA.
    To ensure that adequate program coverage is maintained, the 
proposed regulation requires a State to compare its coverage under the 
new thresholds with program coverage under the existing thresholds 
determined by the Single Audit Act. Consider, for example, a State that 
has a threshold of $10 million under the existing regulation, using the 
current 0.3 percent multiplier, and would have its threshold doubled to 
$20 million under the proposed regulation using the 0.6 percent 
multiplier. That State must sum the total dollar value of the 
additional programs that would be exempted under the proposed rule. If 
that figure exceeds 10 percent of the total dollar value of the 
programs covered using the lower threshold amount, then the threshold 
must be lowered until 90 percent coverage of the total program dollars 
is maintained.
    Assume, for purposes of our example that, under the existing 
regulations the State's $10 million dollar threshold would cover 24 
programs that represent a total value of $600 million. Under the 
proposed regulation, the threshold rises to $20 million, covering 15 
programs that total $530 million. To determine if 90% coverage is 
maintained, the State must divide the reduction in total program 
coverage by the program coverage value under the existing rule or ($600 
million-$530 million)/$600 million=11.6 percent. In this case, program 
coverage would be reduced by more than 10% and the threshold level 
would be adjusted downward until that level of coverage is reached. The 
10% reduction in program coverage is not a target, but an outer limit. 
A State that doubles its threshold which eliminates less than 10% of 
its total program dollar coverage is NOT allowed to automatically 
increase its threshold to reach the 10% level.

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    As noted in Sec. 205.3, States that wish to retain or expand 
current CMIA program coverage would be allowed to continue to negotiate 
Treasury-State Agreements containing lower program thresholds.
    To determine if a program meets the threshold for a ``major'' 
program, refer to Table A in proposed Sec. 205.5. For example, assume a 
State receives $3 billion in Federal assistance for all programs. To 
determine which programs are major Federal assistance programs, look at 
the corresponding information in Column B. Column B indicates that any 
program with expenditures exceeding 0.60 percent of the total Federal 
assistance expenditures would be considered a major Federal assistance 
program. Under the proposed rule, the State calculates the threshold by 
multiplying $3 billion by 0.60 percent, totaling $18 million.
    On May 5, 1999, the current regulation was revised with updated 
major program threshold criteria derived from the Single Audit Act 
Amendments of 1996, 64 FR 24242. We are now proposing to move the 
amended table describing these thresholds to proposed Sec. 205.5 from 
the definitions section of the current rule. The Single Audit Act 
Amendments of 1996 identify programs subject to audit based on a 
combination of objective funding figures and a subjective ``risk'' 
analysis of each program. The ``risk based'' criteria do not apply to 
this Part. The only criterion for designation as a major program 
subject to this Part is funding level.

Section 205.6  What Is a Treasury-State Agreement?

    Proposed Sec. 205.6 includes provisions found in current 
Sec. 205.9, Treasury-State Agreements. Provisions from current 
Sec. 205.6, Funding Techniques are moved to proposed Sec. 205.12. A 
Treasury-State Agreement is a document negotiated by FMS and the States 
that identifies the covered programs, funding techniques, and interest 
calculation methods used for programs subject to subpart A.
    We are proposing a major change in the Treasury-State Agreement 
negotiation process. Currently, the majority of Treasury-State 
Agreements have a one-year term and thus must be renegotiated annually. 
We do not believe that it is necessary or productive to renegotiate 
each agreement every year, particularly since agreements are amended as 
necessary to reflect changes in programs, funding techniques, and 
clearance patterns. Therefore, we are proposing to make Treasury-State 
Agreements effective until terminated. States and the Federal 
Government retain the right to terminate a Treasury-State Agreement 
with 30 days written notice.

Section 205.7  Can a Treasury-State Agreement Be Amended?

    Proposed Sec. 205.7 is a new section that contains details on the 
amendment process currently set forth in Policy Statement 10 
(``Amendment Policy and Process,'' May 11, 1994). In general, proposed 
Sec. 205.7 indicates how, when, and for what reason States can amend 
Treasury-State Agreements. A State may amend a Treasury-State Agreement 
for such reasons as: adding or deleting programs, changing funding 
techniques, and changing clearance patterns.

Section 205.8  What if There Is No Treasury-State Agreement in Effect?

    This section addresses the default process that is currently part 
of existing Sec. 205.9 Treasury-State Agreements. It describes the 
situation when there is no Treasury-State Agreement in effect. In these 
circumstances, we will prescribe default procedures to implement 
subpart A. We will identify the major programs to be subject to subpart 
A as well as the funding techniques to be used by the State.

Section 205.9  What Is Included in a Treasury-State Agreement?

    Proposed Sec. 205.9 is similar to current Sec. 205.9 in that it 
describes the components that must be included in a Treasury-State 
Agreement. Proposed Sec. 205.9 also prescribes a uniform format for 
Treasury-State Agreements. Although we have made an effort in the past 
to standardize the format of the first-year agreements, most agreements 
still have differences in format. These differing formats add to the 
time needed to review the agreements and make it difficult to examine 
and compare them. Proposed Sec. 205.9 is designed to correct this 
problem, but it is not intended to change the substantive provisions of 
the agreements. We'll provide the new format to the designated State 
and Federal agency CMIA contacts. The format will consist of terms and 
conditions common to all States, followed by addenda specific to any 
one State.

Section 205.10  How Do You Document Funding Techniques?

    Proposed Sec. 205.10 replaces current Sec. 205.7, Requesting and 
transferring funds. Proposed Sec. 205.10 clarifies the information on 
funding techniques that must be included in a Treasury-State Agreement. 
Concise descriptions of each funding technique must include details 
such as ``what is a timely request for funds?'' and ``what procedures 
are used to reconcile estimates with actual cash needs?'
    It is important to include these details in the negotiated 
Treasury-State Agreement because we aren't requiring any particular 
funding techniques. Therefore, it will benefit all parties to have the 
terms of the agreed upon funding techniques clearly described.

Section 205.11  What Requirements Apply to Funding Techniques?

    Proposed Sec. 205.11 contains basic requirements a State and a 
Federal agency have to meet to achieve an efficient level of funds 
transfers. Proposed Sec. 205.11 restates much of current Sec. 205.11. 
In addition, proposed Sec. 205.11 mandates electronic funds transfer 
for Federal funds transfers to States, pursuant to the Debt Collection 
Improvement Act of 1996 and its implementing regulation, 31 CFR Part 
208. 63 FR 51490. The definition of electronic funds transfer found in 
proposed Sec. 205.2 has been expanded beyond wire transfers and 
Automated Clearing House payments to include any payment made 
electronically.
    In response to the questions received from States on the treatment 
of compensating balances under CMIA, proposed Sec. 205.11(c) provides 
that a State must not draw down funds from its account in the 
Unemployment Trust Fund or from a Federal account in the Unemployment 
Trust Fund in advance of actual immediate cash needs for the express 
purpose of maintaining a compensating balance. Compensating balances 
are deposits held in bank accounts to offset the costs of bank 
services.
    CMIA requires States and Federal agencies to minimize the time 
between the drawdown and the subsequent expenditure of Federal funds 
for Federal assistance program purposes. Thus, a State may only draw 
down Federal funds in accordance with the timing and amounts dictated 
by the agreed upon funding technique. The amount drawn down must equal 
the amount issued or the amount expected to clear. Drawdowns may not 
include an extra amount, or occur earlier, to create a balance for the 
purpose of compensating a bank. A State's interest liability on funds 
withdrawn from a State account in the Unemployment Trust Fund is based 
on actual interest earned. The proposed rule clarifies that actual 
interest earned does not include non-cash bank earnings.

[[Page 60800]]

Section 205.12  What Funding Techniques May Be Used?

    Proposed Sec. 205.12 contains much of current Sec. 205.6, Funding 
techniques. However, proposed Sec. 205.12 states in clear language that 
the funding techniques listed in the section are not the only methods 
allowed. The General Accounting Office report, ``Financial Management: 
Implementation of the Cash Management Improvement Act,'' January 1996, 
noted that States found the restrictions on the use of reimbursable 
funding burdensome. In response, FMS is giving States more flexibility 
in choosing funding techniques. However, we believe that there is value 
in providing definitions of some funding techniques. States and Federal 
agencies may benefit from having a standard definition when negotiating 
a Treasury-State Agreement. The definitions in proposed Sec. 205.12 may 
be adopted, modified, or excluded from a Treasury-State Agreement at 
the discretion of the parties negotiating the agreement.
    The proposal allows States and Federal program agencies to 
negotiate the use of a technique that meets their needs, including 
reimbursable funding, which is currently prohibited. Reimbursable 
funding is a funds transfer method where, after a State pays out its 
own funds for the Federal portion of a program, the State then requests 
and receives reimbursement for the Federal funds paid out by the State. 
The proposal would eliminate the current prohibition on reimbursable 
funding.
    We're proposing this change because some States have used 
reimbursable funding to fund certain administrative and overhead costs 
through cost allocation or other after-the-fact distribution methods. 
We expect to limit the use of reimbursable funding to those limited 
circumstances where there aren't any other acceptable funding 
techniques.

Section 205.13  How Do You Determine When State or Federal Interest 
Liability Accrues?

    Proposed Sec. 205.13 is a new separate section that clarifies that 
State or Federal interest liability may accrue when funding techniques 
agreed to in the Treasury-State Agreement are applied. Proposed 
Sec. 205.13 contains a provision included in existing Sec. 205.10 that 
allows a State and FMS to agree not to assess interest liability for 
indirect costs or indirect allocated costs. These costs would be based 
on an indirect cost rate and the arrangement must be included in the 
Treasury-State Agreement.

Section 205.14  When Does Federal Interest Liability Accrue?

    Proposed Sec. 205.14 replaces current Sec. 205.11 governing Federal 
interest liabilities. In general, the Federal government incurs an 
interest liability if the State pays out its own funds for Federal 
assistance program purposes with valid obligational authority. 
Obligational authority is defined as ``the existence of a definite 
commitment on the part of the Federal government to provide 
appropriated funds to a State to carry out specified programs, whether 
the commitment is executed before or after a State pays out funds for 
Federal assistance program purposes.'' Thus, obligational authority 
exists if the Federal government is authorized to make payments to a 
State and appropriates funds to make those payments. If a State pays 
out funds for Federal assistance program purposes before Congress has 
appropriated funds, and Congress subsequently appropriates funds to 
cover the period for which the State paid out the funds, obligational 
authority exists and the Federal Government incurs an interest 
liability to the State.
    Some Federal agencies have questioned whether obligational 
authority exists if a State's expenditure of funds is subject to agency 
approval or authorization, and the State pays out funds prior to 
obtaining the agency's approval or authorization. We invite agencies 
and States to comment on the nature and operation of any agency 
approval requirements that currently are in place, including whether 
the agency's approval or authorization requirement is imposed pursuant 
to a Federal statute, a Federal regulation, or an agreement between the 
Federal agency and the State. We also request comment on whether we 
should amend the definition of ``obligational authority'' in the 
regulation to address this issue more specifically.
    Proposed Sec. 205.14(a)(3) clarifies that a Federal agency does not 
accrue retroactive interest liability if a State expends funds for a 
discretionary grant project prior to receiving approval from the 
Federal agency. A discretionary grant is a project for which a Federal 
program agency is authorized by law to exercise judgment in awarding a 
grant and in selecting a grantee, generally through a competitive 
process. CMIA interest liability on discretionary grants cannot begin 
to accrue until the Federal program agency approves the project. This 
position is consistent with the existing regulation.
    Proposed Sec. 205.14(a)(5) includes a provision that allows FMS to 
deny Federal interest liability if a State fails to follow the agreed 
upon procedures outlined in the Treasury-State Agreement. The intent of 
this regulation, efficient cash management, is best accomplished when 
all parties comply with the Treasury-State Agreement.

