[Final Audit Report âIndirect Cost Fund, Government of the Virgin Islandsâ (No. V-IN-VIS-0110-2003)]
[From the U.S. Government Printing Office, www.gpo.gov]

Date: June 22, 2005

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Honorable Charles W. Turnbull
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802

Subject:	Final Audit Report ï¿½Indirect Cost Fund, Government of the Virgin Islandsï¿½ (No. V-IN-VIS-0110-2003)

Dear Governor Turnbull:

	The attached report presents the results of our audit of the Indirect Cost Fund.  The objective of the audit was to determine whether the Government of the Virgin Islands accurately accounted for and properly used indirect cost funds in accordance with applicable Federal and local laws and regulations.

	The legislation, as amended (5 U.S.C. app. 3), creating the Office of Inspector General requires that we report to Congress semiannually on all reports issued, actions taken to implement our recommendations, and recommendations that have not been implemented.  Therefore, this report will be included in the next semiannual report.

	Please provide a response to this report by July 22, 2005.  The response should provide the information requested in Appendixï¿½4 and should be addressed to me at the above address, with a copy to our Caribbean Field Office, Ron deLugo Federal Building ï¿½ Room 207, St. Thomas, VI 00802.

						Sincerely,


ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
						Anne L. Richards
						Assistant Inspector General for Audits
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CONTENTS

Background	   1
Objective and Scope	   2
Prior Audit Coverage	   3


Overview	   4
UnderRecovery of Indirect Costs	   4
Accounting for and Use of Indirect Cost Reimbursements	   8
Conclusion	 12


To the Governor of the Virgin Islands	 15
To the Legislature of the Virgin Islands	 15
Auditee Response	 16


1.	Monetary Impact	 17
2.	Federal Grant Awards and Indirect Cost Reimbursements	 18
3.	Indirect Cost Rates	 19
4.	Response to Draft Report	 20
5.	Status of Recommendations	 26



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INTRODUCTION

Eight program agencies of the Government of the Virgin Islands (GVI) received Federal grants in the amount of $87.9ï¿½million in 2002 to administer 112 programs.  Ten program agencies received $93ï¿½million in 2003 for 118 programs (see Appendix 2).  In most instances, the terms of Federal grants allow the recipients to recover the necessary, reasonable, and allowable direct and indirect costs of performing and administering the grants.1 

Costs incurred by nonFederal organizations in running Federal grant programs are comprised of indirect costs and direct costs.  Indirect costs are costs that cannot be readily or costeffectively attributed to an individual project.  An example of an indirect cost is the cost of data processing for an organization that administers multiple grant programs.  Most governments incur indirect costs on two levels ï¿½ at a centralized level, such as the cost of a Department of Finance that provides accounting services to operating agencies, and at the operating agency level, such as the agencyï¿½s cost of maintaining a building that houses multiple grant programs.  A direct cost is one that is easily identified with a specific project, such as the cost of supplies used in a particular grant. 2

Because indirect costs inevitably benefit ï¿½ or burden ï¿½ all grantfunded programs, they should never be ignored.  Pretending they donï¿½t matter can be very dangerous to an organizationï¿½s fiscal health.  Calculating the full cost of a program is a prerequisite to determining its relative importance within the organization as a whole, to preparing accurate budget forecasts and financial statements, to setting fees for program services, and ï¿½ perhaps most importantly for grant administrators ï¿½ to requesting reimbursement from grant makers.3

To help ensure that reimbursements for indirect costs are used to benefit Federal grant programs, the Legislature of the Virgin Islands established an Indirect Cost Fund (Fund) in 1981 for the deposit of allowable indirect cost reimbursements from Federal grant programs.4  The Legislature may appropriate monies in the Fund for the V.I. Office of Management and Budget, to support Federal program activities of the GVI, and for Federal grant matching purposes when other matching funds are not available.

Program agencies contributed indirect costs of $1.7ï¿½million to the Fund in fiscal year 2002 and $2.5ï¿½million in fiscal year 2003.  As of Septemberï¿½30, 2003, the Department of Finance reported an Indirect Cost Fund balance of $6.5ï¿½million.  The Virgin Islands Legislature made lump-sum appropriations from the Fund totaling $3.2ï¿½million in 2002 and $3.8ï¿½million in 2003 for salaries, operating expenses, and other purposes of the Office of Management and Budget, the Division of Personnel, the Department of Finance, and the Department of Property and Procurement (central service agencies).  

