ILEarlyChildhoodCollab.org | Financial Management Issues

SUBJECT: Financial Management Issues in Head Start Programs Utilizing Other Sources of Funding

PURPOSE: The purpose of this memorandum is to clarify grants management and financial management policies that apply when Head Start funds are used in conjunction with other sources of funding. It provides descriptions--not models or recommendations--of various ways that Head Start grantees manage multiple funding sources and the cost principles that apply.

The memorandum does not address preferred ways of providing child care services or issues concerning program quality and comprehensiveness.

LEGAL AND RELATED AUTHORITY:
The Head Start Act, as amended; 45 CFR Parts 74 and 92; 48 CFR Part 31. Office of Management and Budget (OMB) Circulars A-21 "Cost Principles for Educational Institutions"; A-87 "Cost Principles for State, Local and Indian Tribal Governments"; and A-122 "Cost Principles for Non-Profit Organizations."

RELATED ISSUANCES:
This Information Memorandum incorporates and updates material previously issued in ACF-IM-91-10 (Head Start Grantees with Multiple Sources of Funding); ACYF-IM-93-18 (Cost Allocation Plan Requirement for Head Start Programs); and ACYF-IM-HS-95-27 (Reimbursement for Services, Including Medicaid and Child Care, for Head Start Children and Families). These earlier issuances are superseded by the current IM. In addition, relevant changes to the Head Start Act in 1998 have been included. These changes were summarized in ACYF-IM-HS-98-20, dated December 21, 1998.

BACKGROUND:
In response to the major changes in the implementation of welfare reform being implemented under the Temporary Assistance for Needy Families (TANF) legislation, many agencies that operate Head Start and Early Head Start programs have broadened their funding base and operational horizons to meet the changing needs of children and their families. In so doing they have forged relationships with a wide variety of other agencies in their communities. As a result, many are operating programs that provide services to children who may or may not be eligible for Head Start, combine funding from a variety of sources for eligible and non-eligible children, and have changed significantly to meet the full-day, full-year child care needs of parents.

Head Start has always fostered a partnership of Federal and local support. The Bureau has actively encouraged grantees to seek other Federal and non?Federal sources of funding (including State funding) to augment Federal Head Start dollars in order to serve more children. In addition, increasing the availability of full-day child care to Head Start families has been a major priority in the past several years. Head Start grantees should be in the forefront of efforts to bring funding from all sources together to provide services to all eligible children.

One result of this growth and change of Head Start programs is greatly increased complexity in financial management, particularly regarding how to manage funds from multiple sources without violating the basic rules of grants administration. Attached to this IM is guidance on managing multiple sources of funding (originally issued as ACYF-IM-91-10) for grantees who may wish to review some of the basic cost allocation and other financial management issues.

In carrying out this ambitious initiative, grantees must meet or exceed the revised Performance Standards and maintain their traditionally high standards of service. To the extent possible, agencies that serve both Head Start and non-Head Start children should attempt to operate programs that are comprehensive and seamless from the point of view of the children and families served. In many cases, there may be no need to compartmentalize Head Start-eligible children and provide separate services for their peers from families with slightly higher incomes. In fact, there are many solid programmatic reasons for not doing so.

COLLABORATION WITH OTHER FUNDING SOURCES:
Over the past several years, Head Start grantees have been encouraged to explore new and innovative ways to collaborate with child care providers to provide full-day, full-year services to Head Start and Early Head Start families who need such services. As long as the child care services are part of the wide range of services provided to children enrolled in Head Start and the comprehensive nature of the service is maintained, child care is an allowable cost under the Head Start program. However, although Head Start grantees may provide full-day, full-year child care using Head Start dollars when necessary, funding for child care services is available from several other ACF child care programs and State and local sources that serve low-income families.