Section 205.15  When Does State Interest Liability Accrue?

    Proposed Sec. 205.15 replaces current Sec. 205.12 describing the 
circumstances under which State interest liability accrues.
    Proposed Sec. 205.15(b) provides that States will incur an interest 
liability on disallowances. The CMIA states the following: ``The 
Secretary shall issue regulations that shall require a State, when not 
inconsistent with Federal assistance program purposes, to pay interest 
to the United States on funds from the time funds are deposited by the 
United States to the State's account until the time that funds are paid 
out by the State in order to redeem checks or warrants or make payments 
by other means for program purposes.'' Disallowed funds are funds that 
have been paid out for other than Federal assistance program purposes 
and, therefore, are not properly chargeable to the Federal government. 
Under CMIA, a State must pay interest to the United States on such 
funds.
    In general, if a Federal program agency disallows a State 
expenditure, a State will owe interest from the day on which the 
Federal funds associated with the disallowed expenditure were credited 
to the State's account to the day the funds are credited back to the 
Federal government. In many instances, however, State expenditures are 
disallowed by a Federal program agency in CMIA reporting years 
subsequent to the CMIA reporting year in which the State originally 
made the expenditure. In such instances, either the State or the 
Federal government may previously have paid CMIA interest on the funds 
associated with the disallowed expenditure. The State's CMIA interest 
calculation resulting from the disallowance shall be adjusted to 
reflect any prior CMIA interest payments.
    For example, a State may have paid interest to the Federal 
government in the reporting year in which the State made the 
expenditure because the State drew down Federal funds early. In that 
case, the State's interest liability resulting from the disallowance 
should be reduced by the amount of interest it had already paid in the 
earlier reporting year (i.e., interest accruing from the day the State 
drew down the funds until the State paid out the funds). Alternatively,

[[Page 60801]]

the Federal government may have paid interest to a State in an earlier 
reporting year because the State advanced the funds associated with the 
disallowed expenditure. Because the State did not pay out the funds for 
Federal assistance program purposes, the State was not entitled to the 
interest that the Federal government paid for that period. Accordingly, 
the State must reimburse the Federal government for that interest, and 
the State's liability resulting from the disallowance must be increased 
accordingly.
    FMS is specifically seeking comment on the implementation of this 
provision.
    Proposed Sec. 205.15(c)(2)changes the current provision allowing 
States and FMS to agree on a refund transaction exemption threshold of 
$10,000. The proposed rule lets FMS and a State mutually agree on 
either a $50,000 threshold or no refund transaction threshold. The 
purpose of the threshold is to give States relief from tracking large 
volumes of small dollar refunds. The General Accounting Office report 
noted that some States believe excessive effort is required to monitor 
and calculate interest on refunds. Some States adopted labor-intensive 
procedures to separate refund transactions above the threshold from 
those below it, and to calculate interest on each refund transaction 
rather than an aggregate refund activity.

Section 205.16  What Special Rules Apply to Federal Assistance Programs 
and Projects Funded by the Highway Trust Fund?

    Proposed Sec. 205.16 contains provisions currently included in 
Sec. 205.11, Federal interest liabilities. Some States have asked FMS 
to clarify the Federal interest provisions for programs and projects 
funded from the Federal Highway Trust Fund. If a State pays out its own 
funds in the absence of a project agreement, the Federal Government 
will not incur an interest liability, even if obligational authority is 
established subsequently to permit payment for the State's expenditure. 
This is the current policy, and it remains unchanged in the proposed 
rule. Where a project agreement exists, States must request funds at 
least weekly for current project costs. The Federal Government will 
accrue an interest liability on current project costs for which there 
is valid obligational authority, for a maximum of one week's time. The 
Federal Government will not accrue an interest liability on project 
costs accrued prior to the week the State request funds.

Section 205.17  Are Funds Transfers Delayed by Automated Payment 
Systems Restrictions Based on the Size and Timing of the Drawdown 
Request Subject to This Part?

    Proposed Sec. 205.17 clarifies the role Part 205 plays when funds 
transfers are delayed by a Federal program agency. Part 205 applies to 
funds transfers that are deferred by a Federal program agency based 
solely on the size and timing of the drawdown request. This is in 
response to State concerns that payment systems such as the Automated 
Standard Application for Payment (ASAP) and the Payment Management 
System (PMS) may allow Federal program agencies to automatically reject 
drawdown requests that fall outside a predetermined set of parameters.

Section 205.18  Are Federal Program Agency Grants for Administrative 
Costs Subject to This Part?

    Proposed Sec. 205.18 clarifies the treatment of grants made to 
States to compensate for indirect administrative costs. This subject is 
addressed in current Sec. 205.10, Funding of indirect costs and 
administrative costs. We are proposing these changes in response to 
concerns that tracking these costs is not an efficient use of 
resources. These two provisions make clear that Federal agency grants 
that are 100% dedicated to compensate for indirect and/or other 
administrative costs are subject to subpart A. However, as for grants 
that contain funds dedicated to program costs and administrative costs, 
the portion of the grant dedicated to indirect administrative costs is 
not subject to Part 205.

Section 205.19  How Is Interest Calculated?

    Proposed Sec. 205.19 incorporates the provisions of current 
Sec. 205.13, Interest calculation. Proposed Sec. 205.19 lists the 
requirements that States must comply with to calculate and support 
interest liability claims. States must ensure that the interest 
calculations are auditable and retain a record of the calculations. 
This section also describes the method used to calculate the interest 
rate applied to CMIA liabilities. We will provide that interest rate to 
each State.

Section 205.20  What Is a Clearance Pattern?

    Proposed Sec. 205.20 contains information found in current 
Sec. 205.8, as well as more detailed information regarding the 
requirements of developing and maintaining proper clearance patterns. 
These requirements are intended to ensure that all clearance patterns 
meet an adequate level of accuracy and detail. In general, a clearance 
pattern must accurately represent the flow of Federal funds under the 
Federal assistance programs. These clearance patterns must be based on 
at least three consecutive months of disbursement data, and valid 
statistical sampling must be applied.
    Several States have requested a clearer statement of the standards 
to be used in developing clearance patterns. Therefore, the proposed 
rule specifies:
    (1) The information that must be included in a Treasury-State 
Agreement, consistent with proposed Sec. 205.9;
    (2) The amount of data to be used to develop a clearance pattern;
    (3) The standards of statistical accuracy to be applied if checks 
are sampled to develop a clearance pattern; and
    (4) the range of days which a clearance pattern must cover.
    Some States have questioned why we require that a clearance pattern 
be carried out until 99 percent of the dollars in a disbursement clear 
or are paid out for Federal assistance program purposes. The States' 
concern was noted in the General Accounting Office report, ``Financial 
Management: Implementation of the Cash Management Improvement Act,'' 
January 1996. The 99 percent standard, currently documented in FMS 
Policy Statement 11 (``Clearance Patterns,'' May 20, 1994), is 
incorporated in the proposed rule. The 99 percent standard was adopted 
because the 95 percent standard did not accurately represent the flow 
of funds, leaving a substantial amount of funding undocumented.
    When CMIA was initially implemented, we required that a clearance 
pattern be carried out until 95% of the dollars cleared. At that time, 
only a limited amount of clearance data were available. When additional 
clearance data became available, we learned that some States do not 
have expiration dates for checks; thus, checks could remain outstanding 
for years. The 95 percent standard allowed States to draw down 5 
percent of Federal funds before the dollars cleared. Further, the 95 
percent clearance standard allowed the dollar-weighted average day of 
clearance to be one day earlier than with the 99 percent standard.
    A clearance pattern based on either the old 95 percent standard or 
the current 99 percent standard may extend over a significant period of 
time. Some States are concerned about making numerous small drawdowns, 
as noted in the GAO report. There are many ways to avoid this, such as 
the use of average clearance. A State also may use estimated clearance 
for a period of time

[[Page 60802]]

specified in its Treasury-State Agreement. A State may use estimated 
clearance for the first two weeks of the clearance pattern, then make 
one additional drawdown on the average day of clearance of the 
remaining funds.

Section 205.21  When May Clearance Patterns Be Used?

    Proposed Sec. 205.21 through Sec. 205.23 address specific issues 
regarding clearance patterns, found in current Sec. 205.8, Clearance 
patterns. A State may use clearance patterns to estimate when funds are 
paid out, given a known dollar amount and a known date of disbursement. 
When the dollar amount and/or the timing of disbursements are not 
known, we may agree with a State on other procedures to use to estimate 
when funds are paid out. Clearance patterns may be used to determine 
the flow of funds for individual Federal assistance programs, accounts 
at financial institutions, groups of Federal assistance programs, and 
other types of payments. The methods used to create and maintain 
clearance patterns must be contained in the Treasury-State Agreement.

Section 205.22  How Are Accurate Clearance Patterns Maintained?

    If a State has knowledge that a clearance pattern is no longer 
accurate, it must notify us. The State must develop a new and accurate 
clearance pattern, certify it, and submit it to us. Clearance patterns 
must be re-certified by the authorized State official every five years.

Section 205.23  What Requirements Apply to Estimates?

    A major change that we are proposing to the current rule is the 
introduction of standards for developing, documenting, and maintaining 
estimates, other than clearance patterns, used to determine the amount 
to request and the timing of the transfer of funds. Many States have 
negotiated unique funding techniques that are not based on the actual 
amount of funds in a disbursement, but rely on some method of 
estimating the State's cash requirements. Often these funding 
techniques are difficult to audit because they are not documented in 
sufficient detail. The proposed standards are designed to ensure that, 
when such estimates are used, a Treasury-State Agreement clearly 
documents how to calculate the amount to request, the timing of the 
transfer of funds, and the method for reconciling estimates and actual 
payments for Federal assistance program purposes.
    Estimates are used for predicting program volume for non-payment 
variables. For example, under a Child Care program, a State would need 
to estimate the increase or decrease of children needing care. This 
could be based on population growth or a change in the unemployment 
rate, or other factors. These estimates will affect the amount of funds 
a State draws down. The new language requires that States document and 
justify their estimates.

Section 205.24  How Are Accurate Estimates Maintained?

    The proposed rule requires that States notify us immediately when 
they possess actual or constructive knowledge that the estimates in use 
are not accurate. This is similar to the requirement that States inform 
us of changes in clearance patterns.

Section 205.25  How Does This Part Apply to Certain Federal Assistance 
Programs or Funds?

    Proposed Sec. 205.25 contains information on how Part 205 affects 
several different programs.

Unemployment Trust Fund (UTF)

    Proposed Sec. 205.25 describes the treatment of the UTF under Part 
205. A state's interest liability on funds withdrawn from its UTF 
account do not accrue at the designated CMIA rate. Instead, the 
interest is calculated at the actual interest earned on those funds 
less the related banking costs. To maintain an accurate interest 
calculation, if funds that are withdrawn from a State UTF account are 
commingled with other monies, the UTF funds must be allocated a 
proportional share of the related interest earnings and banking costs.
    Interest earned on funds withdrawn by a State from a Federal UTF 
account, with the exception of the Federal Unemployment Account, will 
accrue under the rules of this Part, specifically, Sec. 205.19.