In December 2001, representatives of most Federal grantor agencies met with GVI officials to begin developing a comprehensive 3year Compliance Agreement to assist the Virgin Islands Department of Education and other Virgin Islands agencies to improve their administration of Federallyfunded programs.  The Compliance Agreement between the Government of the Virgin Islands and the U.S. Department of Education was finalized in September 2002.  SubIssueï¿½2.2 of the Compliance Agreement specified, among other things, that the GVI eliminate all the underlying problems having to do with indirect costs by 2004, ï¿½so that audits and other monitoring procedures will have minimal findings related to indirect cost rates in FY [fiscal year] 2003, and no findings related to indirect cost rates in FYï¿½2004 and 2005.ï¿½


The objective of the audit was to determine whether the GVI accurately accounted for and properly used indirect cost funds in accordance with applicable Federal and local laws and regulations.  The scope of the audit included indirect costs paid into and disbursed from the Indirect Cost Fund in fiscal years 2002 and 2003. 

To accomplish our audit objective, we interviewed officials and reviewed indirect cost agreements, grant awards, payroll records, Statements of Remittance,5 appropriations, and expenditures of the Virgin Islands Departments of Agriculture, Education, Finance, Health, Human Services, Justice, Labor, Planning and Natural Resources, Police, Property and Procurement; Offices of Management and Budget, the Adjutant General, the Governor; and Division of Personnel.

Our audit was conducted in accordance with the ï¿½Government Auditing Standards,ï¿½ issued by the Comptroller General of the United States.  Accordingly, we included such tests of records and other auditing procedures that were considered necessary under the circumstances.  The ï¿½Standardsï¿½ require that we obtain sufficient, competent, and relevant evidence to afford a reasonable basis for our findings and conclusions.

As part of our audit, we evaluated the internal controls related to financial accountability and administration of the Indirect Cost Fund to the extent we considered necessary to accomplish the audit objective.  Internal control weaknesses identified in these areas are discussed in the Results of Audit section of this report.  The recommendations, if implemented, should improve the internal controls in these areas.


Neither the Office of the Inspector General, U.S. Department of the Interior, nor the Office of the Virgin Islands Inspector General has performed any prior audits of the Indirect Cost Fund.



RESULTS OF AUDIT

The Government of the Virgin Islands (GVI) did not effectively manage the recovery of indirect costs on its Federal grant programs.  We attributed this condition to the lack of a sound overall approach for administering indirect costs.  As a result, the GVI underrecovered indirect costs and did not make sure that the indirect costs which it did recover were properly accounted for or used only for the management and improvement of Federal grant programs.

The GVI significantly under recovered indirect costs.  For example, for fiscal year 2003, recoverable indirect costs could have totaled as much as $5.9 million,6 whereas actual deposits into the Indirect Cost Fund were only $2.5ï¿½million.  Indirect costs were underrecovered because some GVI program agencies did not request indirect costs from Federal agencies, billed for indirect costs using incorrect rates, and/or applied the indirect cost rates incorrectly.  (The indirect cost rates for fiscal years 2003 through 2005 are presented in Appendix 3.)

The Virgin Islands Code7 states that every application for Federal grantsinaid or other form of Federal funding shall request reimbursement to the Territorial Government of all indirect costs when reimbursement for such costs is permitted by Federal law.  We identified five program agencies that did not request indirect cost reimbursements from Federal grantor agencies in fiscal years 2002 and 2003.  Specifically:

> The Department of Health received Federal grants of $7.2 million to administer the medical assistance and child health insurance programs for fiscal year 2002.  The Program Director informed us that the agency did not request indirect cost reimbursements for fiscal year 2002 because the indirect cost rate was too high and would cut deeply into the programsï¿½ administrative budget.  We estimated that the Department of Health did not recover indirect cost reimbursements totaling at least $76,500.