The Head Start Bureau recognizes that these other funding sources may have limitations in statute or regulation regarding how much can be paid for services. These limitations are determined by formula, by actual costs in a geographic area, or by other methods, and they affect Head Start grantees in very specific, locally-determined ways. Since these programs, administered by States, Territories or Tribes, allow a wide range of options for implementation, this Information Memorandum is intended to provide only general guidance for utilizing these other funding sources in collaboration with Head Start funds.

BUDGET AND COST CONSIDERATIONS:
Where feasible, grantees should develop their child care programs, including cost sharing agreements, in conjunction with other child care funding agencies in order to take advantage of these other funding sources. As long as cost sharing arrangements are worked out in advance and reflected in the agency's approved Head Start grant, no separate cost allocation procedures will be necessary to separate the Head Start costs from other costs. (Cost allocation requirements are discussed further below). Grantees that rely on reimbursement for a substantial part of their operating budgets should explicitly address the other funding source(s)in their Head Start refunding application (see Section 3 "Budget and Budget Justification" and accompanying budget page in the Grant Application). For example, grantees should explain the arrangements with the other agencies and any issues that might affect the level or timing of the planned reimbursement. When the application is approved and the grantee's budget is funded, the planned reimbursement is an integral part of the operation of the program. Substantial deviation from the approved budget (e.g., a large number of "no-shows" in a child care program that reduces potential reimbursement) should be brought to the attention of the Federal funding official promptly and a request for program amendment submitted.

Careful documentation of the reimbursement arrangements will assist auditors and Federal reviewers when Head Start program financial records are reviewed. Specifically, the documentation should provide sufficient information so that those auditors can understand the flow of funds in all relevant accounts. Having the funds from reimbursement built into the approved budget will provide for greater stability in the agency's cash flow and avoid the temptation to "borrow" from Head Start to meet other financial obligations. Such borrowing is called an interfund transfer, a practice that violates grants regulations, leading to a potential disallowance. Finally, of course, if an agency provides child care services to additional children who are not Head Start-eligible, or eligible but not part of the funded enrollment in the Head Start grant, such costs would have to be charged exclusively to other sources.

Head Start grantees should assure that providing the whole range of needed services to children and families is their highest priority. Where specific services can be provided by referring children and families to other, non-Head Start programs, then referral arrangements should be made.

Where Head Start dollars are being used to provide services but reimbursement is available, then reimbursement for as large a share of the costs as possible should be negotiated. In this context, reimbursement could be in the form of payments from agencies or voluntary payments from individuals in the form of vouchers or similar payment mechanisms. In cases, where reimbursement covers only part of the cost of providing an allowable service, Head Start funds may be used for the difference. Shortfalls in reimbursements should not deter grantees from providing all required services to children and their families.

POLICY AND STATUTORY PROHIBITION REGARDING FEES:
The Head Start Act at Section 645 (b) has a strict prohibition against charging fees:

The Secretary shall not prescribe any fee schedule or otherwise provide for the charging of any fees for participation in Head Start programs....

This prohibition is reiterated at 45 CFR 1305.9. When integrating Head Start services with child care services for which families must pay fees, grantees must be careful to avoid violation of this prohibition. Many grantees have dealt with this issue by clearly identifying in their budgets the hours of the day that constitute the Head Start program and are chargeable to Head Start and those which are supported by fees from other funding sources. In these cases, parents should clearly understand that fees are being charged only for the non-Head Start portion of the day.

There is a limited exception to the general prohibition on fees when Head Start programs are providing full-day services in collaboration with other agencies. The 1998 Head Start Act contains a new provision in Section 645 (b) that reads as follows:

A Head Start agency that provides a Head Start program with full-working-day services in collaboration with other agencies or entities may collect a family copayment to support extended day services if a copayment is required in conjunction with the collaborative. The copayment charged to families receiving services through the Head Start program shall not exceed the copayment charged to families with similar incomes and circumstances who are receiving the services through participation in a program carried out by another agency or entity.