Supplemental Security Income

    Proposed Sec. 205.25 sets forth the treatment of Supplemental 
Security Income transactions under CMIA. This subsection describes the 
effect of this Part on Supplemental Security Income administrative fees 
and supplemental State payments by integrating Policy Statement 4 
(``Interest Calculations for the Supplemental Security Income 
Program,'' February 22, 1993,) and Policy Statement 14 (``Supplemental 
Security Income Program Fees,'' December 21, 1994) into the regulation.
    For the most part, Part 205 applies to programs in which money 
flows from the Federal Government to the State. SSI is unique under 
CMIA in that it is a program in which money flows from the State to the 
Federal Government. Congress especially addressed this ``reverse flow'' 
in 31 U.S.C. 6503(g), which provides:

    If the Federal Government makes a payment to a recipient under a 
Federal program, and a portion of that payment is an amount which 
the Federal Government is paying to such recipient on behalf of a 
State, such amounts will be considered a transfer of funds between 
the Federal Government and the State for purposes of this section.

    Interest must be calculated on the difference between a State's 
monthly SSI payment, which is an estimate, and the State's actual 
liability. This is consistent with other requirements to calculate 
interest on quarterly shortfalls or reporting period adjustments.
    Interest liabilities shall not accrue to the Federal Government or 
States on refunds of State funds because States are credited with the 
refunds in advance, before the Social Security Administration even 
collects the funds. Rather than being liable for interest, the Federal 
Government bears the cost of crediting States with refunds early.
    This provision makes it clear that the only SSI funds that are 
subject to CMIA are payments to recipients. Since the new 
administrative fees are not funds to be delivered to recipients, they 
are not considered a transfer of funds and, therefore, are not governed 
by CMIA. Interest on late fees is calculated in accordance with the 
Social Security Administration's (SSA) debt collection procedures.
    Under the SSI program, States may supplement the Federal SSI 
benefit. States where the Federal SSI benefit would be less than 
beneficiaries received under State programs prior to SSI must 
supplement the Federal SSI benefit. All but a few States and 
jurisdictions provide supplementation. States may administer their 
supplementary payments themselves or may contract with the SSA for 
Federal administration. The SSA administers the State supplementation 
of SSI benefits in 27 States and the District of Columbia. Interest on 
late State supplementation is calculated in accordance with the 
provisions of Part 205.

Child Support Enforcement Program transactions

    Proposed Sec. 205.25(d) incorporates Policy Statement 6 (``Funds 
Collected by States Under the Child Support Enforcement Program,'' 
February 26, 1993), which describes the treatment for CMIA purposes of 
certain funds received under the Child Support Enforcement Program.

[[Page 60803]]

    The interest provisions of CMIA do not come into play with respect 
to child support collections by States. Federal law provides that the 
Federal government will reimburse States for a portion of a State's 
expenditures in administering a State child support enforcement 
program, conditioned on the State's complying with Federal assistance 
program requirements. When a State collects child support, the Federal 
funding scheme allows the State to retain certain collections for a 
period of time rather than immediately distributing them to custodial 
parents. CMIA interest does not accrue on such undistributed funds 
because they are considered still paid out for Federal assistance 
program purposes. Rather, interest earned on undistributed funds is 
treated as program income under program regulations found at 45 CFR 
304.50(b) and, in accordance with those regulations, must be deducted 
from a State's claim to the Federal government for reimbursement. 
Additionally, late payment fees collected by States from absent 
parents, as permitted by the Federal funding scheme, are not subject to 
interest liabilities under CMIA. These fees are State funds and are not 
considered Federal funds for CMIA purposes. In accordance with program 
regulations found at 45 CFR 302.75(b)(6), such fees must be treated as 
program income and must be deducted from a State's claim to the Federal 
government for reimbursement.

Block Grant Programs

    Proposed Sec. 205.25(e) provides clarification on Part 205's effect 
on certain block grant programs. This section incorporates information 
included in Policy Statement 7 (``Interest Provisions for Block Grants 
Where States Voluntarily Supplement Federal Funding,'' March 31, 1993) 
related to Social Services Block Grants (SSBG) and Policy Statement 19 
(``Inclusion of the New Temporary Assistance to Needy Families and the 
New Matching and Mandatory Child Care Funds Programs Under CMIA,'' June 
1, 1999). Proposed Sec. 205.25(e) is meant to implement a policy that 
favors neither States nor Federal agencies participating in block grant 
programs.
    States that supplement SSBG funding with their own funds are not 
allowed to draw down all Federal funds first, then use State funds. A 
State must draw down Federal funds in proportion to the State's 
participation in the block grant program.
    Policy Statement 7 addresses two questions: (1) If a State 
voluntarily supplements the SSBG program, can the Federal program 
agency limit the drawdowns to be made quarterly, forcing States to 
supplement funds, or will this limitation result in an interest 
liability for the agency? (2) Can a State draw and spend all Federal 
funds for allowable expenses first, then spend State funds?
    Federal law requires all definite appropriations to be apportioned 
to prevent obligation at a rate that would result in a deficiency or 
necessitate a supplemental appropriation. For example, if a program is 
expected to use funds at a constant rate and receives a quarterly 
Federal payment, the drawdown should be \1/4\ of the total amount. 
Given the nature of the SSBG program, it is expected that the Office of 
Management and Budget will continue to apportion funds quarterly. 
Policy Statement 7 clarifies that States are entitled to interest if 
they must advance their own funds due to funding breakdowns caused by 
apportionments.
    With SSBG programs, the State is under no obligation to match or 
appropriate funding. However, if a State elects to appropriate funding 
(as opposed to temporarily fronting State funds pending reimbursement 
at the start of the next fiscal quarter), the State may not arbitrarily 
assign its earliest costs to the Federal Government and claim interest.
    If a State elects to appropriate funding for the SSBG program, 
which does not require matching or State appropriations, funds should 
be allocated in a manner that benefits neither the Federal Government 
nor the State with respect to cash flow. Consequently, Federal funds 
and State funds should be combined and allocated proportionately with 
no interest ramifications until the combined quarterly allocation is 
exceeded. For example, if the total Federal allotment to a State for a 
given program is $16 million ($4M per quarter) and the State 
voluntarily appropriates $8 million ($2M per quarter), interest 
liabilities could occur once $6 million is paid out in any given 
quarter. Under this scenario, neither party ``wins'' regarding cash 
flow. Therefore, a State cannot draw and exhaust Federal funds first 
because voluntary funds which the State appropriates must be made 
commensurately with each Federal drawdown. In addition, States should 
indicate in their Treasury-State Agreement if State appropriations will 
currently supplement, or have historically supplemented, Federal block 
grants or programs which do not require a State match. If States claim 
interest liabilities have been incurred, Annual Reports should provide 
the amount of the State appropriation and State apportionment 
procedure.
    Policy Statement 19 refers to Temporary Assistance to Needy 
Families (TANF) and Mandatory and Matching Child Care Funds Programs 
that require a State maintenance-of-effort for funding. This Policy 
Statement reaffirms Policy Statement 7 that Federal funds must not be 
drawn down in advance of, or out of proportion with, State funds used 
in these programs.

Women, Infants, and Children Program

    Proposed Sec. 205.25(f) is added to the regulation to clarify that 
interest earned on rebates from the Women, Infants, and Children 
Program (WIC) is not subject to Part 205 if the funds are used for 
Federal assistance program purposes. As noted in Policy Statement 18 
(``Special Supplemental Food Program for WIC Rebates,'' September 13, 
1995), this subsection recognizes the November 2, 1994 amendment to the 
Child Nutrition Act of 1966. That amendment declared that States will 
not incur any interest liability to the Federal Government on rebate 
funds for infant formula and other foods provided all interest earned 
by the State on funds is used for Federal assistance program purposes.

Revolving Loan Funds

    Proposed Sec. 205.25(g) incorporates Policy Statement 15 
(``Community Development Block Grant Revolving Loan Funds,'' March 13, 
1995), which describes the effect of Part 205 on revolving loan funds. 
Although Policy Statement 15 addresses a question on one specific 
program, proposed Sec. 205.25(g) applies to all revolving loan fund 
programs. If a Federal agency program authorizes a revolving loan fund 
and specifically designates that income earned from that fund be used 
for Federal assistance program purposes, then the interest earned is 
not subject to this Part if it is used for Federal assistance program 
purposes. However, transfers of funds to the revolving loan fund remain 
subject to Part 205.

Section 205.26  What Are the Requirements for Creating Annual Reports?

    Proposed Sec. 205.26 contains provisions of current Sec. 205.15, 
Annual reports. Proposed Sec. 205.26 provides that annual reports are 
due to FMS on December 31 for the State's most recently completed 
fiscal year. Interest will continue to be exchanged on March 1 since 
interest liabilities are aggregated among all States to offset direct 
costs, as noted in proposed Sec. 205.27. Prior period adjustments are 
limited to the two State

[[Page 60804]]

fiscal years prior to the State fiscal year covered by an annual 
report.

Section 205.27  How Are Direct Costs Calculated?

    Proposed Sec. 205.27 contains provisions found in current 
Sec. 205.14, Direct costs of implementation. Provisions on cost claims 
for the initial implementation of CMIA are deleted. In addition, the 
proposed rule deletes the requirement that FMS review the policies on 
direct costs of implementation to determine their effectiveness. In 
reviewing direct cost claims for reasonableness, we will consider how 
necessary a task is to the development and maintenance of clearance 
patterns in support of interest calculations or the actual calculation 
of interest liabilities. All States seeking reimbursement should 
maintain proper documentation of accrued expenses. States seeking more 
than $50,000 for direct costs should have documentation supporting that 
assertion.
    The General Accounting Office report noted that some States believe 
they should be reimbursed for costs that are outside the definition of 
direct costs for the implementation of subpart A as set forth in 
Sec. 205.12. Congress authorized FMS to reimburse only those costs 
directly related to the interest calculations required by this Part. 
Congress intended that other costs should be reimbursed in accordance 
with Office of Management and Budget guidelines for reimbursement for 
indirect program costs (OMB Circular A-87). In order to clarify the 
scope of direct costs that are reimbursable under CMIA, the definition 
of direct cost in Sec. 205.2 has been revised to provide that States 
will be compensated only for costs associated with the calculation of 
CMIA interest, including those costs a State incurs in developing and 
maintaining clearance patterns in support of interest calculations. The 
legislative history of the cost recovery provisions of CMIA was 
discussed in the proposed and final CMIA rules. 57 FR 10102 and 57 FR 
44272.

Section 205.28  How Are Interest Payments Exchanged?

    Proposed Sec. 205.28 addresses the manner in which States and the 
Federal agencies offset interest liability on or before March 31 of 
each year. This interest exchange date is changed from March 1 in the 
existing regulation. The date change will benefit all stakeholders 
seeking an equitable exchange of interest because more time will be 
allowed to conduct comprehensive reviews of disputed liabilities.

Section 205.29  What Are the State Oversight and Compliance 
Responsibilities?

    Proposed Sec. 205.29 restates, without material change, the State 
oversight and compliance responsibilities that are set forth in current 
Sec. 205.17, Compliance and oversight. A State's implementation of 
subpart A is subject to audit in accordance with the requirements for 
single audits. CMIA specific audit objectives and suggested audit 
procedures now appear in the OMB Circular A-133 Compliance Supplement. 
States are required to maintain all pertinent records for three fiscal 
years following submission of an Annual Report.

Section 205.30  What Are the Federal Oversight and Compliance 
Responsibilities?