> The Police Department received Federal grants of $4.8 million to administer seven law enforcement programs for fiscal year 2002.  The Director of Financial Management Services informed us that prior to fiscal year 2003, the Department had never requested reimbursement of indirect costs.  We estimated that indirect cost reimbursements totaling at least $20,200 were not recovered.  The Police Department also received Federal grants of $7.9 million to administer four programs in community policing, information technology, crime control, and safe streets for fiscal years 2002 to 2005.  The Director of Fiscal Property told us that the Police Department did not budget for indirect costs for the four programs.  We could not determine the applicable amount of unreimbursed indirect costs for the four programs because the necessary documents were not readily available. 

> The Department of Human Services received Federal grants of $20ï¿½million to administer its preschool program and $450,000 for a national and community service program for fiscal years 2002 and 2003.  The Deputy Commissioner for Fiscal Operations told us that requests for reimbursement of indirect costs were not made for either program because the indirect cost rates were too high.  We estimated that indirect cost reimbursements totaling $312,300 were not sought.

> The Department of Agriculture received two Federal grants totaling $165,000 to administer the State and Private Forestry program for fiscal year 2003.  The Commissioner said he considered indirect costs to be a tax, and that the employee trained to handle indirect costs was no longer with the Department.  Therefore, the Department of Agriculture did not request reimbursement of indirect costs.  We were unable to determine the applicable amount of unreimbursed indirect costs because necessary records were not available.

> The Virgin Islands National Guard unit of the Office of Adjutant General did not request reimbursement of indirect costs in fiscal years 2002 and 2003.  An agency official informed us that its six programs were exempt from indirect costs because of an agreement with the V.I. Office of Management and Budget.  However, officials of the Office of Management and Budget told us that this exemption was only for the 3year cycle of fiscal years 1997 to 1999 because of Hurricane Marilyn in September 1995.  We requested the grant award documents for the programs, but they were never provided.  Therefore, we could not determine the applicable amount of unreimbursed indirect costs.

Four program agencies did not use the correct indirect cost rates.  Specifically:

> The Virgin Islands Territorial Emergency Management Agency unit of the Office of Adjutant General, in a September 2002 letter to the V.I. Office of Management and Budget Director, said that a rate higher than 15ï¿½percent would hamper its ability to receive future Federal grants and that an increase in indirect costs would significantly decrease its available funds for program administration and would result in a reduction of staff.  As a result, the Agency continued to use its fiscal year 2002 indirect cost rate of 15ï¿½percent instead of the approved rate of 25.29ï¿½percent for fiscal year 2003.  This resulted in an underrecovery of about $37,400 in indirect costs.

> The Director of Business and Administrative Services at the Department of Planning and Natural Resources told us that there was no signed indirect cost agreement for fiscal year 2003, and that she was notified of the new rates late.  The Director also stated that the rates were too high and would hamper the administration of the programs. Therefore, the agency used its fiscal year 2002 indirect cost rate of 18.13ï¿½percent for its programs in fiscal year 2003 instead of its new rates of 39.52ï¿½percent for Fish and Wildlife programs and 21.11ï¿½percent for Environmental Protection programs.  This resulted in an underrecovery of about $236,269 in indirect costs. Also, the Department used a 7ï¿½percent rate for its Libraries, Archives and Museums program instead of the approved rates of 18.13 percent for fiscal year 2002 and 24.87ï¿½percents for fiscal year 2003.  If the correct indirect cost rates had been applied in fiscal years 2002 and 2003, indirect cost reimbursements would have been $13,083 greater.

> The Commissioner of the Department of Agriculture stated that the proposed 52.7ï¿½percent indirect cost rate was unreasonably high and would be detrimental to its grant programs.  In that regard, a September 2003 letter from the grantor agency stated, ï¿½This [indirect cost] charge could result in a loss of U.S. Forest Service federal grant funds due to the fact that after the deduction there would be less than half of the funds available for projects and program administration.  It [indirect cost] will affect your ability to complete projects and without positive performance outcomes your competition for future funds will be extremely limited.ï¿½  A V.I. Office of Management and Budget official told us that a followup meeting was held with the Commissioner in November 2003, and it was agreed that the approved indirect cost rate should be used for fiscal years 2004 and 2005.  However, Agriculture did not request any reimbursement of indirect costs.

