[Federal Register Volume 67, Number 91 (Friday, May 10, 2002)]
[Rules and Regulations]
[Pages 31880-31894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11540]



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Part III





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; Final 
Rule

  Federal Register / Vol. 67, No. 91 / Friday, May 10, 2002 / Rules and 
Regulations  

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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: Final rule.

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SUMMARY: On October 12, 2000, the Financial Management Service issued a 
Notice of Proposed Rulemaking proposing revisions to 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. 
This final rule finalizes the proposed rule, with changes, and 
addresses issues raised by comments received in response to the Notice 
of Proposed Rulemaking. The purpose of this final rule is to update the 
current regulations and address various concerns raised since the 
initial issuance of the regulations. This rule is intended to improve 
the efficiency of Federal-State funds transfers.

EFFECTIVE DATE: June 24, 2002.

FOR FURTHER INFORMATION CONTACT: Stephen K. Kenneally, Financial 
Program Specialist, at (202) 874-6966, 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 a.m. and 4 p.m. Eastern time, 
Monday through Friday, excluding Federal holidays. A copy of this final 
rule is being made available on the Financial Management Service web 
site at the following address: http://www.fms.treas.gov/policycmia.

SUPPLEMENTARY INFORMATION:

I. Background

    We are revising our regulations at 31 CFR part 205 (part 205). 
Since we issued part 205 in 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 this final rule is to 
update the current regulations by deleting obsolete provisions and 
incorporating Policy Statements. Another purpose is to address various 
concerns that States, Federal agencies, and the General Accounting 
Office \1\ have raised since the initial issuance of part 205. 
Specifically, the regulations:
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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) Provide greater flexibility in funding techniques;
    (2) Ensure that Treasury-State agreements are unambiguous and 
auditable;
    (3) Reflect new laws and directives, including the Single Audit 
Act Amendments of 1996, 31 U.S.C. chapter 75; Executive Order 12866 
of September 30, 1993, Regulatory Planning and Review; and the Debt 
Collection Improvement Act of 1996; and, (4) Are clearer and, where 
possible, more concise.

    We provided an earlier draft of the 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. Their 
comments were considered in the formulation of the proposed rule. 
Several States and State Associations commented on the proposed rule 
and, as described in more detail below, their comments were considered 
in the formulation of this final rule.

II. Summary of Comments

    We received 57 written comments in response to the Notice of 
Proposed Rulemaking (NPRM) from State agencies, State Associations, and 
Federal agencies. Two issues were of particular interest to the 
commenters. These issues involve the application of CMIA to disallowed 
expenses (Sec. 205.15 of the NPRM) and the requirement of proportional 
drawdowns of Federal funds for certain grant programs (Sec. 205.25 of 
the NPRM). In addition to these two issues, commenters submitted 
numerous questions, comments and recommendations regarding several 
other sections. Responses to questions raised by commenters that did 
not impact the rule and, therefore, are not addressed in the Preamble 
to this rule, will be published on our web site at http://www.fms.treas.gov/policycmia. Substantive changes to the rule are 
summarized below.

Disallowances

    Forty-seven of the fifty-seven commenters opposed the proposed 
provision in Sec. 205.15 that would have imposed an interest liability 
on States for disallowed expenditures. The commenters opposed the 
NPRM's inclusion of disallowance coverage for four main reasons: the 
increased administrative burden imposed on States for tracking 
additional interest over longer time periods; the conflicts between 
existing Federal Program Agency regulations and the NPRM; the inequity 
caused by States being subject to interest liability if they lose an 
appeal, but no correlating provision describing Federal Program Agency 
liability; and the unfairness of the NPRM's interest accrual date being 
the date funds were drawn down and not the later date when a State is 
informed that a funds transfer was disallowed.
    We have carefully considered the comments received relating to 
disallowances and the concerns raised therein. Based upon these 
comments and upon reconsideration of the intent of CMIA, we have 
deleted those provisions of the NPRM which would subject disallowances 
to interest liability under CMIA. This treatment of disallowed expenses 
is consistent with longstanding current practice.
    The primary goal of CMIA is to improve the efficiency and 
effectiveness of funds transfers between the Federal government and 
States. Disallowances are reflective of program management disputes, 
not a lack of efficiency of funds transfers. Federal Program Agencies 
administering Federal programs are the authorities best suited to 
determine whether funds have been used for an allowable program 
purpose.
    States are required to ensure that Federal funds are used solely 
for appropriate program purposes. Although disallowances are not 
governed by the CMIA regulations, they are covered by specific program 
regulations. In addition, disallowed expenses are subject to existing 
debt collection regulations.

Proportional Drawdowns

    Eighteen State entities and five State Associations opposed 
proposed Sec. 205.25 which would have required States that provide 
matching State funding and/or maintenance-of-effort (MOE) funding to 
coordinate a proportional drawdown of State and Federal funds to avoid 
interest liabilities.
    The matter of proportional drawdowns was addressed in Policy 
Statements 7 (dated March 31, 1993) and 19 (dated June 1, 1999). These 
Policy Statements addressed the treatment of programs that incorporate 
(MOE) and ``matching'' requirements. Programs with MOE requirements 
provide a State with an amount of Federal funds and mandate that a 
State contribute a set minimum of their