COST ALLOCATION PLAN REQUIREMENTS:
In some cases, a cost allocation plan will be required to make clear which of two or more programs is to pay for particular services. The term "cost allocation" is sometimes used by cost accountants to describe the allocation of costs, especially overhead costs, to specified accounting categories. For purposes of cost allocation plans for Head Start grantees discussed in this IM, cost allocation refers to the allocation of costs to various sources of funding, not to accounting categories.

As a general rule, the cost allocation plan should be the simplest, most straight-forward way of allocating costs fairly. Complex, highly detailed plans should be avoided when a simple approach will achieve the objective. The complexity and level of detail in the plan should not exceed the complexity of the funding situation.

Plans stated in terms of percentages or fractions of cost items are acceptable. For example, a cost allocation plan for staff could be as simple as a statement of the percent of time attributable to a funding source. If an individual spends half of the day on Head Start activities, another 25% on funding source A and 25% on funding source B, then the cost allocation plan is simply 50% to Head Start, 25% to A, 25% to B. These percentages may then be applied to all relevant personnel costs for that individual (or group of individuals) for a budget period. Minute-by-minute, hour-by-hour allocation is not required, but there must be a way to reasonably establish the basis for the allocation, such as agency or classroom schedules or prior year reports.

The cost allocation plan for a Head Start agency would be the aggregate of all individual allocation schemes for all costs of the agency's program. Unnecessary proliferation of individual schemes should be avoided in order to keep the plan as simple as possible. General schemes that can be applied to large portions of the agency's budget and still fairly allocate costs are preferable to complex detailed schemes.

Each of the major "cost centers" or cost items in the agency's budget should be looked at for a reasonable, fair way to allocate the costs of that item. Allocation plans for the cost of facilities (space) may be quite different than the plan for staff, but still expressed in simple percentage terms. For example, an agency should analyze the space (expressed in square feet) used in the administration of various programs. If the Head Start director and secretary use 500 square feet in an agency's headquarters building with a total of 2,000 square feet, then Head Start's fair share of that space's cost is 25% (500/2000). Other cost items would be analyzed in similar terms, using appropriate measures for each.

The nature and use of each cost item determines the scheme for the item and the methodology for the allocation of costs. Taking an approach such as "Head Start has the largest budget, so Head Start should pay the largest share of costs" is not acceptable. The Head Start share of an agency budget is determined by the cost allocation plan, not by the quantity of Head Start dollars going into the agency's total budget.

1. Provide detailed information on the sources of revenue for the program, supported by historical or other data to substantiate the amounts.

2. Describe how many children, out of the total number of Head Start enrollees, are in the portion of the program covered by the cost allocation plan.

3. Include a description of the methodology used to determine the allocation of the costs of services to the various funding sources.

4. Include the basis for allocating costs within specific cost categories (personnel, space, supplies, etc.) and a description of how expenditures within the major cost categories will be apportioned and recorded in the grantee's accounting system.

EXCEPTION TO COST ALLOCATION REQUIREMENTS:
In order to encourage Head Start grantees to collaborate with other child care programs, the 1998 amendments to the Head Start Act provide an exception to the general requirement to allocate costs. When there is a collaborative activity between Head Start and another Federal child care or early education program, two cost categories, equipment and nonconsumable supplies, do not have to be allocated between the programs, so long as Head Start is the predominant source of funding for the activity. While these two categories are generally rather small in Head Start budgets, this exception will hopefully reduce their being a barrier to effective collaboration. (See Section 640 (a)(5)(E) of the Head Start Act.)

CONCLUSION:
Head Start grantees are strongly encouraged to seek out other sources of funding to meet the needs of the children and families they serve. Although we recognize that the widely differing statutory and regulatory authorities for many Federal programs often do not make collaboration simple, cost allocation requirements should not preclude significant collaboration with other agencies.

Grantees are encouraged to seek the assistance of their Regional Office on the issues discussed in this IM. We will be working closely with these offices to help resolve any difficulties that may arise.