> The Department of Human Services used its fiscal year 2002 indirect cost rate of 26.31ï¿½percent instead of the correct rate of 27.65ï¿½percent for its food and nutrition service program in fiscal year 2003.  If the correct indirect cost rate was applied, indirect cost reimbursements would have been $778 greater.

To comply with the indirect cost section of the Compliance Agreement between the GVI and the U.S. Department of Education, the V.I. Office of Management and Budget contracted with an accounting firm to prepare a new comprehensive indirect cost allocation plan and related indirect cost rates for fiscal years 2003 through 2005.  The accounting firm computed rates for program agencies using a base of net total direct costs8 instead of direct salaries and wages, as had been the past practice.  We found, however, that program agencies continued the past practice of applying indirect cost rates to direct salaries and wages for fiscal year 2003.  As direct salaries and wages are generally lower than net total direct costs, application of the rates to salaries and wages resulted in decreased indirect cost recoveries.

According to V.I. Office of Management and Budget officials, this error occurred because (1) fiscal year 2003 was a period of transition, (2) it would have been cumbersome to apply rates against net total direct costs, and (3) the Financial Management System was not set up to accommodate rates based on net total direct costs.  Further, our audit disclosed that most Indirect Cost Negotiation Agreements did not become effective until late in fiscal year 2003 or early in fiscal year 2004, which was too late to begin applying rates to net total direct costs for fiscal year 2003.  The V.I. Office of Management and Budget advised that it anticipated that indirect cost rates would be applied to net total direct costs for fiscal year 2004.

The GVI did not properly account for and use indirect cost reimbursements.  Specifically, the amount of indirect costs deposited into the Indirect Cost Fund was not accurately tracked, Fund revenues were not used to support grant administration in the program agencies, and Fund revenues were used for unauthorized purposes or expenditures were not adequately supported.

At the time of our review, the Financial Management System automatically computed indirect costs based on the rates programmed into the System for the ten program agencies.  The programmed rates were generally based on the approved indirect cost negotiation agreements.  However, as already noted, these rates were not always used by program agencies, and some program agencies simply did not request indirect cost reimbursements.  However, the Department of Finance used information in the Financial Management System to prepare quarterly reports on the status of the Indirect Cost Fund for the Governor, the Director of the V.I. Office of Management and Budget, and the Legislature.  Consequently, amounts reflected in Indirect Cost Fund quarterly reports were not accurate.  For example, the Department of Finance reported indirect cost revenues of $4.8 million from Federal grantor agencies for the 3month period ended Septemberï¿½30, 2003, but our audit disclosed that actual deposits into the Fund totaled only $2.5ï¿½million.  Nevertheless, these reports were used by the Legislature to make decisions related to appropriations from the Fund.

The Virgin Islands Code9 states that monies deposited into the Indirect Cost Fund may be appropriated to support Federal program activities established within the various departments or agencies of the GVI receiving Federal grant assistance.  We found that the Legislature properly appropriated $3.2ï¿½million in fiscal year 2002 and $3.8ï¿½million in fiscal year 2003 for salaries, operating expenses, and other purposes of four central service agencies.  However, indirect cost reimbursements were not specifically appropriated to cover the internal grant administration costs of most program agencies ï¿½ a deficiency that adversely impacted the administration of Federal programs by the program agencies and also resulted in the General Fund having to cover some of the administrative costs of the Federal programs.

We found that only the Departments of Education and Justice received funds from the Indirect Cost Fund to cover a portion of their grant administrative costs.  A Department of Justice official told us it had been a struggle to get back its indirect cost monies.  Also, officials of three program agencies told us that they could have used indirect cost reimbursements to pay shared and overhead costs of running their grant programs; and officials of four other program agencies said that since they have never been reimbursed for indirect costs, they have managed to run the programs without those additional monies.