[[Page 31881]]

historical financial commitment as a condition for receiving Federal 
funds. Programs with matching requirements allow the Federal Program 
Agency and a State to share the costs of a program. For example, for 
every two dollars spent by the Federal Program Agency, a State must 
contribute one dollar.
    The NPRM would have required that States contributing their own 
funds to a Federal-State program through a MOE requirement or matching 
program not draw down all Federal funds before State funds are used. 
The NPRM would have required that Federal and State funds be spent 
concurrently and in the appropriate proportion.
    A large number of commenters noted that the proposed proportional 
drawdown provision was more prescriptive than are the specific 
regulations governing the programs. Several commenters noted that the 
NPRM requirements exceeded the Federal Program Agency requirements 
governing not only how Federal funds are disbursed, but how States 
spend their own funds. For example, several commenters indicated that 
the NPRM provision conflicts directly with the Social Services Block 
Grant (SSBG), the Child Care Development Fund (CCDF), and the Temporary 
Assistance for Needy Families (TANF) block grant requirements. These 
commenters further commented that the use and disbursement of State 
funds has nothing to do with the relationship between the Federal 
government and the State as it relates to Federal funds in the SSBG. 
Commenters also stated that TANF and CCDF funds should not be subject 
to the proportional drawdown requirement. These commenters noted that 
under the Federal TANF and CCDF programs agencies must meet the MOE 
requirement by the close of the fiscal year, but not on a proportional 
or ongoing basis. In addition, several commenters recommended that 
clarifications be made between programs that require MOE and those that 
require matching funds, and that this section not treat MOE in the same 
manner as State matching requirements. One commenter noted that while 
both involve cost sharing, the requirements are not the same and should 
not be treated as such in the regulations.
    Commenters indicated that States require flexibility in 
administering block grant funds, given the complex funding structures 
associated with these funds. They stated that monitoring block grant 
funds closely to ensure proportionality creates an administrative 
burden for the States, particularly since many States have automated 
drawdown systems not capable of calculating proportional drawdown 
requests. One commenter wrote that this provision would cause such an 
administrative burden that it would result in a disincentive for States 
to voluntarily supplement their programs throughout the year.
    One Federal Program Agency addressed this provision, recommending 
that the regulatory requirements applying to matching funds and MOE be 
clarified because they are two different types of funding mechanisms.
    Based on comments received and additional research, the final rule 
recognizes that the different funding techniques associated with MOE, 
mandatory matching, and voluntary matching require proportional State 
contributions only in limited circumstances. We agree that the 
requirement in the NPRM for proportional drawdowns in programs that 
utilize MOE funding may be more prescriptive than are program 
requirements. Therefore, for programs utilizing MOE contributions from 
States, the final rule does not require concurrent proportional State 
contributions. This gives States the added flexibility that was 
intended for the administration of block grant programs and eases the 
burden associated with the use of in-kind contributions and funds being 
used across a large number of State agencies for one program. However, 
the CMIA regulations' interest provisions continue to apply to the 
Federal funds received by the State. The time between receiving these 
Federal funds and expending these funds for program purposes must 
continue to be minimized.
    In programs utilizing voluntary matching contributions from States, 
the final rule does not require concurrent proportional State 
contributions. We believe that the CMIA regulations should not hinder 
States from making voluntary contributions to Federal/State programs. 
The CMIA regulations' interest provisions will continue to apply to 
Federal funds received by the State, but the CMIA regulations will not 
require proportional draws of State voluntary contributions.
    In programs utilizing mandatory matching of funds, the requirement 
for proportional drawdowns is maintained in the final rule in 
Sec. 205.15(d). Because of the nature of this funding technique, it is 
necessary to maintain a close linkage between State and Federal 
funding.

Section 205.2  What Definitions Apply to This Part?

    Commenters stated that the proposed definition of ``administrative 
costs'' is too vague. They stated that because of the variances among 
grants a uniform definition of this term is not possible or desirable 
and would cause an undue burden on States in meeting Federal financial 
reporting requirements. A few commenters suggested that FMS remove this 
definition altogether from the regulations and others suggested 
tailoring the definition according to each specific grant program 
definition of the term. Because the rule describes the treatment of 
administrative costs under CMIA, a definition of administrative costs 
is necessary and is intentionally broad to ensure the variances among 
the many Federal programs are covered. The definition has been amended, 
however, to clarify that administrative costs include indirect costs.
    Commenters noted that the definition of ``disburse'' should 
recognize that an off-line environment, such as the Electronic Benefit 
Transfers system, is also an option for the disbursement of funds. We 
agree with this recommendation and have amended the definition of 
``disburse'' accordingly.
    Commenters stated that the definition of ``indirect costs'' is too 
vague and should be narrowed to include only true indirect costs. These 
commenters noted that the definition should not be so broad as to 
include direct apportioned costs, which are used by public assistance 
agencies. One State entity added that the definition should not include 
allowable allocated costs.
    Another State entity added that this definition cannot be 
standardized because it can have different meanings for different 
grants. The definition of indirect costs has not been changed. The 
definition is intentionally broad to ensure it encompasses the 
variances among Federal programs.
    One commenter stated that the definition of ``indirect cost rate'' 
should be parallel to the definition in Office of Management and Budget 
(OMB) Circular A-87. We have declined to adopt this suggestion, but 
believe that the existing definition allows a State and FMS to agree to 
use indirect cost rates as defined in OMB Circular A-87.
    Another commenter noted that the NPRM used the term ``direct cost'' 
in two different ways. The commenter recommended that this apparent 
discrepancy be clarified. The term ``direct cost'' as used within the 
definition of ``indirect cost rate'' is not intended to have the same 
meaning as that term is used elsewhere in the rule.