Attachment for Information Memorandum (Above) ACYF-IM-HS-00-06

Considerations for Grantees with Multiple Sources of Funding

There are two major sections in this attachment. The first relates to the Financial Assistance Award and the total approved budget. The second concerns cost allocation principles. Although neither of these policy areas is new, this document provides clarification of existing policies in light of the changing circumstances in the Head Start program.

It is important to remember that Head Start non-Federal share requirements may not be met through funds derived from other Federal grants, including Federal funds administered by States, unless the authorizing legislation specifically provides that the funds may be used as the non-Federal share. Additionally, matching funds derived from States must not be used to match more than one Federal program. The Indian Self-determination and Education Assistance Act (P.L. 93-638) is an example of a Federal program that may be used as match for the Head Start program. Most other Federal programs, including block grants, may not be used as match for the Head Start program.

1. Financial Assistance Award

The basic document used by the Administration for Children and Families (ACF) for awarding discretionary grants is the Financial Assistance Award (FAA). The FAA reflects key dollar figures that are important in the financial relationship between the granting agency and the grantee: the Federal and non-Federal funds subject to Federal oversight. The FAA includes the amount of Federal Head Start funding being awarded to provide Head Start services; the non-Federal share being provided by the grantee; and the total number of children to be served with the approved budget.

It is important that grantees be aware that the FAA, along with the approved application from the grantee, constitutes the legal definition of the Head Start program for purposes of financial
management and compliance with the grants management requirements. Auditors use the FAA and the approved application as the definition of the program which will be audited for all Federal requirements related to Head Start. These requirements apply to all of the funds approved in the FAA, regardless of their source (Head Start or other Federal or non-Federal funds).

Head Start grantees may choose from a wide range of program configurations when making application to receive a Head Start grant. For the sake of simplicity, this guidance will describe only three configurations to illustrate the basic issues.

The three configurations that follow are intended only to clarify the financial management issues in this IM. They are not models or "best practices" that grantees are expected to emulate in any way.

In the first configuration, grantees may provide services for more children than the Federal Head Start funding (plus non-Federal match) would allow, elect to include all additional children (and the non-Federal dollars to support them) in their application, and therefore have a larger than required non-Federal share or "overmatch" from other funding sources. When approved by ACF, the total of the Federal funds and the "overmatch" constitutes the total approved budget and will be reflected in the FAA. In this case, the agency's entire program reflected in the FAA is subject to all Federal requirements. A separate cost allocation plan is not required, and non-Head Start funding sources may find that they can achieve significant program results without creating duplicate administrative structures.

The second configuration includes grantees which operate two or more separate and distinct programs, and whose application for ACF funding reflects Head Start funds and the required non-Federal share only for the Head Start program. If the grantee, in this case, chooses to provide additional services to other children similar to the services received by children in Head Start, or provides other child care to Head Start or other children, it would be choosing to provide the child care services entirely separately. This configuration might be employed when a Head Start program provides child care as an adjunct to its Head Start services, but does not meet all of the Head Start Program Performance Standards for the child care portion. In this configuration, the cost of staff, facilities, or other items would not be shared between the Head Start program and these other services, and the grantee must be able to separately identify those children and services supported by Head Start funds and the required non-Federal share.

The third configuration is one in which there is a single program with shared staff, facilities and other costs supported by multiple sources of funding and in which children may be co-located. When a grantee chooses this configuration, its application must clearly describe that portion of its total program that it wishes ACF to fund, including the Federal and non-Federal share. Children covered by Head Start funding must be clearly identified as well as those children covered by other sources of funding. All costs must be allocated according to the principles discussed below.

2. Cost Allocation Principles

When operating a child care program that is added to or wrapped around a Head Start program, it is important for grantees to document the fair allocation of costs among the funding sources. The first and second of the three program configurations described above are examples of arrangements that do not require cost allocation plans. In the first configuration, any cost allocation requirements will be met in the formulation of the total approved budget; in the second there is no cost allocation requirement since no resources are shared.