In accordance with the Compliance Agreement between the GVI and the U.S. Department of Education, steps to determine indirect costs and distribute indirect cost reimbursements between the V.I. Department of Education and the central service agencies were to be fully implemented by Octoberï¿½1, 2002 (the beginning of fiscal year 2003).  The V.I. Office of Management and Budget also used the procedures established for the Department of Education to compute central service agency components of indirect costs and the indirect cost rates for program agencies.  However, it had not begun to routinely allocate indirect cost reimbursements between the program agencies and central service agencies using the established rates.

In September 2003, the Department of Finance developed a new Indirect Cost Fund account number and new expenditure and revenue cost center codes to allocate indirect costs between program agencies and central service agencies.  Under this new process, program agencies would be required to prepare two Miscellaneous Disbursement Vouchers for each year (beginning with fiscal year 2004) using the new cost center codes to record the allocation of indirect cost reimbursements between the program agencies and the central service agencies.

However, program agency officials reported that, as of March 2004, they had not started using this new process and that their inquiries on the Financial Management System showed no activity for the new cost center codes.  Further, we identified three program agencies which were not aware of the new process for allocation of indirect cost reimbursements.  In April 2004, the V.I. Office of Management and Budget held meetings with program agency and Department of Finance officials to finalize plans for implementing the new process. 

Subsequent to our February 10, 2005 exit conference, the V.I. Office of Management and Budget provided us with documentation showing that a training session, attended by more than 50ï¿½program agency and central service agency representatives, was held on Aprilï¿½20, 2004 to explain the new procedures that had been developed for processing indirect cost reimbursements.  Management and Budget also provided us with a copy of the new procedures, which were formally issued on June 10, 2004.  The procedures included detailed examples for calculating the allocation of indirect cost reimbursements between program agency and central service agency components and examples of completed forms needed to properly record the receipt and allocation of the indirect cost reimbursements.

The Virgin Islands Code10 stresses that the Indirect Cost Fund be used for the purpose of improving Federal grants administration and management and increasing the Virgin Islandsï¿½ participation in Federal grantinaid programs.  However, we found that the Legislature sometimes appropriated monies from the Fund for purposes that were not related to these areas.

In October 1998 (Act No. 6254), the Legislature appropriated $318,000 from the Indirect Cost Fund for purposes such as (1) Department of Public Works operation and maintenance coordinator, St. John landfill closure reanalysis study, and wastewater collection recording system; (2) Office of Management and Budget economic program; (3) Roy L. Schneider Hospital institutional consultant; (4) Department of Finance needs assessment for Treasury Division; and (5) Department of Education inventory and survey of public school facilities.

At our February 10, 2005 exit conference, V.I. Office of Management and Budget officials stated that some of the appropriated amounts listed above were related to the administration of Federal grants.  However, as of May 2, 2005, they had not provided us with documentation to support that assertion.

In January 2002, the Office of Inspector General, U.S. Department of Interior, wrote to the Governor and the Legislature informing them of the consensus reached by Federal grantor agency representatives at a joint Federal/Virgin Islands conference held in the Virgin Islands during December 2001.  During this conference, extensive discussions were held regarding the Governmentwide procedures for computation, distribution, and use of indirect cost reimbursements from Federal grant programs.  The letter stated, in part:

Based on the definition of indirect costs included in Attachment E of the Office of Management and Budget Circular A-87, the indirect cost reimbursements deposited into the Indirect Cost Fund should be used solely to support the costs associated with administering the respective grant programs.  Specifically, we do not believe that appropriations should be made from the Fund for nongrant expenditures, such as the $318,000 appropriation made by Act No. 6254.  We believe that the Fund should be used to reimburse the central service agencies for the costs associated with such Government-wide grant administrative functions as grant oversight, single audits, and financial accounting and to reimburse the individual grant recipient agencies for internal costs associated with administering the grant programs.

Despite this policy statement, in December 2002 (Act No. 6571), the Legislature appropriated $3.6 million from the Indirect Cost Fund to finance negotiated union contracts for firefighters.  The Governor, however, vetoed this appropriation, stating that he was not in favor of ï¿½raiding the Indirect Cost Fund to support nonfederal salary increases for which this Government lacks resources because it jeopardizes all federal programs.ï¿½  The Governor urged the Legislature to seek an alternative source of funding.