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We agree that the use of the term ``direct cost'' to describe the costs 
a State incurs in calculating interest liabilities may be confusing. We 
have, therefore, changed the term describing the costs a State incurs 
in calculating interest liabilities to ``Interest Calculation Costs.''
    One commenter expressed concern that the definition of 
``compensating balances'' would result in increased costs to States, 
because it would require banking costs to be paid directly from grant 
funds. Under the NPRM, a State may not draw down funds from its account 
in the Unemployment Trust Fund in advance of immediate cash needs for 
any purpose including maintaining a compensating balance. Another 
commenter suggested that a definition should be included for 
``immediate cash needs,'' to clarify the vagueness of the regulations. 
The definition of compensating balances was added to clarify existing 
policy regarding drawing down funds in advance of need. The rule merely 
states, consistent with the goals of CMIA, that funds, including funds 
drawn down for the purpose of maintaining a compensating balance, may 
not be drawn down in advance of need. This does not necessarily require 
that banking costs be paid directly from grant funds. For example, 
where a Treasury-State agreement establishes a funding technique that 
creates a State interest liability on funds drawn from the State's 
account in the Unemployment Trust Fund (e.g., pre-issuance funding), 
consistent with CMIA, a State may deduct its banking costs from any 
interest paid. However, States may not draw down funds in advance of 
need solely for the purpose of covering banking costs.
    One commenter recommended that the definition of ``estimate'' be 
revised so that its usage is consistent in other sections in the 
regulations. Specifically, the commenter questioned whether the 
definition applies to references of drawing down Federal funds or in 
establishing future grant authority amounts. We agree that the term 
``estimate'' is used in various sections of the rule in a manner which 
is inconsistent with how the term is defined. Accordingly, where 
appropriate, we have replaced the term ``estimate'' with the term 
``project'' in Secs. 205.10, 205.12, and 205.20.

Section 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?

    This section allows, under limited circumstances, the exclusion of 
components of a major Federal assistance program from interest 
calculations if the State administers the program through several State 
agencies. Two commenters wrote that this section does not greatly 
reduce the State's administrative burden, particularly if the 
management of Federal funds is decentralized within the State. One of 
these commenters commented that if the agreement is with the State, the 
entire program should be covered. The other commenter recommended that 
if the State agencies covered in the agreement account for 90-95% or 
more of the total program expenditures, the amounts drawn by the 
remaining agencies should be assumed interest neutral and excluded from 
the calculations completely. We have not made changes to this section 
because we believe that, as proposed, it may reduce a State's 
administrative burden. Where a State administers a Federal financial 
assistance program through more than one State agency, the State is 
only required to track funding to a single agency and may pro-rate to 
determine interest liabilities funding to the remaining agency or 
agencies. Additionally, this method of calculating interest is optional 
and, therefore, need not be adopted if it creates a burden. Therefore, 
no changes to this section have been made.
    Two commenters noted that proposed Sec. 205.4(b)(1) does not result 
in the same exclusions as do the examples in the current CMIA Policy 
Statement 8 (dated April 19, 1993). In response, we have amended 
Sec. 205.4(b)(1) to ensure that the final rule and Policy Statement 8 
are consistent. States may exclude a component of a major Federal 
assistance program that is administered by multiple State agencies from 
the provisions of CMIA on the basis that the funding for that component 
is an immaterial percentage of the program. FMS will agree to this 
immaterial exception only if certain requirements are met. These 
requirements are that the dollar amount of the exempted cash flow or 
component may not exceed 5% of the State's Single Audit threshold, and 
the total amount excluded under a single program, by all State agencies 
administering the program, may not exceed 10% of the total program 
expenditures. If less than total program funding is subject to interest 
calculation procedures, the interest liabilities that are calculated 
under the program should be prorated to 100% of the program to provide 
the truest projection of interest liabilities.
    The only Federal Program Agency commenting on this section 
suggested that this section be clarified to state that all major 
programs not already included in a Treasury-State agreement are covered 
by default procedures until the agreement is modified. We agree that it 
is important that new major programs be covered as soon as possible, 
however, we do believe that covering such programs by default 
procedures until such time as a Treasury-State agreement is modified is 
the most effective way to ensure prompt coverage. To address this 
concern, we have clarified in Sec. 205.7 that States must inform us of 
new major programs in a timely manner (within 30 days) so that they may 
properly be included in a Treasury-State agreement.

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

    This section describes new thresholds for determining major Federal 
assistance programs, as well as the methodology to calculate the new 
thresholds. Many of the commenters wrote that the formulas included in 
this section were difficult to understand and, therefore, require 
further simplification. One commenter stated that it is not clear if 
the 10% comparison should be calculated each year that the Single Audit 
is issued or if it should be performed on a one-time basis. We have 
clarified that this is an annual requirement. We have also revised this 
section in an attempt to clarify the threshold calculations. Assistance 
in calculating the threshold can be found at http://www.fms.treas.gov/policmia.

Section 205.6  What Is a Treasury-State Agreement?

    This section provides that Treasury-State agreements will remain in 
effect until terminated. Commenters suggested that we clarify that 
Treasury-State agreements can still be negotiated yearly if the parties 
desire to do so. This section has been amended to clarify that we and a 
State may still agree that a Treasury-State agreement will terminate on 
a specific termination date, where appropriate.

Section 205.7  Can a Treasury-State Agreement Be Amended?

    Two commenters proposed that amendments to the Treasury-State 
agreement should be retroactive based on mutual consent by a State and 
FMS. We agree that there may be circumstances where it is appropriate 
for a change to a Treasury-State agreement to be effective as of the 
date the Treasury-State agreement was entered into. We have therefore 
amended this section to allow the parties to agree to the effective 
date of an amendment.