    The Federal oversight and compliance responsibilities that are set 
forth in current Sec. 205.17, Compliance and oversight, are relocated 
to proposed Sec. 205.30. In addition, proposed Sec. 205.30 requires 
Federal agencies to notify us when they have actual or constructive 
knowledge that corrective action needs to be taken by us or by a State 
with respect to the implementation of Part 205 or if a State's 
clearance pattern doesn't correspond to a program's clearance activity. 
We believe that this requirement will improve compliance with Part 205.
    Proposed Sec. 205.30 also clarifies that Federal program agencies 
are responsible for determinations regarding whether or not costs 
should be properly chargeable to the Federal government.
    Federal program agencies that incur interest liabilities through 
improper actions or compliance failures continue to be subject to 
charges by FMS. In these instances, we will issue a Notice of 
Assessment that describes the nature of the non-compliance and the 
amount of the charge to the Federal program agency. An appeals process 
is available to Federal program agencies.

Section 205.31  How Does a State or Federal Program Agency Appeal a 
Determination Made by Us and Resolve Disputes?

    Proposed Sec. 205.31 sets forth the appeal and dispute provisions 
that appear in current Sec. 205.18. However, unlike the current rule, 
the proposed rule provides that an aggrieved party has 90 days from the 
date of the notice of assessment to submit a written petition if a 
dispute arises from the implementation or administration of subpart A. 
Currently there is no limitation on the amount of time an aggrieved 
party can take to submit a written appeal. We are proposing this change 
to respond to requests from Federal agencies for a time limit on filing 
appeals.
    Proposed Sec. 205.31 also clarifies that the appeal and dispute 
resolution procedures of this section apply to matters concerning the 
implementation of subpart A and do not apply to disputes between States 
and Federal program agencies concerning the determination of whether a 
cost is properly chargeable to the Federal government.

Subpart B: Rules Applicable to Federal Assistance Programs Not Included 
in a Treasury-State Agreement

Section 205.32  What Federal Assistance Programs Are Subject to Subpart 
B?

    This section clarifies that all Federal assistance programs listed 
in the Catalogue of Federal Domestic Assistance, but not included in a 
State's Treasury-State Agreement or subject to default procedures, are 
subject to subpart B.

Section 205.33  How Are Funds Transfers Processed?

    Proposed Sec. 205.33 reaffirms the overall goal of Part 205, 
efficient cash management. Federal program agencies and States must 
limit funds transfers to the minimum amounts necessary to meet program 
goals. These funds transfers must be conducted to minimize the time 
between the funding and the paying out of the funds for Federal 
assistance program purposes.
    This section states that no interest liability will be incurred by 
States or Federal program agencies for funds transfers subject to 
subpart B.

Section 205.34  What Are the Federal Oversight and Compliance 
Responsibilities?

    Federal program agencies must monitor a State's practices and 
notify us if a State exhibits an unwillingness or inability to practice 
efficient cash management. Federal program agencies must develop 
procedures to comply with subpart B to promote efficient cash 
management.

Section 205.35  What Is the Result of Federal Program Agency or State 
Non-Compliance?

    In the event of State or Federal program agency non-compliance, we 
may transfer Federal assistance programs to subpart A. These programs 
would then be subject to interest liabilities.

[[Page 60805]]

Subpart C [Reserved]

    Subpart C remains reserved pending further consideration. In the 
Notice of Proposed Rulemaking issued in March 1992, 57 FR 10102, this 
section applied to programs administered by non-State recipients and 
non-State subrecipients. Subpart C did not apply the interest 
provisions of CMIA to these non-state recipients and sub-recipients and 
is not included in the Final Rule.

IV. Procedural Matters

Executive Order 12866, Regulatory Planning and Review

    These proposed regulations are not a significant regulatory action 
and are not subject to review by the Office of Management and Budget 
under Executive Order 12866. These proposed regulations will not have 
effect of $100 million or more on the economy. They will not adversely 
affect in a material way the economy, productivity, competition, jobs, 
the environment, public health or safety, or State, local, or tribal 
governments or communities. These proposed regulations will not create 
a serious inconsistency or otherwise interfere with an action taken or 
planned by another agency. These proposed regulations do not alter the 
budgetary effects of entitlement, grants, user fees, or loan programs, 
or the right or obligations of their recipients; nor do they raise 
novel legal or policy issues.

Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are simple and easy to understand. President Clinton's 
Presidential memorandum of June 2, 1998, requires us to write new 
regulations in plain language. We invite your comments on how to make 
these proposed regulations easier to understand.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, it is 
hereby certified that this proposal will not have a significant 
economic impact on a substantial number of small business entities. The 
proposed rule does not require any actions on the part of small 
entities. Accordingly, a Regulatory Flexibility Act analysis is not 
required.

Paperwork Reduction Act

    The Office of Management and Budget has approved the information 
collection requirements in the proposed rule under the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3501 et seq., and has assigned 
clearance number 1510-0061. Sections of this proposed rule with 
information collection requirements are 205.9, 205.26, 205.27, 205.29, 
and we estimate the public reporting burden of these sections to 
average, respectively, 500 hours per response. This estimate includes 
the time for reviewing instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. We estimate the number of respondents to 
be 56.
    Send comments regarding this burden estimate or any other aspect of 
this collection of information, including suggestions for reducing the 
burden, to Information Collection Clearance Officer, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
New Executive Office Building, Washington, DC 20503; Attention: 1510-
AA38; with copies to Juanita Holder, Public Reports Clearance Officer, 
Financial Management Service, 3361 75th Avenue, Landover, Maryland 
20785.

List of Subjects in 31 CFR Part 205

    Electronic funds transfer, Grant programs, Intergovernmental 
relations.

Authority and Issuance

    For the reasons set out in the preamble, we propose to revise part 
205 of title 31 of the Code of Regulations to read as follows:

PART 205--RULES AND PROCEDURES FOR EFFICIENT FEDERAL-STATE FUNDS 
TRANSFERS

Sec.
205.1   What Federal assistance programs are covered by this part?
205.2   What definitions apply to this part?
Subpart A--Rules Applicable to Federal Assistance Programs Included in 
a Treasury-State Agreement
205.3   What Federal assistance programs are subject to this subpart 
A?
205.4   Are there any circumstances where a Federal assistance 
program that meets the criteria of Sec. 205.3 would not be subject 
to this subpart A?
205.5   What are the thresholds for major Federal assistance 
programs?
205.6   What is a Treasury-State Agreement?
205.7   Can a Treasury-State Agreement be amended?
205.8   What if there is no Treasury-State Agreement in effect?
205.9   What is included in a Treasury-State Agreement?
205.10   How do you document funding techniques?
205.11   What requirements apply to funding techniques?
205.12   What funding techniques may be used?
205.13   How do you determine when State or Federal interest 
liability accrues?
205.14   When does Federal interest liability accrue?
205.15   When does State interest liability accrue?
205.16   What special rules apply to Federal assistance programs and 
projects funded by the Federal Highway Trust Fund?
205.17   Are funds transfers delayed by automated payment systems 
restrictions based on the size and timing of the drawdown request 
subject to this part?
205.18   Are Federal assistance program agency grants for 
administrative costs subject to this part?
205.19   How is interest calculated?
205.20   What is a clearance pattern?
205.21   When may clearance patterns be used?
205.22   How are accurate clearance patterns maintained?
205.23   What requirements apply to estimates?
205.24   How are accurate estimates maintained?
205.25   How does this part apply to certain Federal assistance 
programs or funds?
205.26   What are the requirements for creating Annual Reports?
205.27   How are direct costs calculated?
205.28   How are interest payments exchanged?
205.29   What are the State oversight and compliance 
responsibilities?
205.30   What are the Federal oversight and compliance 
responsibilities?
205.31   How does a State or Federal program agency appeal a 
determination made by us and resolve disputes?
Subpart B--Rules Applicable to Federal Assistance Programs Not Included 
in a Treasury-State Agreement
205.32   What Federal assistance programs are subject to this 
subpart B?
205.33   How are funds transfers processed?
205.34   What are the Federal oversight and compliance 
responsibilities?
205.35   What is the result of Federal program agency or State non-
compliance?
Subpart C--[Reserved]

    Authority: 5 U.S.C. 301; 31 U.S.C. 321, 3335, 6501, 6503.


Sec. 205.1  What Federal assistance programs are covered by this part?

    (a) This part prescribes rules for transferring funds between the 
Federal Government and States for Federal assistance programs. This 
part applies to:
    (1) All States as defined in Sec. 205.2; and
    (2) All Federal program agencies, except the Tennessee Valley 
Administration (TVA) and its Federal assistance programs.
    (b) Only programs listed in the Catalog of Federal Domestic 
Assistance, as established by Chapter 61 of Title 31, United States 
Code (U.S.C.) are covered by this part.
    (c) This part does not apply to:
    (1) Payments made to States acting as vendors on Federal contracts, 
which are

[[Page 60806]]

subject to the Prompt Payment Act of 1982, as amended, 31 U.S.C. 3901 
et seq., 5 CFR part 1315, and 48 CFR part 32; or
    (2) Direct loans from the Federal Government to States.


Sec. 205.2  What definitions apply to this part?