In a related test, we reviewed fiscal year 2002 and 2003 appropriations of $7.9ï¿½million and expenditures of $4.9ï¿½million for four central service agencies to determine if indirect cost monies were used in accordance with applicable local laws and regulations.  We concluded that expenditures were generally for authorized purposes, except for $2,480 that was not supported and $8,400 that was outside the scope of grant management, as follows:

> The V.I. Office of Management and Budget could not provide supporting documents for $2,480 spent for cleaning services and utilities.

> The Division of Personnel spent $1,000 to publish the names of employees of the year for 2002, $6,400 to host public service ceremonies on St. Thomas and St. Croix, $600 for Christmas party items, and $400 for meals during prearbitration and financial meetings.

The language included in the Virgin Islands Code pertaining to the acceptable uses of the Indirect Cost Fund ï¿½ specifically the catchall phrase ï¿½and for other purposesï¿½ ï¿½  allows the Indirect Cost Fund to be used for purposes unrelated to Federal grant programs.  Reimbursements to the Indirect Cost Fund are needed to (1) assist the central service agencies that provide vital services such as grant oversight, single audits, and financial accounting and (2)  reimburse the program agencies for internal costs associated with administering grant programs.  We believe the indirect cost reimbursements received from Federal grant programs and deposited into the Indirect Cost Fund should be used only for these purposes.


Agencies of the GVI which operate Federal grant programs should, to the extent permitted by Federal law, regulation, and agreements, recover and retain their appropriate share of indirect costs to help effectively operate grantfunded programs.  This is not happening in the Virgin Islands.  Based on our audit, we concluded that agencies of the GVI do not fully recognize the complexities of estimating, budgeting, and recovering indirect costs.  Further, the requirement to deposit indirect cost reimbursements into the Indirect Cost Fund serves as a disincentive, in our opinion, for program agencies to optimize indirect cost reimbursements because the Legislature has not given the appropriate share of the deposits back to the program agencies.

We believe that the GVI lacks a comprehensive strategy to administer indirect costs.  Such a strategy should include:

> An analysis of all Federal grants and contracts regularly awarded to the GVI to identify any limitations on indirect cost recoveries, to identify instances where application of the full indirect cost rate will be detrimental to the delivery of direct program services, and to identify instances where application of the full indirect cost rates will hinder the GVIï¿½s ability to compete for grant awards;

> An estimate, based on the above analysis, of the amount of recoverable indirect costs and the development of agency budgets and grant proposals that include accurate forecasts of the cost of grant administration to be financed with indirect and direct costs to be recovered under the grants and with GVI funds;

> The provision of ongoing refresher training to agency management and key staff on the computation, recovery, and use of indirect costs; and

> The revision of the Virgin Islands Code (33 VIC ï¿½3025) to provide that the portion of program agency payments into the Indirect Cost Fund that are applicable to their internal grant administrative costs  are transferred to the program agencies to cover such costs.
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RECOMMENDATIONS

We recommend that the Governor of the Virgin Islands:

   1. Develop and implement a comprehensive strategy to administer indirect costs, as outlined in the Conclusion section of this report.

In the interim, we also recommend that the Governor of the Virgin Islands ensure that:

   2. The Office of Management and Budget continues to monitor the program agencies to ensure that they budget for indirect cost reimbursements, complete the negotiation process for indirect cost agreements, and use only current, approved indirect cost rates.

   3. The Office of Management and Budget takes the necessary steps to comply with the requirement that indirect cost rates are applied to net total direct costs as stated in the Summary of Proposed Indirect Cost Rates and Indirect Cost Negotiation Agreements.

   4. The Department of Finance takes the steps necessary to require that future indirect cost reimbursements are recorded to the correct revenue codes on Statements of Remittance for accurate reporting on Indirect Cost Fund quarterly reports to the Governor, the Office of Management and Budget, and the Legislature. 

   5. The Office of Management and Budget locates and provides to us the supporting documents for $2,480 in expenditures from the Indirect Cost Fund.  

   6. Program agencies and central service agencies comply with the Virgin Islands Code provisions for the appropriate uses of the Indirect Cost Fund for the purpose of enhancing the administration of grant programs. 