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    One commenter sought clarification on how soon after Single Audit 
data is available a State must notify FMS when a Treasury-State 
agreement needs to be amended due to Federal assistance program 
changes. This section has been amended to reflect that States must 
notify us of required amendments to the Treasury-State agreement within 
30 days of the time the State becomes aware of the change.

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

    One commenter recommended there be a middle ground between 
establishing a Treasury-State agreement and resorting to default 
procedures, to prevent the entire agreement from going into default due 
to disagreement over coverage of a single program. In the ``middle 
ground'' case, default procedures would go into effect only for the 
program about which there is a disagreement; a Treasury-State agreement 
would be entered into for all other programs. We agree that where we 
and a State are unable to reach agreement over a particular program, we 
may impose default procedures for only that one program and, therefore, 
have incorporated this change.

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

    This section describes information required to be in Treasury-State 
agreements, including applicable funding techniques, methodology 
regarding clearance patterns and estimates, and interest calculations. 
Two commenters described 205.9(g), which requires States and Federal 
agencies to describe the methods used to calculate interest 
liabilities, as excessive and contrary to efforts of reducing 
administrative burden. We have not changed this provision because we 
believe the required information is necessary to ensure that interest 
liabilities are being properly calculated.
    Two commenters also stated that 205.9(f), which requires States to 
include the results of the clearance pattern process, is unnecessary 
and places an undue burden on States. One of these commenters noted 
that this burden is placed on States that use pre-issuance funding 
techniques when computing clearance patterns for inclusion in an 
agreement that will not be required to be used for interest 
calculations for over 15 months. In response to this comment, we have 
amended this section to reflect our intent that this section apply only 
to programs where funds are drawn based on clearance patterns. Pre-
issuance States may provide the results of their clearance pattern 
process with their annual report.

Section 205.11  What Requirements Apply to Funding Techniques?

    Many of the comments on this section addressed compensating 
balances. Although no change in the treatment of compensating balances 
was intended in the NPRM, some commenters interpreted the language as a 
new policy position that prohibited the use of Federal funds for 
compensating balances. It has been our longstanding policy position, 
consistent with the purpose of CMIA, that funds cannot be drawn down in 
advance of need. Because questions regarding compensating balances have 
arisen, this section of the rule is meant to merely clarify existing 
policy prohibiting the drawing down of funds for the purpose of 
maintaining a compensating balance. This does not prohibit those States 
that are required to have funds on hand before issuing checks from 
drawing down funds early nor does it prohibit those States from 
deducting their banking costs from any interest paid.

Section 205.12  What Funding Techniques May Be Used?

    Some State Constitutions require that States have funds on hand 
before issuing checks. These pre-issuance States are allowed to draw 
funds early, but are subject to interest liability. The commenters 
strongly recommended retaining the current three-day drawdown window 
for pre-issuance States, rather than the two-day window proposed in the 
NPRM. One State said the proposed two-day drawdown window was 
``arbitrary and unrealistic'' while another State entity called it 
``unnecessary and restrictive.'' We agree that the two-day window 
proposed in the NPRM may not give States sufficient time to ensure that 
funds are on hand prior to the issuance of payments. This section has, 
therefore, been amended to retain the three-day drawdown window that 
currently exists.

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

    One commenter wrote that the indirect costs referenced in 
Sec. 205.13(b) should be for Statewide indirect costs, not agency 
specific costs. Another commenter recommended clarifying Sec. 205.13(b) 
by including specific reference to costs allocated through a Federally-
approved public assistance cost allocation plan or through a Federally-
approved Statewide cost allocation plan. Based on these comments, we 
have made changes in the final rule. States will be allowed to apply a 
Statewide indirect cost rate or a public assistance indirect cost rate, 
where appropriate. The cost rate must be consistent with OMB Circular 
A-87, including Attachments.

Section 205.14  When Does Federal Interest Liability Accrue?

    Three commenters requested clarification on how interest is 
calculated when obligational authority is established after an 
expenditure is made. Under Sec. 205.14(a)(2), Federal interest 
liability may accrue when States expend their own funds for program 
purposes and obligational authority is subsequently established to 
cover those expenditures. In accordance with Sec. 205.14(a)(1), this 
Federal interest liability is calculated from the time of expenditure. 
Paragraph (a)(2) has been amended to clarify this intent.
    One commenter commented that Sec. 205.14(c) conflicts with 
Sec. 205.14(a)(1). Section 205.14(c) requires that a State adhere to 
Federal disbursement schedules when requesting funds; Sec. 205.14(a)(1) 
states that interest begins to accrue against the Federal government 
whenever a State advances funds for program purposes. We do not agree 
that these two provisions conflict. Section 205.14(a)(1) contains the 
general rule regarding the accrual of Federal interest liabilities. 
Section 205.14(c) contains an exception to that rule, namely, we may 
deny interest liability even if a State advances its own funds for 
program purposes if it does so because it failed to timely request a 
drawdown of the funds. To clarify this in the rule, we have added the 
phrase ``notwithstanding any other provision of this section'' at the 
beginning of 205.14(c).
    One Federal Program Agency recommended that there be no Federal 
interest liability for implementation of new activities by the State 
until the Federal Program Agency approves the new plan(s) and/or system 
projects. The same agency proposed adding language to this section 
saying no Federal interest will accrue while approval is pending. In 
response to these comments, we have modified the provisions of 
paragraph (a)(2) to allow for greater flexibility to deny interest in 
certain circumstances where a State expends its own funds without 
Federal approval even if obligational authority is subsequently 
established. For example, if a State is required to have an approved 
State plan in effect as a pre-condition to Federal funding and makes an 
expenditure prior to the time the plan has been approved, we may deny 
Federal interest liability if

[[Page 31884]]

the State failed to act reasonably in obtaining Federal approval.