    For purposes of this part:
    Administrative cost grant means a grant wholly dedicated to 
compensate States for administrative expenses.
    Administrative costs means expenses incurred by a State associated 
with managing a Federal assistance program.
    Auditable means records must be retained to allow for calculations 
outlined in the Treasury-State Agreements to be reviewed and replicated 
for compliance purposes. States must maintain these records to be 
readily available, fully documented, and verifiable.
    Authorized State Official means a person with the authority under 
the laws of a State to make commitments on behalf of the State for the 
purposes of this part, or that person's official designee as certified 
in writing.
    Business day means a day when Federal Reserve Banks are open.
    Catalog of Federal Domestic Assistance (CFDA) means the government-
wide list of Federal assistance programs, projects, services, and 
activities which provide assistance or benefits to the American public. 
The listing includes financial and nonfinancial Federal assistance 
programs administered by agencies of the Federal Government. (The 
Catalog is available at http://www.cfda.gov)
    Clearance pattern means a forecast showing the daily amount 
subtracted from a State's bank account each day after the State makes a 
disbursement. For example, a State mailing out benefit checks may 
forecast that the percentage of checks cashed each day will be 0% for 
the first day, 10% for the second day, 80% on the third day, and 10% on 
the fourth day following issuance. Clearance patterns are used to 
schedule the transfer of funds with various funding techniques and to 
support interest calculations.
    Compensating balance means funds maintained in State bank accounts 
and/or State Treasurer bank accounts to offset the costs of bank 
services.
    Current project cost means a cost for which the State has recorded 
a liability on or after the day that the State last requested funds for 
the project.
    Day means a calendar day unless otherwise specified.
    Default procedures means efficient cash management practices that 
we prescribe for Federal funds transfers to a State if a Treasury-State 
Agreement is not in place.
    Direct cost means those costs a State incurs in performing the 
actual calculation of interest liabilities, including those costs a 
State incurs in developing and maintaining clearance patterns in 
support of interest calculations.
    Disallowances mean costs incurred by a State which the Federal 
program agency has determined to be costs which should not be charged 
to the Federal Government either because the funds were used for other 
than Federal assistance program purposes or the amount of the funds 
used for Federal assistance program purposes was improper.
    Disburse means to issue a check or initiate an electronic funds 
transfer payment.
    Discretionary grant project means a project for which a Federal 
program agency is authorized by law to exercise judgment in awarding a 
grant and in selecting a grantee, generally through a competitive 
process.
    Dollar-weighted average day of clearance means the day when, on a 
cumulative basis, 50 percent of funds have been paid out. To calculate 
the dollar-weighted average day of clearance for a clearance pattern:
    (1) For each day, multiply the percentage of dollars paid out that 
day by the number of days that have elapsed since the payments were 
issued. For example, on the first day payments were issued, multiply 
the percentage of dollars paid out on that day by zero, since zero days 
have elapsed. On the day after payments were issued, multiply the 
percentage of dollars paid out on that day by one, since one day has 
elapsed; and so forth.
    (2) Total the results from paragraph (1) of this definition. Round 
to the nearest whole number. This is the dollar-weighted average day of 
clearance.
    Draw down (verb) means a process in which a State requests and 
receives Federal funds. Drawdown (noun) means Federal funds requested 
and received by a State.
    Electronic Funds Transfer (EFT) means any transfer of funds, other 
than a transaction originated by cash, check, or similar paper 
instrument, that is initiated through an electronic terminal, 
telephone, computer, or magnetic tape, for the purpose of ordering, 
instructing, or authorizing a financial institution to debit or credit 
an account.
    Estimate means a projection of the future needs of a Federal 
assistance program that can't be accurately described by a clearance 
pattern.
    Federal assistance program means a program included in the Catalog 
of Federal Domestic Assistance where funds are transferred from the 
Federal Government to a State. Federal assistance programs do not 
include vendor payments or direct loans.
    Federal program agency means an executive agency as defined by 
section 102 of title 31, United States Code, except the Tennessee 
Valley Authority (TVA), that issues and administers grants to States or 
cooperative agreements with States.
    Federal-State agreement means an agreement between a State and a 
Federal program agency specifying terms and conditions for carrying out 
a Federal assistance program or group of programs. This is different 
than a Treasury-State Agreement.
    Financial Management Service (we or us) means the Bureau of the 
U.S. Department of the Treasury responsible for implementation of this 
part.
    Fiscal Year means the twelve-month period that a State designates 
as its budget year.
    Grant means, for the purposes of this Part, a funds transfer by the 
Federal Government associated with a Federal assistance program listed 
in the Catalog of Federal Domestic Assistance.
    Indirect cost means costs a State incurs that are necessary to the 
operation and performance of its Federal assistance programs, but that 
aren't readily identifiable with a particular project or Federal 
assistance program.
    Indirect cost rate means a formula that identifies the amount of 
indirect costs based on the amount of accrued direct costs.
    Maintenance-of-effort means a requirement that a State spend at 
least a specified amount of State funds for Federal assistance program 
purposes.
    Major Federal assistance program means a Federal assistance program 
which receives Federal funding in excess of the dollar thresholds found 
in Table A to Sec. 205.5.
    Obligational authority means the existence of a definite commitment 
on the part of the Federal Government to provide appropriated funds to 
a State to carry out specified programs, whether the commitment is 
executed before or after a State pays out funds for Federal assistance 
program purposes.
    Pay out means to debit the State's bank account.
    Pay out funds for Federal assistance program purposes means, in the 
context of State payments, to debit a State account for the purpose of 
making a payment properly chargeable to the Federal Government to:

[[Page 60807]]

    (1) A person or entity that is not considered part of the State 
pursuant to the definition of ``State'' in this section; or
    (2) A State entity that provides goods or services for the direct 
benefit or use of the payor State entity or the Federal Government to 
further Federal assistance program goals.
    Rebate means funds returned to a State by third parties after a 
State has paid out those funds for Federal assistance program purposes.
    Refund means funds that a State recovers that it previously paid 
out for Federal assistance program purposes. Refunds include rebates 
received from third parties.
    Refund transaction means an entry to the record of a State bank 
account representing a single deposit of refunds. A refund transaction 
may consist of a single check or item, or a bundle of accumulated 
checks.
    Related banking costs means separately identified costs which are 
necessary and customary for maintaining an account in a financial 
institution, whether a commercial account or a State Treasurer account. 
Investment service fees and fees for credit-related services aren't 
related banking costs.
    Request for funds means a State's request for funds that the State 
completes and submits in accordance with Federal program agency 
guidelines.
    Reverse flow program means a Federal assistance program, such as 
Supplemental Security Income (SSI), for which the Federal Government 
makes payments to recipients on behalf of a State.
    Revolving loan fund means a pool of program funds managed by a 
State. States may loan funds from the pool to other entities in support 
of Federal assistance program goals. Investment income is earned on the 
funds that remain in the pool and on loans made from pool funds. A 
Federal program agency may require that all income derived from a 
revolving loan fund be used for Federal assistance program purposes.
    Secretary means the Secretary of the United States Department of 
the Treasury. We are the Secretary's representative in all matters 
concerning this Part, unless otherwise specified.
    State means a State of the United States, the District of Columbia, 
the Commonwealth of Puerto Rico, the Commonwealth of the Northern 
Mariana Islands, American Samoa, Guam, and the Virgin Islands. It 
includes any agency, instrumentality, or fiscal agent of a State that 
is legally and fiscally dependent on the State executive, State 
Treasurer, or State Comptroller.
    (1) A State agency or instrumentality is any organization of the 
primary government of the State financial reporting entity, as defined 
by generally accepted accounting principles.
    (2) A fiscal agent of a State is an entity that pays, collects, or 
holds Federal funds on behalf of the State in furtherance of a Federal 
assistance program, excluding private nonprofit community 
organizations.
    (3) Local governments, Indian Tribal governments, institutions of 
higher education, hospitals, and nonprofit organizations are excluded 
from the definition of State.
    Treasury-State Agreement means a document describing the accepted 
funding techniques and methods for calculating interest and identifying 
the Federal assistance programs governed by this subpart A.
    Trust fund for which the Secretary is the trustee means a trust 
fund administered by the Secretary.
    Vendor payment means a funds transfer by a Federal program agency 
to a State to compensate the State for acting as a vendor on a Federal 
contract.
    We and us means Financial Management Service.

Subpart A--Rules Applicable to Federal Assistance Programs Included 
in a Treasury-State Agreement


Sec. 205.3  What Federal assistance programs are subject to this 
subpart A?

    (a) Generally, this subpart prescribes the rules that apply to 
Federal assistance programs which:
    (1) Are listed in the Catalog of Federal Domestic Assistance;
    (2) Meet the funding threshold for a major Federal assistance 
program; and
    (3) Are included in a Treasury-State Agreement or default 
procedures.
    (b) Upon a State's request, we will make additional Federal 
assistance programs subject to this subpart A by lowering the funding 
threshold in the Treasury-State Agreement. All of a State's programs 
that meet this lower threshold would be subject to this subpart A.
    (c) We may make additional Federal assistance programs subject to 
this subpart A if a State or Federal program agency fails to comply 
with subpart B of this part.


Sec. 205.4  Are there any circumstances where a Federal assistance 
program that meets the criteria of Sec. 205.3 would not be subject to 
this subpart A?

    (a) A Federal assistance program that meets or exceeds the 
threshold for major Federal assistance programs in a State is not 
subject to this subpart A until it is included in an amended Treasury-
State Agreement or in default procedures.
    (b) We and a State may agree to exclude components of a major 
Federal assistance program from interest calculations if the State 
administers the program through several State agencies and meets the 
following requirements:
    (1) The dollar amount of the exempted cash flow doesn't exceed 5% 
of the State's major Federal assistance program threshold and can't 
exceed 10% of that Federal assistance program's total expenditures;
    (2) If less than the total amount of Federal assistance program 
funding is subject to interest calculation procedures, the interest 
liabilities should be pro-rated to 100% of the Federal assistance 
program funding;
    (3) A State may not use this exclusion if a Federal assistance 
program is administered by only one State agency; and
    (4) We may request Federal assistance program specific data on 
funding levels to determine exemptions.
    (c) We and a State may exclude a Federal assistance program from 
this subpart A if the Federal assistance program has been discontinued 
since the most recent Single Audit and the remaining funding is below 
the threshold, or if the Federal assistance program is funded by an 
award not limited to one fiscal year and the remaining Federal 
assistance program funding is below the State's threshold.


Sec. 205.5  What are the thresholds for major Federal assistance 
programs?

    (a) Table A of this section defines major Federal assistance 
programs based on the dollar amount of an individual Federal assistance 
program and the dollar amount of all Federal assistance being received 
by a State for all Federal assistance programs. A State must locate the 
appropriate row in Column A based upon the total expenditures of 
Federal assistance received. In that same row, a State must apply the 
percentage from Column B to determine the State's threshold for major 
Federal assistance programs. A State with expenditures greater than $10 
billion will have a minimum default threshold of $60 million.
    (b) To ensure adequate coverage of all State programs, a State must 
compare its program coverage using the threshold figure obtained under 
paragraph (a) of this section to the program coverage projected by a 
threshold of one half that of paragraph (a) of this section.
    (1) Sum the total dollar expenditures of programs that exceed the 
threshold

[[Page 60808]]

determined in Column B. Designate this amount as X.
    (2) Sum the total dollar expenditures of programs that exceed one 
half of the threshold amount determined in Column B. Designate this 
amount as Y.
    (3) Subtract X from Y. Designate this amount as Z.
    (4) If Z is less than or equal to 10% of Y use the figure found in 
Column B of Table A.
    (5) If Z is greater than 10% of Y, then a State must lower its 
threshold, or add programs, until the difference between Y and the new 
total dollar value of program coverage is less than or equal to 10%.
    (c) Unless specified otherwise, major Federal assistance programs 
must be determined from the most recent Single Audit data available.

                         Table A to Sec.  205.5
------------------------------------------------------------------------
                                             Column B--Major Federal
                                           Assistance Program means any
 Column A--Total expenditure of Federal    Federal  assistance program
 Assistance  for all programs per State   with expenditures that exceed
                                                   these levels
------------------------------------------------------------------------
Between zero and $100 million inclusive  6.00 percent of such total
                                          expenditures.
Over $100 million but less than or       0.60 percent of such total
 equal to $10 billion.                    expenditures.
Over $10 billion.......................  The greater of 0.30 percent of
                                          such total expenditures or $60
                                          million.
------------------------------------------------------------------------

Sec. 205.6  What is a Treasury-State Agreement?

    (a) A Treasury-State Agreement documents the accepted funding 
techniques and methods for calculating interest agreed upon by us and a 
State and identifies the Federal assistance programs governed by this 
subpart A. If anything in a Treasury-State Agreement is inconsistent 
with this subpart A, that part of the Treasury-State Agreement won't 
have any effect and this subpart A will govern.
    (b) A Treasury-State Agreement will be effective until terminated. 
We or a State may terminate a Treasury-State Agreement on 30 days 
written notice.


Sec. 205.7  Can a Treasury-State Agreement be amended?

    (a) We or a State may amend a Treasury-State Agreement at any time 
if both we and the State agree in writing.
    (b) The effective date of an amendment shall be the date both 
parties agree to the amendment in writing. Amendments may not be 
retroactive, except for an amendment to clarify the terms of a 
Treasury-State Agreement.
    (c) We and a State must amend a Treasury-State Agreement as needed 
to change or clarify its language when the terms of the existing 
agreement are either no longer correct or no longer applicable. A State 
must notify us in writing describing the Federal assistance program 
change and include a proposed amendment for our review and a current 
list of all programs included in the Treasury-State Agreement. 
Amendments may address, but are not limited to:
    (1) Additions or deletions of Federal assistance programs subject 
to this subpart A;
    (2) Changes in funding techniques; and
    (3) Changes in clearance patterns.
    (d) Additions or deletions to the list of Federal assistance 
programs subject to this subpart A take effect when a Treasury-State 
Agreement is amended.
    (e) Federal assistance programs that are to be added to a Treasury-
State Agreement are not subject to this subpart A until the Treasury-
State Agreement is amended, except when a Federal assistance program 
subject to this subpart A is being replaced by a Federal assistance 
program governed by subpart B of this part, in which case the 
replacement program is immediately subject to this subpart A.