We further recommend that the Legislature of the Virgin Islands:

   7. Appropriate, in accordance with the Virgin Islands Code, monies from the Indirect Cost Fund only for purposes that improve the administration and management of Federal grant programs. 
 
   8. Consider removing the phrase ï¿½and for other purposesï¿½ from the policy statement for use of the Indirect Cost Fund that is contained in the Virgin Islands Code.

The May 9, 2005, response (Appendix 4) from the Virgin Islands Office of Management and Budget concurred with the findings and recommendations and provided detailed information on actions which have been taken to improve and standardize the indirect cost allocation process within the Government of the Virgin Islands.  Based on the response, we classified Recommendations 1, 2, 3, 4, and 6 as resolved and implemented.  Because the response did not address Recommendation 5, we classified that recommendation as unresolved.  Additionally, because we did not receive a response from the Legislature of the Virgin Islands, we also classified Recommendations 7 and 8 as unresolved.  Appendix 5 describes the documentation that the Government of the Virgin Islands should provide in order to close out Recommendations 5, 7, and 8.



APPENDIX 1 - MONETARY IMPACT

Potential
Unrealized
ï¿½Revenuesï¿½


 ï¿½ï¿½    $696,530 *

      


































__________
* The amount represents Federal funds.


APPENDIX 2 ï¿½ FEDERAL GRANT AWARDS AND
                         INDIRECT COST REIMBURSEMENTS



Program Agency
FY 2002 Federal
Grant Awards
Number of Grant
Programs
FY 2002
Indirect Costs Reimbursed
Office of Adjutant General
         $561,176
           1
      $46,999
Department of Education
      15,942,877
         26
      156,071
Department of Health
     20,349,538
         20
      337,505
Department of Human Services
     17,371,919
           8
      381,761
Department of Justice
       3,263,306
           1
                0
Department of Labor
       7,288,023
         13 
      289,279
Dept. of Planning and Natural Resources
     15,332,065
         34
      445,629
Police Department
       7,784,672
           9
                 0
Totals
   $87,893,576
       112
 $1,657,244


Program Agency
FY 2003 Federal
Grant Awards
Number of Grant
Programs
FY 2003
Indirect Costs Reimbursed
Office of Adjutant General   
        $632,810
           1
      $54,492
Department of Agriculture
          165,000  
           1
                 0
Department of Education
     19,830,243
         29
      450,131
Office of the Governor
            42,000
           1
          5,140
Department of Health
     20,780,001
         23
      745,673
Department of Human Services
     18,627,745
           8
      363,774
Department of Justice
       3,110,821
           1
      124,121
Department of Labor
       6,496,237
         14
      235,408
Department of Planning and Natural Resources
     14,956,432
         34
      525,321
Police Department
       8,398,151
           6
          6,688
Totals
   $93,039,440
       118
 $2,510,748

APPENDIX 3 ï¿½ INDIRECT COST RATES

Program Agency and Rate Type
  ï¿½   Program
Central Service
      Overall
(Rates Applicable to Fiscal Years 2003 to 2005)
 ï¿½Agency Rate
ï¿½ï¿½Agency Rateï¿½ï¿½
Combined Rate
Department of Education:



Restricted Rate
4.82%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
2.43%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
7.25%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Unrestricted Rate
12.33%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
2.65%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
14.98%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Health:



Medical Care
5.15%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
0.92%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
6.07%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Emergency Services
12.93%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
2.31%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
15.24%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Health, Planning, Research
46.26%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
8.27%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
54.53%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Preventive Health
19.99%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
3.58%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
23.57%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Human Services:



Pre-School Services
10.68%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
2.99%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
13.67%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Food Stamps
21.03%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
5.88%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
26.91%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
All Other Programs
21.60%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
6.05%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
27.65%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Police:



Law Enforcement/Victim Witness
1.77%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
0.57%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
2.34%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Highway Safety/Vehicle Registration
20.60%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
6.67%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
27.27%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
All Other Programs
12.09%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
3.91%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
16.00%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Planning and Natural Resources:



