Cost Accounting in Local Government

What type of CAP should I use?

The A-87 CAP was created because our profession (Municipal Finance Officers Association, at the time) wanted overhead reimbursement on Federal Grant programs which we knew cost us (Finance Directors) additional work. The result was the proverbial “half a loaf” as we were allowed to charge general overhead but not costs related to the legislative function (city councils and the city manager, city clerk, & city attorney to the extent that they supported the city council). This was certainly better than we had previously, which was nothing.

The A-87 guidelines do not require that we use audited expenditures for the first CAP; but, if we use budgeted expenditures, we have to perform a “roll-forward” calculation that adjusts a future CAP for the difference between our budgeted expenditures and the audited year-end results. Since the “roll-forward” calculation is a lot of extra work, many finance directors have opted for calculating the A-87 CAP using audited expenditures. Simplifying the A-87 process by using audited expenditures was not a big deal when the primary purpose of the CAP was grant overhead reimbursement.

Today, the most important use of the CAP is to recover “full costs” on service fees and municipal utilities which is why we were one of the first firms to develop the Total Cost CAP. Basing a Total Cost CAP on budgeted expenditures for the next fiscal year has the following advantages: (1) The calculated fees and charges more closely match the costs of providing the service rather than being based on audited expenditures which could be two or more years old; and, (2) The costs of the legislative function and its support are included which can be a significant cost.

If your only goal is to maximize revenues from fee services, the decision is a “no brainer.” However, if you have state and/or federal grant programs that require the A-87 process, you have to make a decision based on the unique circumstances for your agency: (1) Should I do both? or (2) Can I negotiate an overhead rate on the programs that require the A-87 in lieu of preparing the A-87 CAP? or (3) Is there a simpler indirect cost approach that can be done in-house in lieu of preparing an A-87 CAP that is permitted by the grantor?

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