Sec. 205.8  What if there is no Treasury-State Agreement in effect?

    When a State doesn't have a Treasury-State Agreement in effect, we 
will prescribe default procedures to implement this subpart A. The 
default procedures will prescribe efficient funds transfer procedures 
consistent with State and Federal law and identify the covered Federal 
assistance programs and designated funding techniques.


Sec. 205.9  What is included in a Treasury-State Agreement?

    We will prescribe a uniform format for all Treasury-State 
Agreements. A Treasury-State Agreement must include, but is not limited 
to, the following:
    (a) State agencies, instrumentalities, and fiscal agents that 
administer the Federal assistance programs subject to this subpart A.
    (b) Federal assistance programs subject to this subpart A, 
consistent with Secs. 205.3 and 205.4. A State must use its most recent 
single audit report as a basis for determining the funding thresholds 
for major Federal assistance programs, unless otherwise specified in 
the Treasury-State Agreement. A State may use budget or appropriations 
data for a more recent period instead of single audit data, if 
specified in the Treasury-State Agreement.
    (c) Funding techniques applied to Federal assistance programs 
subject to subpart A based on the Federal assistance program's purpose 
and administration.
    (d) Methods the State will use to develop and maintain clearance 
patterns and estimates, consistent with Sec. 205.11. The method must 
include, at a minimum, a clear indication of:
    (1) the data used;
    (2) the sources of the data;
    (3) the development process;
    (4) for estimates, when and how the State will update the estimate 
to reflect the most recent data available;
    (5) for estimates, when and how the State will make adjustments, if 
any, to reconcile the difference between the estimate and the State's 
actual cash needs; and
    (6) any assumptions, standards, or conventions used in converting 
the data into the clearance pattern or estimate.
    (e) Federal program agency provisions requiring reconciliation of 
estimates to actual outlays may be included in a Treasury-State 
Agreement. The supporting documentation must be retained by the State 
for three years.
    (f) States must include the results of the clearance pattern 
process in the Treasury-State Agreement. The supporting documentation 
must be retained by the State for three years.
    (g) Methods used by the State and Federal agencies to calculate 
interest liabilities pursuant to this subpart A. The method must 
include, but is not limited to, a clear indication of:
    (1) the data used;
    (2) the sources of the data;
    (3) the calculation process; and
    (4) any assumptions, standards, or conventions used in converting 
the data into the interest liability amounts.
    (h) Treasury-State agreements must include language describing how 
a State and Federal program agency will address a State request for 
supplemental funding. This language must include, but is not limited 
to, the following provisions:

[[Page 60809]]

    (1) What constitutes a timely request for supplemental funds for 
Federal assistance program purposes by a State; and
    (2) What constitutes a timely transfer of supplemental funds for 
Federal assistance program purposes from a Federal program agency to a 
State.


Sec. 205.10  How do you document funding techniques?

    The Treasury-State Agreement must include a concise description for 
each funding technique that a State will use. The description must 
include the following:
    (a) What constitutes a timely request for funds;
    (b) How the State determines the amount of funds to request;
    (c) What procedures are used to estimate or reconcile estimates 
with actual and immediate cash needs;
    (d) What constitutes the timely receipt of funds; and
    (e) Whether a State or Federal interest liability accrues when the 
funding technique, including any associated procedure for estimation or 
reconciliation, is properly applied.


Sec. 205.11  What requirements apply to funding techniques?

    (a) A State and a Federal program agency must minimize the time 
elapsing between the transfer of funds from the United States Treasury 
and the State's pay out of funds for Federal assistance program 
purposes, whether the transfer occurs before or after the pay out of 
funds.
    (b) A State and a Federal program agency must limit the amount of 
funds transferred to the minimum required to meet a State's actual and 
immediate cash needs.
    (c) A State must not draw down funds from its account in the 
Unemployment Trust Fund or from a Federal account in the Unemployment 
Trust Fund in advance of actual immediate cash needs for any purpose 
including maintaining a compensating balance.
    (d) A Federal program agency must allow a State to submit requests 
for funds daily. This requirement shouldn't be construed as a change to 
Federal program agency guidelines defining a properly completed request 
for funds.
    (e) In accordance with the electronic funds transfer provisions of 
the Debt Collection Improvement Act of 1996 (31 U.S.C. 3332), a Federal 
program agency must use electronic funds transfer methods to transfer 
funds to States unless a waiver is available.


Sec. 205.12  What funding techniques may be used?

    (a) We and a State may negotiate the use of mutually agreed upon 
funding techniques. We may deny interest liability if a State does not 
use a mutually agreed upon funding technique. Funding techniques should 
be efficient and minimize the exchange of interest between States and 
Federal agencies.
    (b) We and a State may base our agreement on the sample funding 
techniques listed in paragraphs (b)(1) through (5) of this section, or 
any other technique upon which both parties agree.
    (1) Zero balance accounting means that a Federal program agency 
transfers the actual amount of Federal funds to a State that are paid 
out by the State each day.
    (2) Estimated clearance means that a Federal program agency 
transfers to a State the estimated amount of funds that the State pays 
out each day. The estimated amount paid out each day is determined by 
applying a clearance pattern to the total amount the State will 
disburse.
    (3) Average clearance means that a Federal program agency, on the 
dollar-weighted average day of clearance of a disbursement, transfers 
to a State a lump sum equal to the actual amount of funds that the 
State is paying out. The dollar-weighted average day of clearance is 
the day when, on a cumulative basis, 50 percent of the funds have been 
paid out. The dollar-weighted average day of clearance is calculated 
from a clearance pattern, consistent with Sec. 205.20.
    (4) Cash advance (preissuance) funding means that a Federal program 
agency transfers the actual amount of Federal funds to a State that 
will be paid out by the State, in a lump sum, not more than 2 business 
days prior to the day the State issues checks or initiates EFT 
payments.
    (5) Reimbursable funding means that a Federal program agency 
transfers Federal funds to a State after that State has already paid 
out the funds for Federal assistance program purposes.


Sec. 205.13  How do you determine when State or Federal interest 
liability accrues?

    (a) State or Federal interest liability may or may not apply when 
mutually agreed to funding techniques are applied, depending on the 
terms of the Treasury-State Agreement.
    (b) We and a State may agree in a Treasury-State Agreement that no 
State or Federal interest liability will accrue for indirect costs or 
indirect allocated costs based on an indirect cost rate. This indirect 
cost rate must be approved by the appropriate Federal program agency 
under Office of Management and Budget (OMB) Circular A-87 (available 
from the addresses in 5 CFR 1310.3) and be in accordance with this 
subpart A.


Sec. 205.14  When does Federal interest liability accrue?

    (a) Federal interest liabilities may accrue if funding techniques 
aren't properly applied, in accordance with the following provisions:
    (1) The Federal program agency incurs interest liability if a State 
pays out its own funds for Federal assistance program purposes with 
valid obligational authority under Federal law, Federal regulation, or 
Federal-State agreement. A Federal interest liability will accrue from 
the day a State pays out its own funds for Federal assistance program 
purposes to the day Federal funds are credited to a State account.
    (2) If a State pays out its own funds for Federal assistance 
program purposes without obligational authority, the Federal program 
agency incurs an interest liability if obligational authority 
subsequently is established.
    (3) If a State pays out its own funds prior to the day a Federal 
program agency officially notifies the State in writing that a 
discretionary grant project is approved, the Federal program agency 
doesn't incur an interest liability, notwithstanding any other 
provision of this section.
    (4) If a State pays out its own funds prior to the availability of 
Federal funds authorized or appropriated for a future Federal fiscal 
year, the Federal program agency doesn't incur an interest liability, 
notwithstanding any other provision of this section.
    (5) If a State fails to request funds timely as set forth in 
Sec. 205.29 or otherwise fails to apply a funding technique properly, 
we may deny any resulting Federal interest liability.
    (b) Federal agency programs that have specific payment dates set by 
the Federal program agency that create interest liabilities are subject 
to this part.
    (c) States must adhere to Federal program agency disbursement 
schedules when requesting funds. We may deny a State's claim for 
Federal interest liability for the period prior to a late drawdown 
request. States must time their funds drawdown so that it does not 
create Federal interest liability. The drawdown request must allow the 
Federal program agency sufficient time to meet its disbursement 
schedule. If the Federal program agency does not make a timely payout 
in accordance with the terms of the Treasury-State Agreement,

[[Page 60810]]

a State may submit a claim for interest liability.


Sec. 205.15  When does State interest liability accrue?

    (a) General rule. State interest liability may accrue if Federal 
funds are received by a State prior to the day the State pays out the 
funds for Federal assistance program purposes. State interest liability 
accrues from the day Federal funds are credited to a State account to 
the day the State pays out the Federal funds for Federal assistance 
program purposes.
    (b) Disallowances. A State incurs an interest liability on 
disallowances.
    (1) If a Federal program agency disallows a State expenditure, a 
State will owe interest from the day that Federal funds associated with 
the disallowance are credited to a State account to the day the funds 
are credited to the Federal government.
    (2) In instances where an expenditure is disallowed in a CMIA 
reporting year subsequent to the CMIA reporting year in which the State 
made the expenditure, the amount of interest calculated in accordance 
with paragraph (b)(1) of this section shall be adjusted for any CMIA 
interest previously paid on such amounts, either by a State or by the 
Federal government.
    (c) Refunds. (1) A State incurs interest liability on refunds of 
Federal funds from the day the refund is credited to a State account to 
the day the refund is either paid out for Federal assistance program 
purposes or credited to the Federal government.
    (2) We and a State may agree, in a Treasury-State Agreement, that a 
State doesn't incur an interest liability on refunds in refund 
transactions under $50,000.
    (d) Exception to the general rule. A State does not incur an 
interest liability to the Federal Government if a Federal statute 
requires the State to retain or use for Federal assistance program 
purposes the interest earned on Federal funds, notwithstanding any 
other provision in this section.


Sec. 205.16  What special rules apply to Federal assistance programs 
and projects funded by the Federal Highway Trust Fund?

    The following applies to Federal assistance programs and projects 
funded out of the Federal Highway Trust Fund, notwithstanding any other 
provision of this part:
    (a) A State must request funds at least weekly for current project 
costs, or Federal interest liability won't accrue prior to the day a 
State submits a request for funds.
    (b) If a State pays out its own funds in the absence of a project 
agreement or in excess of the Federal obligation in a project 
agreement, the Federal program agency won't incur an interest 
liability.


Sec. 205.17  Are funds transfers delayed by automated payment systems 
restrictions based on the size and timing of the drawdown request 
subject to this part?

    Funds transfers delayed due to payment processes that automatically 
reject drawdown requests that fall outside a pre-determined set of 
parameters are subject to this part.


Sec. 205.18  Are Federal assistance program agency grants for 
administrative costs subject to this part?

    (a) Federal assistance program agency grants wholly dedicated to 
compensate States for administrative costs are subject to this part.
    (b) Federal assistance program agency grants dedicating only a 
portion of their funding for administrative costs are partially exempt 
from this part. The portion dedicated to compensate States for indirect 
and other administrative costs is not subject to this part.


Sec. 205.19  How is interest calculated?