Fish and Wildlife
27.74%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
11.78%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
39.52%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Environmental Protection
14.82%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
6.29%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
21.11%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
All Other Programs
17.46%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
7.41%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
24.87%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Justice:



Paternity and Child Support
6.37%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
4.37%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
10.74%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
All Other Programs
9.84%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
6.75%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
16.59%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Agriculture:



All Programs
33.85%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
18.85%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
52.70%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Department of Labor:



Central Office
8.34%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
12.34%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
20.68%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Division of Training Programs
4.04%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
5.98%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
10.02%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
V.I. Employment Security Agency
3.51%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
5.19%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
8.70%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½




Office of Adjutant General:



V.I. Emergency Management Agency
10.73%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
14.56%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
25.29%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
All Other Program
35.67%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
48.38%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
84.05%ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½

APPENDIX 4 - RESPONSE TO DRAFT REPORT


Appendix 4
Page 2 of 6


Appendix 4
Page 3 of 6


Appendix 4
Page 4 of 6



Appendix 4
Page 5 of 6


Appendix 4
Page 6 of 6




APPENDIX 5 - STATUS OF RECOMMENDATIONS


Finding/Recommendation
        ï¿½    Referenceï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½             

1, 2, 3, 4, and 6


5, 7, and 8
 



         Statusï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½         

Resolved and Implemented.

Unresolved.



                       ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½Actionï¿½Requiredï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½               

No further action required.


Provide a response that expresses concurrence or nonconcurrence with each recommendation.  If concurrence is indicated, provide a plan of action that includes target dates and the titles of the officials responsible for implementing corrective action.  If nonconcurrence is indicated, provide the reason for nonconcurrence and a plan of action that includes alternative corrective action and target dates for addressing the underlying deficiencies.



1 Recovery of indirect costs may be limited or prohibited by Federal law, regulation, or the grant agreement.
2 U.S. Office of Management and Budget Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, establishes the standards that governments must follow to determine allowable grant direct and indirect costs.  Regarding indirect costs, the Circular establishes mechanisms for governments to recover indirect costs incurred at their central service and operating agency levels.  Governments must submit central service cost allocation plans to the U.S. Department of Health and Human Services for approval.  Once approved, governments may allocate the central service costs to their operating agencies for inclusion in the operating agenciesï¿½ indirect cost proposals.  Operating agencies submit their indirect cost proposals for approval to the Federal department that has provided the most Federal assistance to the government during a specified period.  Once approved, the operating agencies may use the indirect cost rates to calculate and bill for indirect costs on all their Federal grants and contracts.
3 Understanding Indirect Costs by Henry Flood and Richard W. Phelps (2002).
4 33 VIC ï¿½3025.
5 A Statement of Remittance is a form used as the source document for recording the receipt and deposit of revenues into the appropriate account in the GVIï¿½s Financial Management System.

6 It was not practical for us to precisely calculate the indirect costs that the GVI should have recovered because doing so would have required a detailed analysis of (1) each grant agreement and associated laws and regulations to identify any limitations on indirect costs and (2) the direct costs of each grant to determine how to apply the approved indirect costs rates.  The estimate of $5.9ï¿½million  was developed by the public accounting firm contracted by the GVI to prepare the indirect cost proposals and may not have taken into consideration limitations that some Federal grant programs have on the amount of indirect cost recoveries.
7 33 VIC ï¿½ 3023(b)
8 Net total direct costs are total direct costs less cost categories that are considered to be unallowable under Circular A87 and the specific laws and regulations related to certain grant programs.
9 33 VIC ï¿½ 3025(b)(5)
10 33 VIC ï¿½ 3025(b)(4) states, ï¿½The Indirect Cost Fund shall be utilized for the purpose of improving Federal grants administration and management in the Territory and increasing Virgin Islandsï¿½ participation in Federal grant-in-aid programs, including but not limited to, grant budget and accounting assistance, grant proposal development, grant management training, special studies and acquisition, accounting or reporting of Federal grant programs, and for other purposes.ï¿½
??

??

??

??






This draft report is exempt from disclosure to the public under the Freedom of Information Act, 5 U.S.C. ï¿½ 5525.  For this reason, recipients may not show or release its contents for purposes other than official review and comment.


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