Accounting and Financial Reporting

Reimbursement of Administrative Costs Incurred by State and Local Governments in Connection with Federal Programs

State and local governments deliver most of the services provided through federal assistance programs. Traditionally, state and local governments have been reimbursed by the federal government for at least part of the cost of administering these programs. Recently, the federal government has begun to reexamine the cost allocation methods used to reimburse state and local governments for these costs.

The GFOA believes that the current system of federal administrative cost reimbursement has become unduly burdensome. The GFOA also believes that any changes that are to be made to the current system should be governed by the following basic principles:

  • The federal government should pay its fair share of the cost to state and local governments of administering federal assistance programs
  • The cost of administering federal assistance programs necessarily includes both direct and indirect costs
  • Any change in the system of administrative cost reimbursement should not result in shifting a greater share of the cost of federal programs to state and local governments.

The GFOA wishes to underscore two practical applications of these principles. First, it would be unreasonable to assume that administrative costs will be uniform throughout the country. Second, it would be unfair to "lock in" current reimbursement levels as a "base" for future reimbursement, because not all governments currently have sophisticated systems in place to identify and allocate administrative costs. Such a deficiency should not be allowed to jeopardize a government's future reimbursement of actual administrative costs.

The GFOA also recommends that the federal government consider the feasibility of allowing state and local governments the options of either 1) accepting a standardized percentage of program costs as an appropriate measure of administrative costs for reimbursement purposes, or 2) claiming reimbursement of actual administrative costs up to a specified maximum level. It is essential that the use of a standard percentage remain optional to ensure that the rate selected fairly reflects actual administrative costs.

  • Publication date: June 1994