    (a) A State must calculate Federal interest liabilities and State 
interest liabilities for each Federal assistance program subject to 
this subpart A.
    (b) The interest rate for all interest liabilities for each Federal 
assistance program subject to subpart A is the annualized rate equal to 
the average equivalent yields of 13-week Treasury Bills auctioned 
during a State's fiscal year. We provide this rate to each State.
    (c) A State must calculate and report interest liabilities on the 
basis of its fiscal year. A State must ensure that its interest 
calculations are auditable and retain a record of the calculations.
    (d) As set forth in Sec. 205.9, a Treasury-State Agreement must 
include the method a State uses to calculate and document interest 
liabilities.
    (e) A State may use actual data, a clearance pattern, or 
statistical sampling to calculate interest. A clearance pattern used to 
calculate interest must meet the standards of Sec. 205.20. If a State 
uses statistical sampling to calculate interest, the State must sample 
transactions separately for each Federal assistance program subject to 
this subpart A. Each sample must be representative of the pool of 
transactions and be of sufficient size to accurately represent the flow 
of Federal funds under the Federal assistance program, including 
seasonal or other periodic variations.
    (f) For the first year in which a Federal assistance program is 
covered in a Treasury-State Agreement, funds transfers that occur prior 
to the first day of the State's fiscal year must not be included in 
interest calculations and are not subject to the interest liability 
provisions of this part.


Sec. 205.20  What is a clearance pattern?

    States use clearance patterns to estimate when funds are paid out, 
given a known dollar amount and a known date of disbursement. We and a 
State may agree to other procedures to estimate when funds are paid out 
when the dollar amount and/or the timing of disbursements are not 
known. A State must ensure that clearance patterns meet the following 
standards:
    (a) A clearance pattern must be auditable.
    (b) A clearance pattern must accurately represent the flow of 
Federal funds under the Federal assistance programs to which it is 
applied.
    (c) A clearance pattern must include seasonal or other periodic 
variations in clearance activity.
    (d) A clearance pattern must be based on at least three consecutive 
months of disbursement data, unless additional data is required to 
accurately represent the flow of Federal funds.
    (e) If a State uses statistical sampling to develop a clearance 
pattern, the sample size must be sufficient to ensure a 96% confidence 
interval no more than plus or minus 0.25 weighted days above or below 
the estimated mean.
    (f) A clearance pattern must extend, at a minimum, until 99 percent 
of the dollars in a disbursement have been paid out for Federal 
assistance program purposes.


Sec. 205.21  When may clearance patterns be used?

    (a) A State may develop a clearance pattern for:
    (1) An individual Federal assistance program;
    (2) A logical group of Federal assistance programs that have the 
same disbursement method and type of payee;
    (3) A bank account;
    (4) A specific type of payments, such as payroll or vendor 
payments; or
    (5) Anything that is agreed upon by us and a State. If a clearance 
pattern is used for multiple Federal assistance programs, a State must 
apply the clearance pattern separately to each Federal assistance 
program when scheduling funds transfers or calculating interest.
    (b) As set forth in Sec. 205.9, a Treasury-State Agreement must 
include the method a State uses to develop and maintain clearance 
patterns.


Sec. 205.22  How are accurate clearance patterns maintained?

    (a) If a State has knowledge, at any time, that a clearance pattern 
no longer

[[Page 60811]]

reflects a Federal assistance program's actual clearance activity, or 
if a Federal assistance program undergoes operational changes that may 
affect clearance activity, the State must notify us, develop a new 
clearance pattern, and certify that the new pattern corresponds to the 
Federal assistance program's clearance activity.
    (b) An authorized State official must certify that a clearance 
pattern corresponds to the clearance activity of the Federal assistance 
programs to which it is applied. An authorized State official must re-
certify the accuracy of a clearance pattern at least every 5 years. If 
a State develops a clearance pattern for a bank account or a specific 
type of payment, or on another basis, as set forth in Sec. 205.21, we 
may prescribe other requirements for re-certifying the accuracy of the 
clearance pattern. A State can begin to use a new clearance pattern on 
the date the new clearance pattern is certified.


Sec. 205.23  What requirements apply to estimates?

    The requirements in this section apply when we and a State 
negotiate a mutually agreed upon funds transfer procedure based on an 
estimate of the State's immediate cash needs. These requirements don't 
apply to an estimate based on a clearance pattern or an indirect cost 
rate.
    (a) The State must ensure that the estimate reasonably represents 
the flow of Federal funds under the Federal assistance program or 
program component to which the estimate applies. The estimate must take 
into account seasonal or other periodic variations in activity 
throughout the period for which the Federal funds are available. If a 
State supplements the Federal funds for a Federal assistance program, 
other than through required matching, the State must not arbitrarily 
assign its earliest costs to the Federal Government. The State may 
allocate its costs proportionately over the period for which the 
Federal funds are available, or specify in the Treasury-State Agreement 
which Federal assistance program components will use Federal funds 
exclusively.
    (b) As set forth in Sec. 205.9, a Treasury-State Agreement must 
include the method a State uses to develop and maintain the estimate.


Sec. 205.24  How are accurate estimates maintained?

    (a) If a State has knowledge that an estimate doesn't reasonably 
correspond to the State's cash needs for a Federal assistance program 
or program component, or if a Federal assistance program undergoes 
operational changes that may affect cash needs, the State must 
immediately notify us in writing. We and the State will amend the 
funding technique provisions in the Treasury-State Agreement or take 
other mutually agreed upon corrective action.
    (b) When estimates are properly updated and applied, a State or 
Federal interest liability may or may not accrue, depending on the 
terms of the Treasury-State Agreement.
    (c) We may require a State to justify in writing that it is not 
feasible to use a more efficient funding technique for the Federal 
assistance program or program component to which an estimate is 
applied. We may prescribe requirements for certifying the 
reasonableness of an estimate.


Sec. 205.25  How does this part apply to certain Federal assistance 
programs or funds?

    (a) Special rules apply to certain Federal assistance programs or 
funds described in this section. To the extent the provisions of this 
section are inconsistent with other provisions of this part, this 
section applies.
    (b) A State's interest liability on funds withdrawn from its 
account in the Unemployment Trust Fund equals the actual interest 
earned on such funds less the related banking costs. Actual interest 
earned doesn't include non-cash bank earnings. If funds withdrawn from 
the State account in the UTF are commingled with other funds, the funds 
withdrawn from the State account must be allocated a proportionate 
share of interest earnings and banking costs. (Interest liabilities on 
funds withdrawn from a Federal account in the UTF, except the Federal 
Unemployment Account, are calculated in accordance with Sec. 205.19.)
    (c) Supplemental Security Income. (1) The Federal Government incurs 
an interest liability from the day State funds are credited to the 
Federal Government's account to the day a Federal program agency pays 
out the State funds for Federal assistance program purposes. A State 
incurs an interest liability from the day a Federal program agency pays 
out Federal funds for Federal assistance program purposes to the day 
State funds are credited to the Federal Government's account.
    (2) Interest liability must be calculated on the difference between 
a State's monthly Supplemental Security Income payment and the State's 
actual liability for the month.
    (3) The Federal Government won't incur interest liabilities on 
refunds of State funds under the Supplemental Security Income Program.
    (4) Administrative fees charged by the Social Security 
Administration to States under the Supplemental Security Income program 
are not subject to this part.
    (5) Supplemental State payments made in conjunction with 
Supplemental Security Income are not subject to this part.
    (d) Funds collected under the Child Support Enforcement Program. 
(1) Funds collected by States from absent parents pursuant to Title IV-
D of the Social Security Act are not subject to this part.
    (2) Interest earned by States on undistributed collections must be 
treated as Federal assistance program income under 45 CFR 304.50(b) and 
is not subject to this part.
    (3) Late payment fees collected by States from absent parents are 
not subject to CMIA interest liabilities and are not subject to this 
Part. However, such fees must be treated as Federal assistance program 
income in accordance with 45 CFR 302.75(b)(6).
    (e) States supplementing Social Services block grants, Temporary 
Assistance for Needy Families block grants, and the Mandatory and 
Matching Child Care Funds program. (1) At the discretion of the Office 
of Management and Budget, Federal funds will be apportioned to avoid 
depletion and a supplemental appropriation.
    (2) A State must not draw down all Federal funds prior to spending 
State funds.
    (3) A State is entitled to interest if the apportioned funds are 
not transferred timely.
    (4) A State that provides matching State funding and/or 
maintenance-of-effort funding, as defined in 45 CFR 98.60(f), in 
conjunction with a Federal block grant program:
    (i) Must not arbitrarily assign its earliest costs to the Federal 
Government;
    (ii) Must coordinate a proportional drawdown of State and Federal 
funds to avoid interest liabilities; and
    (iii) Must include these arrangements in the Treasury-State 
Agreement.
    (f) A State that earns interest on Special Supplemental Food 
Program for Women, Infants, and Children rebates is not subject to 
interest liability if the funds earned are used for Federal assistance 
program purposes.
    (g) Revolving Loan Funds. (1) This part applies to any transfer of 
funds from the Federal program agency to the State for the Revolving 
Loan Fund.
    (2) This part doesn't apply to interest a State earns on Revolving 
Loan Funds when Federal program agency regulations require that all 
interest

[[Page 60812]]

earned on invested funds be used for Federal assistance program 
purposes.


Sec. 205.26  What are the requirements for creating Annual Reports?

    (a) A State must submit to us an Annual Report accounting for the 
interest liabilities of the State's most recently completed fiscal 
year. Adjustments to the Annual Report must be limited to the two State 
fiscal years prior to the State fiscal year covered by the report. The 
authorized State official must certify the accuracy of a State's Annual 
Report. A signed original of the Annual Report must be received by the 
next December 31 after the end of the State's fiscal year. We will 
provide copies of Annual Reports to Federal agencies. We will prescribe 
the format of the Annual Report, and may prescribe that the Annual 
Report be submitted by electronic means.
    (b) A State must submit a description and supporting documentation 
for liability claims greater than $5,000. This information must include 
the following:
    (1) The amount of funds requested;
    (2) The date the funds were requested;
    (3) The date the funds were paid out for Federal assistance program 
purposes;
    (4) The date the funds were received by the State; and
    (5) The date of late grant awards.
    (c) A State may submit with its Annual Report a claim for 
reimbursement of the direct costs of implementing this subpart A, 
calculated in accordance with Sec. 205.27. An authorized State official 
must certify the accuracy of a State's direct cost claim.


Sec. 205.27  How are direct costs calculated?

    (a) We will compensate a State annually for the direct costs of 
implementing this subpart A, subject to the conditions and limitations 
of this section.
    (b) We may deny a direct cost claim if a State doesn't:
    (1) Have a Treasury-State Agreement with us, as set forth in 
Secs. 205.6 through 205.9;
    (2) Submit timely a Treasury-State Agreement, as set forth in 
Secs. 205.6 through 205.9;
    (3) Submit timely an updated list of Federal assistance programs 
subject to this subpart A, as set forth in Secs. 205.6 through 205.9;
    (4) Submit timely a claim for direct costs with its Annual Report, 
as set forth in Sec. 205.26; or
    (5) Submit timely its Annual Report, as set forth in Sec. 205.26.
    (c) A State must maintain documentation to substantiate its claim 
for direct costs. We may require a State to provide documentation to 
support its direct cost claims. We will review all direct cost claims 
for reasonableness. If we determine that a cost claim is unreasonable, 
we will not reimburse a State for that cost, notwithstanding any other 
provision of this section.
    (d) Eligibility and treatment of direct costs. (1) Direct costs 
don't include expenses for normal disbursing services, such as 
processing checks or maintaining records for accounting and 
reconciliation of cash accounts, or expenses for upgrading or 
modernizing accounting systems.
    (2) Direct costs in excess of $50,000 in any year are not eligible 
for reimbursement, unless a State can justify to us that the State is 
unable to develop and maintain clearance patterns in support of 
interest calculations, or perform the actual calculation of interest, 
without incurring such costs. Supporting documentation must accompany 
State requests for reimbursement in excess of $50,000.
    (3) Direct costs that a State incurs in fiscal years prior to its 
most recently completed Annual Report are not eligible for 
reimbursement.
    (4) A State must not include the direct costs of implementing this 
subpart A in its State-wide cost allocation plan, as defined and 
provided for in OMB Circular A-87. All costs incurred by a State to 
implement this subpart A, other than direct costs, are subject to the 
procedures and principles of OMB Circular A-87.
    (e) The payments from the Federal Government to individual States 
to offset direct costs incurred are funded from the aggregate interest 
payments States make to the Federal Government. The following 
limitations apply:
    (1) We will not reduce or adjust interest liabilities for Federal 
assistance programs funded out of trust funds for which the Secretary 
is trustee; and
    (2) The aggregate payments from the Federal Government to States to 
offset direct costs will not be greater than the aggregate interest 
payments States make to the Federal Government.