Section 205.15  When Does State Interest Liability Accrue?

    As previously discussed, the provisions addressing interest 
liability on disallowances have been deleted.
    The final rule clarifies that for mandatory matching programs, the 
interest provisions of the CMIA regulations apply when a State draws 
Federal funds in advance or in excess of State funds.

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

    One commenter disagreed with the policy on valid projects that 
experience an unforeseen cost overrun. Under this section, a State that 
advances its own funds because of cost overruns may be reimbursed later 
by the Federal Highway Administration. However, no CMIA interest will 
be paid to the State, even though it advanced its own funds. The 
policy, which has not changed from the existing rule, is intended to 
discourage cost overruns. Accordingly we have not made any changes to 
this provision.

Section 205.18  Are Administrative Costs Subject to This Part?

    One commenter questioned why the determination of whether indirect 
and administrative costs are subject to subpart A is based upon whether 
the grants are wholly dedicated to these purposes. Another commenter 
noted that the exclusion in 205.18(b) exempting the administrative and 
indirect cost portions of Federal Program Agency grants from subpart A 
of the regulations may prevent States from collecting interest from 
Federal Program Agencies. One commenter sought a definition or example 
of ``administrative costs'' while another stated that the regulations 
should not provide a definition at all, but rely on how the term is 
defined by the Federal Program Agency responsible for that particular 
program. One Federal Program Agency suggested that the provision 
clearly state that drawdowns for indirect costs must be related to 
timing of the associated direct costs.
    While the intent of this provision was to ease the burden on States 
of tracking administrative and indirect costs which were only a portion 
of a Federal award, we nevertheless agree that whether an award is 
wholly or partially dedicated to indirect and administrative costs 
should not be the basis for determining whether or not CMIA interest 
applies. We have, therefore, amended this section to clarify that when 
States and Treasury agree, in a Treasury-State agreement, to specified 
funding techniques for administrative costs (including Statewide or 
public assistance indirect costs, if appropriate, consistent with OMB 
Circular A-87), no interest liability will accrue provided the agreed 
upon funding technique is followed. This rule will apply whether the 
Federal grant is dedicated wholly or partially to administrative costs.

Section 205.21  When May Clearance Patterns Be Used?

    One commenter recommended amending Sec. 205.21(b) to delete the 
reference to Sec. 205.9, since that commenter felt the provisions 
contained therein are excessive, unreasonably burdensome, and will be 
costly to develop and incorporate in Treasury-State agreements. We have 
not adopted this recommendation because, without the required 
information, we cannot ensure the accuracy of clearance patterns. The 
costs of developing clearance patterns in support of interest 
calculations may be considered Interest Calculation Costs.

Section 205.23  What Requirements Apply to Estimates?

    One commenter noted that the provisions of this section are counter 
to most, if not all, of the program regulations on block grant 
programs. This commenter suggested that forcing a State to list ``hard 
and fast'' rules in a Treasury-State agreement defeats the purpose and 
intent of block grant law. We do not agree because the requirements of 
this section apply only when the funds transfer procedures agreed upon 
by us and a State are based on estimates. Where the use of estimates is 
not agreed upon, the requirements do not apply.
    Consistent with changes made to Sec. 205.25 on proportional draws, 
the restrictions on MOE and voluntary matching have been removed from 
the final rule.
    Commenters also sought clarification on the use of the term 
``estimates'' in the proposed regulations. We agree that the term 
``estimate'' is used in various sections of the rule in a manner which 
is inconsistent with how the term is defined. Accordingly, where 
appropriate, we have replaced the term ``estimate'' with the term 
``project'' in Secs. 205.10, 205.12, and 205.20. The use of the term 
``estimate'' in Sec. 205.23 remains unchanged.

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

    In addition to comments received on the issue of proportional 
drawdowns, discussed above, two commenters recommended that this 
section be amended to allow States the option of maintaining a 
compensating balance to offset the actual benefit and clearing account 
banking charges incurred. These same commenters also suggested that the 
final rule allow States to earn non-cash credits to offset legitimate 
banking charges related to the Unemployment Insurance Trust Fund.
    We have declined to adopt this recommendation because maintaining a 
compensating balance is not consistent with the goals of CMIA. Under 
CMIA, States must minimize the time elapsing between the receipt of 
funds from the Federal government and the payment of those funds to 
program beneficiaries. Maintaining funds drawn down from the Federal 
government in a bank account for the purpose of covering banking 
expenses is inconsistent with that goal. As previously noted, however, 
nothing in this rule prohibits us and a State from agreeing, in a 
Treasury-State agreement, to a funding technique that creates a State 
interest liability on funds drawn from the State's account in the 
Unemployment Trust Fund (e.g., pre-issuance funding). Where a State 
incurs an interest liability on funds drawn from the State's account in 
the Unemployment Trust Fund, banking costs may be deducted from any 
interest paid.

Section 205.26  What Are the Requirements for Preparing Annual Reports?

    This section requires States to submit supporting documentation for 
all liability claims greater than $5,000. One commenter was in favor of 
increasing the documentation threshold to $10,000. Another recommended 
deleting the requirement of documentation for claims in excess of 
$5,000. A third commenter recommended requiring the $5,000 supporting 
documentation only in cases when the funding technique used would not 
normally be expected to result in a Federal interest liability. We have 
not adopted these recommendations because we are of the view that this 
requirement is necessary to ensure that claims are verified when 
appropriate.

Section 205.27  How Are Interest Calculation Costs Calculated?