The third configuration provides a different example where the agency provides additional services, which are not ACF-funded Head Start services, and where a detailed cost allocation plan is required. If, for example, the Head Start director operates a program serving children and families with multiple sources of funding, the other funding source or sources must bear a fair proportionate share of the salary of the director. Federal Head Start dollars may not be used to support the non-Head Start portion of a grantee's program. Non-Head Start sources must be allocated their full share of the fixed costs of the program, not just the marginal costs of adding to the Head Start portion.

To continue with the example of the Head Start director's salary, it would not be acceptable to allocate fewer dollars per child for the non-Head Start funded slots on the grounds that, without the added slots, the director's salary would be paid by Head Start dollars. The Head Start and non-Head Start sources must have the same average costs per child attributed to the director's salary. Thus, if the Head Start director's salary was $30,000, and the program served 60 Head Start-funded children and 40 non-Head Start funded children, then the average costs per child related to the director's salary would be $300. Head Start funds would support $18,000 (60 x $300) and non-Head Start funds would support $12,000 (40 x $300) of the director's salary.

This principle holds true when the program provides wraparound child care in addition to Head Start. Continuing further with the example of the Head Start director, if the Head Start program is 6 hours per day and the wraparound program is 2 hours per day, then Head Start funds would support $22,500 (75% of $30,000) and non-Head Start funds $7,500 (25% of $30,000) of the director's salary. A similar approach may be used to allocate any cost associated with operating the program. When costs are allocated and children are collocated, the grantee must be able to distinguish Head Start-eligible and non-eligible children.

Thus, while grantees are encouraged to operate programs that do not "compartmentalize" children, teachers, staff or facilities on the basis of funding source, they must be prepared to document the fair allocation of costs between the Head Start program and the non-Head Start program.

A brief summary of information related to allowability of costs and cost allocation based on the Cost Principles relevant to Head Start grantees follows.

POINTS RELATED TO ALLOWABILITY OF COSTS AND
COST ALLOCATION BASED ON COST PRINCIPLES

1. Head Start grantees should use appropriate cost allocation methods described in the Cost Principles, which apply to their particular organizations. Cost Principles for various types of organizations may be found in the following:

Type	Reference
Educational Institutions Government Organizations Nonprofit Organizations Hospitals Commercial Organizations (For profit)	OMB Circular A-21 OMB Circular A-87 OMB Circular A-122 Appendix E to 45 CFR, Part 74 48 CFR Part 31

These documents may be found on the Internet at GRANTSNET (http://www.hhs.gov/grantsnet/). This site includes important grant regulations like 45 CFR Parts 74 and 92 and many of the laws, executive orders, OMB circulars, and policy manuals and directives that govern the grants process.

All grantees must maintain adequate supporting documentation.

2. Cost allocation methodologies must assign costs proportionally and equitably to all applicable funding sources. Any methods of distribution (e.g., time studies or similar analyses based on direct hours of identifiable services provided) may be used which will produce an equitable distribution of cost. It is not acceptable to assign a disproportionate share of costs to Head Start simply because Head Start may be the largest funding source.

3. Head Start matching requirements may not be met through funds derived from other Federal grants unless the authorizing legislation for such programs specifically provides that such funds may be used as match. In general, Federal funds may not be used to match other Federal funds. An exception is the Indian Self-Determination and Education Act (P.L.93-638). In addition, Head Start matching funds may not be used twice, i.e., to match Head Start and another Federal program.

4. Head Start grantees may not transfer, even on a temporary basis, funds from Head Start to compensate for delayed or late payment from other funding sources unrelated to the Head Start Act and for costs that are not allowable in Head Start. This does not preclude shifting funds within the Head Start account for allowable costs (as might be necessary if reimbursement for child care is delayed or reduced below budgeted amounts).

5. All costs of the organization, including administrative and indirect costs, must be shared equitably by the various funding sources, except as provided for in Section 640(a)(5)(E)(ii) of the Head Start Act, as amended, which excludes equipment and nonconsumable supplies in certain circumstances.