Sec. 205.28  How are interest payments exchanged?

    (a) We adjust a State's total interest liability to the Federal 
government and the Federal government's total interest liability to a 
State to determine direct cost reimbursement, as set forth in 
Sec. 205.27.
    (b) The adjusted total State interest liability and the adjusted 
total Federal interest liability for each State are offset to determine 
the net interest payable to or from each specific State. The payment of 
net interest to or from a State for its most recently completed fiscal 
year must occur no later than March 31. We will notify a State of the 
final net interest liability. A State must submit a claim to receive 
payment.
    (c) A State may appeal a decision by us on interest liabilities and 
direct cost claims in accordance with Sec. 205.31.
    (d) If a State appeals the amount of interest payable in accordance 
with the provisions of Sec. 205.31, payment must occur by March 31 for 
any portions not subject to the appeal.


Sec. 205.29  What are the State oversight and compliance 
responsibilities?

    (a) A State must designate an official representative with the 
statutory or administrative authority to coordinate all interaction 
with the Federal Government concerning subpart A, and must notify us in 
writing of the representative's name and title.
    (b) A State must maintain records supporting interest calculations, 
clearance patterns, direct costs, and other functions directly 
pertinent to the implementation and administration of this subpart A 
for audit purposes. A State must retain the records for each fiscal 
year for three years from the date the State submits its Annual Report, 
or until any dispute or action involving the records and documents is 
completed, whichever is later. We, the Comptroller General, and the 
Inspector General or other representative of a Federal program agency 
must have the right of access to, and may require submission of, all 
records for the purpose of verifying interest calculations, clearance 
patterns, direct cost claims, and the State's accounting for Federal 
funds.
    (c) A State's implementation of subpart A is subject to audit in 
accordance with chapter 75 of title 31, United States Code, 
``Requirements for Single Audits.''
    (d) If a State repeatedly or deliberately fails to request funds in 
accordance with the procedures established for its funding techniques, 
as set forth in Sec. 205.11, Sec. 205.12, or a Treasury-State 
Agreement, we may deny the State payment or credit for the resulting 
Federal interest liability, notwithstanding any other provision of this 
part.
    (e) If a State materially fails to comply with this subpart A, we 
may, in addition to the action described in paragraph (d) of this 
section, take one or more of the following actions, as appropriate 
under the circumstances:
    (1) Request a Federal program agency or the General Accounting 
Office to conduct an audit of the State to determine interest owed to 
the Federal

[[Page 60813]]

Government, and to implement procedures to recover such interest;
    (2) Deny the reimbursement of all or a part of the State's direct 
cost claim;
    (3) Initiate a debt collection process to recover claims owed to 
the United States; or
    (4) Take other remedies legally available.


Sec. 205.30  What are the Federal oversight and compliance 
responsibilities?

    (a) A Federal program agency must designate an official 
representative to coordinate all interaction with us and the States 
concerning this subpart A, and must notify us in writing of the 
representative's name and title.
    (b) Determinations regarding whether or not costs are properly 
chargeable to the Federal government shall be the responsibility of the 
Federal program agency responsible for the Federal assistance program 
under which the disallowance arose. Disallowances will be determined in 
accordance with the statutes, regulations, and policies otherwise 
applicable to the Federal assistance program under which the 
disallowance arose.
    (c) A Federal program agency's implementation of this subpart A is 
subject to review pursuant to procedural instructions that we issue.
    (d) We will consult with Federal agencies as necessary and 
appropriate before entering into or amending a Treasury-State 
Agreement.
    (e) We will distribute Annual Reports to Federal agencies, as set 
forth in Sec. 205.26. Upon our request, a Federal program agency must 
review a State's Annual Report for reasonableness and must report its 
findings to us within 10 days.
    (f) A Federal program agency must notify us in writing if the 
program agency has knowledge, at any time, that:
    (1) A State's clearance pattern doesn't correspond to a Federal 
assistance program's clearance activity; or
    (2) Corrective action needs to be taken by a State, us, or another 
Federal program agency, with respect to the implementation of this 
subpart. We will notify the State or Federal program agency as 
appropriate in writing with a description of the Federal program 
agency's claim.
    (g) If a Federal program agency incurs an interest liability by 
failing to comply with this subpart A, we may collect a charge from the 
Federal program agency. A Federal interest liability resulting from 
circumstances beyond the control of a Federal program agency doesn't 
constitute noncompliance. We will determine the charge using the 
following procedures:
    (1) We will issue a Notice of Assessment to the Federal program 
agency, indicating the nature of the noncompliance, the amount of the 
charge, the manner in which it was calculated, and the right to file an 
appeal.
    (2) To the maximum extent practicable, a Federal program agency 
must pay a charge for noncompliance out of appropriations available for 
the Federal program agency's operations and not from the Federal 
program agency's program funds.
    (3) If a Federal program agency doesn't pay a charge for 
noncompliance within 45 days after receiving a Notice of Assessment, we 
will debit the appropriate Federal program agency account.
    (4) In the event a Federal program agency appeals a charge imposed 
under the Notice of Assessment, we will defer the charge until we 
decide the appeal. If we deny the appeal, the effective date of the 
charge may be retroactive to the date indicated in the Notice of 
Assessment.


Sec. 205.31  How does a State or Federal program agency appeal a 
determination made by us and resolve disputes?

    (a) This section documents the procedures for:
    (1) A State to appeal the net interest charge that we have 
assessed;
    (2) A State to appeal a determination we have made regarding the 
State's claim for direct costs in accordance with Sec. 205.27;
    (3) A Federal program agency to appeal a charge for noncompliance 
that we have assessed in accordance with Sec. 205.30; or
    (4) A State or a Federal program agency to resolve other disputes 
with us or between or among each other concerning the implementation of 
this subpart A.
    (b) A State or Federal program agency must submit a written 
petition to the Assistant Commissioner, Federal Finance, Financial 
Management Service (Assistant Commissioner), within 90 days of the date 
of the notice of assessment or the event that initiated the appeal or 
dispute. The Petition must include a concise factual statement, not to 
exceed 15 pages, with supporting documentation in the appendices, of 
the conditions forming the basis of the Petition and the action 
requested of the Assistant Commissioner. In the case of a dispute, the 
party submitting the petition to us must concurrently provide a copy of 
the petition to the other concerned parties. The other concerned 
parties may submit to the Assistant Commissioner a rebuttal within 90 
days of the date of the petition. The rebuttal must include a concise 
factual statement, not to exceed 15 pages, with supporting 
documentation in the appendices.
    (c) The Assistant Commissioner will review the Petition, any 
rebuttal, and all supporting documentation. As part of the review 
process, the Assistant Commissioner may request to meet with any or all 
parties and may request additional information.
    (d) The Assistant Commissioner will issue a written decision within 
the later of 120 days of the date of the Petition, or the rebuttal in 
case of a dispute, or 120 days from receipt of any additional 
information. The Assistant Commissioner's decision will be the final 
program agency action on our part for purposes of judicial review 
procedures under the Administrative Procedures Act (APA), 5 U.S.C. 701-
706, unless either the State or Federal program agency invokes the 
provisions of the Administrative Dispute Resolution Act of 1990 (ADRA), 
5 U.S.C. 581-593.
    (e) Either a State or Federal program agency may seek to invoke the 
provisions of the ADRA within 45 days after the date of the Assistant 
Commissioner's written decision.
    (1) The party invoking the ADRA must notify the Assistant 
Commissioner and any other concerned parties in writing. If all 
parties, including the Assistant Commissioner, agree in writing, a 
neutral party appointed under the provisions of the ADRA may assist in 
resolving the dispute through the use of alternate means of dispute 
resolution as defined in the ADRA.
    (2) If the party invoking the ADRA is unable to reach a 
satisfactory resolution, the Assistant Commissioner's decision will be 
the final agency action on our part for purposes of the judicial review 
procedures under the APA.
    (f) Any amount due as a result of an appeal or dispute must be paid 
within 14 days of the date of the decision of the Assistant 
Commissioner or the date of the resolution under the ADRA. If a State 
fails to pay, the State will be subject to collection techniques under 
31 U.S.C. 3701 et seq., including accrual of interest on outstanding 
balances and administrative offset.
    (g) The appeal and dispute resolution procedures described in this 
section do not apply to disputes between States and Federal program 
agencies concerning whether or not costs are properly chargeable to the 
Federal government.

[[Page 60814]]

Subpart B--Rules Applicable to Federal Assistance Programs Not 
Included in a Treasury-State Agreement


Sec. 205.32  What Federal assistance programs are subject to this 
subpart B?

    This subpart B applies to all Federal assistance programs listed in 
the Catalog of Federal Domestic Assistance that are not subject to 
subpart A of this part.


Sec. 205.33  How are funds transfers processed?

    (a) A Federal program agency must limit a funds transfer to a State 
to the minimum amounts needed by the State and must time the 
disbursement to be in accord with the actual, immediate cash 
requirements of the State in carrying out a Federal assistance program 
or project. The timing and amount of funds transfers must be as close 
as is administratively feasible to a State's actual cash outlay for 
direct program costs and the proportionate share of any allowable 
indirect costs.
    (b) Neither a State nor the Federal government will incur an 
interest liability under this part on the transfer of funds for a 
Federal assistance program subject to this subpart B.


Sec. 205.34  What are the Federal oversight and compliance 
responsibilities?

    (a) A Federal program agency must review the practices of States as 
necessary to ensure compliance with this subpart B.
    (b) A Federal program agency must notify us if a State demonstrates 
an unwillingness or inability to comply with this subpart B.
    (c) A Federal program agency must formulate procedural instructions 
specifying the methods for carrying out the responsibilities of this 
section.


Sec. 205.35  What is the result of Federal program agency or State non-
compliance?

    We have unilateral authority to require a State and a Federal 
program agency to make the affected Federal assistance programs subject 
to subpart A of this part, consistent with Federal assistance program 
purposes and regulations, notwithstanding any other provision of this 
part, if:
    (a) A State demonstrates an unwillingness or inability to comply 
with this subpart B; or
    (b) A Federal program agency demonstrates an unwillingness or 
inability to make Federal funds available to a State as needed to carry 
out a Federal assistance program.

Subpart C--[Reserved]

    Dated: October 3, 2000.
Kenneth R. Papaj,
Acting Commissioner.
[FR Doc. 00-25964 Filed 10-11-00; 8:45 am]
BILLING CODE 4810-35-P