    The title of this section has been amended to eliminate the 
confusion

[[Page 31885]]

caused by use of the term ``direct costs'' to describe those costs 
incurred by a State in performing the interest calculations required 
under CMIA. The term ``direct costs'' has been replaced with the term 
``Interest Calculation Costs.'' Two commenters suggested that Interest 
Calculation Costs should not be limited to amounts that can be offset 
against interest owed by the States to the Federal government. Two 
commenters recommended that the definition of ``interest calculation'' 
be broadened to allow more costs to be charged. One of these commenters 
wrote that, in order to measure the cost benefit of the CMIA program, 
CMIA-related costs need to be recovered by the program. We do not 
believe that CMIA permits us to expand the definition of Interest 
Calculation Costs. The CMIA limits those costs which may be claimed by 
States to costs incurred for interest calculations. The statute does 
not provide a mechanism for paying these costs other than to offset 
them from amounts otherwise owed by States. Additionally, in our view 
the $50,000 limitation imposed by this section is reasonable and 
appropriate.

Section 205.30  What Are the Federal Oversight and Compliance 
Responsibilities?

    One Federal Program Agency submitted comments proposing a time 
period of at least 30 days to review States' Annual Reports. We agree 
that a 30-day time period to review States' annual reports is 
reasonable and have incorporated this change.

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

    One commenter recommended shortening the 90-day periods for appeals 
and rebuttals to 30-day periods. We have not adopted this 
recommendation because we believe 90 days is warranted to ensure that 
appeals and rebuttals are carefully considered and thoroughly reviewed. 
Another commenter suggested removing the discretion granted to the FMS 
Assistant Commissioner on approving when disputes can be moved along 
the Administrative Dispute Resolution Act (ADRA) track. Because the use 
of alternative dispute resolution procedures requires the agreement of 
all parties, we have declined to adopt this recommendation.

Subpart B

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

    One commenter wrote that Secs. 205.3(b), 205.3(c), and 205.35 
seemed contradictory and requested clarification regarding whether or 
not individual programs covered by subpart B could be moved to subpart 
A. Section 205.35 has been clarified to reflect our intent that under 
Sec. 205.35 we may, at our discretion, move a program that falls below 
the threshold for a major Federal assistance program from subpart B to 
subpart A without lowering the threshold applicable to other programs.

III. Procedural Matters

Executive Order 12866, Regulatory Planning and Review

    This final rule is not a significant regulatory action and is not 
subject to review by the Office of Management and Budget under 
Executive Order 12866. These regulations will not have an 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 regulations will not create a serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency. These 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. We invite your comments on how 
to make this final rule easier to understand.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, it is 
hereby certified that this final rule will not have a significant 
economic impact on a substantial number of small entities. The final 
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 final 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 final rule with information collection 
requirements are Secs. 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. No comments were received regarding this burden estimate or any 
other aspect of this collection of information.

List of Subjects in 31 CFR Part 205

    Administrative practice and procedure, Electronic funds transfers, 
Grant programs, Intergovernmental relations.

Authority and Issuance

    For the reasons set out in the Preamble, we revise Part 205 of 
title 31 of the Code of Federal 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?

[[Page 31886]]

205.18  Are 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 preparing Annual Reports?
205.27  How are Interest Calculation 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, 3332, 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 
Authority (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 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 Costs means expenses incurred by a State associated 
with managing a Federal assistance program. This term includes indirect 
costs.
    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 non-financial Federal assistance 
programs administered by agencies of the Federal government.
    Clearance Pattern means a projection 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 
project 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.
    Disburse means to issue a check or initiate an electronic funds 
transfer payment, or to provide access to benefits through an 
electronic benefits transfer.
    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 needs of a Federal Assistance 
Program.
    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 include 
cooperative agreements, but do not include vendor payments or direct 
loans.
    Federal Program Agency means an executive agency as defined by 31 
U.S.C. 102, except the Tennessee Valley Authority (TVA), that issues 
and administers Federal assistance programs 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.

[[Page 31887]]

    Fiscal Year means the twelve-month period that a State designates 
as its budget year.
    Grant means, for 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 Rate means a formula that identifies the amount of 
indirect costs based on the amount of accrued direct costs. The 
applicable indirect cost rate shall be described in the Treasury-State 
agreement.
    Indirect Costs means costs a State incurs that are necessary to the 
operation and performance of its Federal assistance programs, but that 
are not readily identifiable with a particular project or Federal 
assistance program.
    Interest Calculation Costs 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.
    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 to:
    (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 are not 
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 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 
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 a 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 does not exceed 5% 
of the State's major Federal assistance program threshold and the total 
amount excluded under a single program by all State agencies 
administering the program does not exceed 10% of that Federal 
assistance program's total expenditures;

[[Page 31888]]

    (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 including non-cash 
programs. A State must locate the appropriate row in Column A based 
upon the total amount of Federal assistance received. In that same row, 
a State must apply the percentage from Column B to the dollar value of 
all its Federal assistance programs to determine the State's threshold 
for major Federal assistance programs. For example, if the total amount 
received by a State for all Federal assistance programs is $50 million, 
then that State's threshold for major Federal assistance programs is 6% 
of $50 million or $3 million. A State which receives more than $10 
billion under Federal assistance programs will have a minimum default 
threshold of $60 million.
    (b) To ensure adequate coverage of all State programs, a State 
must, on an annual basis, compare its program coverage using the 
percentage obtained from Table A to the program coverage which would 
result using a percentage which is half of the percentage obtained from 
Table A. For example, a State receiving $1 billion in Federal 
Assistance would use Table A to learn that its threshold level would be 
.60 percent of $1 billion. A State would compare program coverage at 
.60 percent of $1 billion to program coverage at .30 percent of $1 
billion.
    (c) If the comparison conducted under paragraph (b) of this section 
results in a reduction of program coverage that is greater than 10%, a 
State must lower its threshold, or add programs, until the difference 
is less than or equal to 10%.
    (d) In accordance with Sec. 205.3(b), a State may lower its 
threshold to include additional programs. All of a State's programs 
that meet this lower threshold would be subject to this subpart A.
    (e) 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
   Column A  Total amount of Federal       Assistance Program means any
 Assistance for all programs per State:  Federal assistance program that
                                               exceed these levels:
------------------------------------------------------------------------
Between zero and $100 million inclusive  6.00 percent of the total
                                          amount of Federal assistance.
Over $100 million but less than or       0.60 percent of the total
 equal to $10 billion.                    amount of Federal assistance.
Over $10 billion.......................  The greater of 0.30 percent of
                                          the total Federal assistance
                                          of $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 will not 
have any effect and this subpart A will govern.
    (b) A Treasury-State agreement will be effective until terminated 
unless we and a State agree to a specific termination date. 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 unless otherwise agreed to by 
both parties.
    (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 within 30 days of the time the State becomes 
aware of a change, describing the Federal assistance program change. 
The notification must 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, unless otherwise agreed to by the parties.
    (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.
    (f) Notwithstanding any other provision of this section, if no 
changes to the Treasury-State agreement are required, States must 
notify us annually.


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

    When a State does not 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. When we and a 
State reach agreement on some but not all Federal assistance programs 
administered by the State, we and the State may enter into a Treasury-
State agreement for all programs on which we are in agreement and we 
may prescribe default procedures governing those programs on which we 
are unable to reach agreement.


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

[[Page 31889]]

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 to be applied to Federal assistance programs 
subject to this subpart A.
    (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 for programs where the timing 
of drawdowns is based on clearance patterns. For programs where the 
timing of drawdowns is not based on clearance patterns, the results of 
the clearance pattern process may be provided with the annual report 
required under Sec. 205.26. 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:
    (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 project 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 projection 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 payout of funds for Federal assistance program 
purposes, whether the transfer occurs before or after the payout 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 (UTF) or from a Federal account in the UTF 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 should not 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 (b)(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) Projected clearance means that a Federal Program Agency 
transfers to a State the projected amount of funds that the State pays 
out each day. The projected 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 (pre-issuance or post-issuance) 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 three 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 accrue 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

[[Page 31890]]

indirect cost must be consistent with OMB Circular A-87 (For 
availability, see 5 CFR 1310.3.) and be in accordance with this subpart 
A. The indirect cost rate may be a Statewide indirect cost rate or a 
public assistance cost rate, where appropriate.


Sec. 205.14  When does Federal interest liability accrue?

    (a) Federal interest liabilities may accrue 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 bank account.
    (2) If a State pays out its own funds for Federal assistance 
program purposes without obligational authority, the Federal Program 
Agency will incur an interest liability if obligational authority 
subsequently is established. However, if the lack of obligational 
authority is the result of the failure of the State to comply with a 
Federal Program Agency requirement established by statute, regulation, 
or agreement, interest liability may be denied. 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 bank account.
    (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 
does not 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 does not 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, notwithstanding 
any other provision of this section.
    (b) Federal Program 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. Notwithstanding any other provision of 
this section, 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, 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) 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 does not incur an interest liability on refunds in refund 
transactions under $50,000.
    (c) 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.
    (d) Mandatory matching of Federal funds. In programs utilizing 
mandatory matching of Federal funds with State funds, a State must not 
arbitrarily assign its earliest costs to the Federal government. A 
State incurs interest liabilities if it draws Federal funds in advance 
and/or in excess of the required proportion of agreed upon levels of 
State contributions in programs utilizing mandatory matching of Federal 
funds with State funds.


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 will not 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 will not 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 administrative costs subject to this part?

    (a) A State and FMS may agree, in a Treasury-State agreement, to 
the following funding conventions for indirect costs and administrative 
costs:
    (1) The State will draw down a prorated amount of administrative 
costs on the date of the State payday. For example, the State would 
draw one-third of its quarterly administrative costs if payroll is 
monthly, or one-sixth of its quarterly administrative costs if payroll 
is semi-monthly.
    (2) If an indirect cost rate is applied to a program, the State 
will include a proportionate share of the indirect cost allowance on 
each drawdown by applying the indirect cost rate to the appropriate 
direct costs on each drawdown.
    (3) If costs must be allocated to various programs pursuant to a 
labor distribution or other system under an approved cost allocation 
plan, the State will draw down funds to meet cash outlay requirements 
based on the most recent, certified cost allocations, with subsequent 
adjustments made pursuant to the actual allocation of costs.
    (b) Notwithstanding any other provision of this part, no interest 
liabilities will be incurred or calculated for indirect costs and 
administrative costs, provided the funding conventions described in 
paragraph (a) of this section are properly applied.


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 this subpart A is the

[[Page 31891]]

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 project when funds are paid out, 
given a known dollar amount and a known date of disbursement. 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 percent 
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.
    (g) We and a State may agree to other procedures, such as estimates 
to project when funds are paid out when the dollar amount and/or the 
timing of disbursements are not known.


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 payment, 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 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. 
Clearance patterns will remain in effect until a new clearance pattern 
is certified.
    (b) An authorized State official must certify that a clearance 
pattern corresponds to the clearance activity of the Federal assistance 
program to which it is applied. An authorized State official must re-
certify the accuracy of a clearance pattern at least every five 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 following requirements 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:
    (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.
    (b) As set forth in Secs. 205.9 and 205.10, a Treasury-State 
agreement must include the method a State uses to develop, maintain, 
and document the estimate.


Sec. 205.24  How are accurate estimates maintained?

    (a) If a State has knowledge that an estimate does not 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 basis for determining the amount of 
funds to be transferred under 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 UTF equals the actual interest earned on such funds less 
the related banking costs. Actual interest earned does not include non-
cash bank earnings. If funds withdrawn from the State account in the 
UTF are commingled with other funds, a proportionate share of interest 
earnings and banking costs must be allocated to the funds withdrawn 
from the State account. Interest liabilities on funds withdrawn from a 
Federal

[[Page 31892]]

account in the UTF, except the Federal Unemployment Account, are 
calculated in accordance with Sec. 205.19.
    (c) Supplemental Security Income. (1) Except as provided in 42 
U.S.C. 1382e(d), 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 will not 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 interest liabilities under this part 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) 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.
    (f) 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 does not apply to interest a State earns on Revolving 
Loan Funds when Federal Program Agency regulations require that all 
interest earned on invested funds be used for Federal assistance 
program purposes.


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

    (a) A State must submit to us an Annual Report accounting for State 
and Federal 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 December 31 of the year in which the State's fiscal year 
ends. 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 award.
    (c) A State claiming reimbursement of Interest Calculation Costs 
must submit its claim with its Annual Report in accordance with 
Sec. 205.27. An authorized State official must certify the accuracy of 
a State's claim for Interest Calculation Costs.


Sec. 205.27  How are Interest Calculation Costs calculated?

    (a) We will compensate a State annually for the costs of 
calculating interest, including the cost of developing and maintaining 
clearance patterns in support of interest calculations, pursuant to 
this subpart A, subject to the conditions and limitations of this 
section.
    (b) We may deny an interest calculation cost claim if a State does 
not:
    (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 Interest Calculation 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 Interest Calculation Costs. We may require a State to provide 
documentation to support its interest calculation cost claims. We will 
review all interest calculation 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 Interest Calculation Costs. (1) 
Interest Calculation Costs do not 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) Interest Calculation 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) Interest Calculation 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 Interest Calculation Costs in its 
Statewide 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 Interest Calculation 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 Interest Calculation 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. These programs include, but are not limited to, 
Unemployment Insurance Trust Fund (CFDA 17.225); Highway & Planning 
Trust Fund (CFDA 20.205); Airport Improvement Trust Fund (CFDA 20.106); 
Federal Transit Capital Improvement Trust Fund (CFDA 20.500); Federal 
Transit Capital & Operating Assistance Trust Fund (CFDA 20.507); and 
Social Security--Disability Insurance Trust Fund (CFDA 96.001); and
    (2) The aggregate payments from the Federal government to States to 
offset Interest Calculation Costs will not be

[[Page 31893]]

greater than the aggregate interest payments States make to the Federal 
government.


Sec. 205.28  How are interest payments exchanged?

    (a) We offset the adjusted total State interest liability and the 
adjusted total Federal interest liability for each State to determine 
the net interest payable to or from each specific State. The payment of 
net interest and any Interest Calculation Costs, as set forth in 
Sec. 205.27, for the 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.
    (b) A State may appeal a decision by us on interest liabilities and 
interest calculation cost claims in accordance with Sec. 205.31.
    (c) 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.
    (d) The Federal government will not be liable for interest on any 
payment of interest to a State.


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 this subpart A, and must notify 
us in writing of the representative's name and title. A State must 
notify us immediately of any change in the official representative.
    (b) A State must maintain records supporting interest calculations, 
clearance patterns, Interest Calculation 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 pending 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, interest calculation cost claims, and 
the State's accounting for Federal funds.
    (c) A State's implementation of this subpart A is subject to audit 
in accordance with 31 U.S.C. Chapter 75, ``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) Deny the reimbursement of all or a part of the State's interest 
calculation cost claim;
    (2) Send notification of the non-compliance to the affected Federal 
Program Agency for appropriate action, including, where appropriate, a 
determination regarding the impact of non-compliance on program 
funding;
    (3) Request a Federal Program Agency or the General Accounting 
Office to conduct an audit of the State to determine interest owed to 
the Federal government, and to implement procedures to recover such 
interest;
    (4) Initiate a debt collection process to recover claims owed to 
the United States; or
    (5) 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. A Federal Program Agency must notify 
us immediately of any change in the official representative.
    (b) A Federal Program Agency's implementation of this subpart A is 
subject to review pursuant to procedural instructions that we issue.
    (c) We will consult with Federal agencies as necessary and 
appropriate before entering into or amending a Treasury-State 
agreement.
    (d) 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 30 days.
    (e) 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 does not 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 assertion.
    (f) A Federal Program Agency must notify us in writing of new 
Federal assistance programs listed in the Catalog of Federal Domestic 
Assistance.
    (g) If a Federal Program Agency causes 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 does not 
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 does not 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 Interest Calculation 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.

[[Page 31894]]

    (b) A State or Federal Program Agency must submit a written 
petition (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, 5 U.S.C. 701-706 
(APA), 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 30 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.

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 State must minimize the time between the drawdown of Federal 
funds from the Federal government and their disbursement for Federal 
program purposes. 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. States should exercise sound cash management in funds 
transfers to subgrantees in accordance with OMB Circular A-102 (For 
availability, see 5 CFR 1310.3.).
    (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 may 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]

Richard L. Gregg,
Commissioner.
[FR Doc. 02-11540 Filed 5-9-02; 8:45 am]
BILLING CODE 4810-35-P