Establishing a Financial Management System

A Financial Management System

The fundamental purpose of financial management is to ensure the appropriate, effective, and timely use of funds.

Specifically, grantees must ensure that:

• Internal controls are in place and adequate;
• Documentation is available to support all accounting records;
• Financial reports and statements are complete, current, reviewed periodically; and
• Audits are conducted in a timely manner and in accordance with applicable standards.

In establishing a financial management system, grantees are to follow both 24 CFR Part 570 and 2 CFR Part 200, which govern CDBG grantee financial management systems. Failure to appropriately document and account for all CDBG funds expended may result in monitoring findings from DOLA or HUD, debarment from participation in DOLA funded programs, and/or removal of good standing status by DOLA.

• A grantee's financial management system must provide for the following:
• Records that identify adequately the source and application of grant funds;
• Comparison of actual outlays with amounts budgeted for the grant;
• Procedures to minimize the amount of time elapsed between the transfer of funds from the US Treasury and the disbursements by the grantee;
• Procedures for determining reasonableness and allowable costs;
• Accounting records that are supported by appropriate source documentation; and
• A systematic method to assure timely and appropriate resolution of audit findings and recommendations.

The three basic functions, which must be served by the financial management system, are:

1. The financial management system must have an identified procedure for recording all financial transactions.
2. All expenditures should be related to allowable activities in the standard agreement approved by DOLA.
3. All expenditures of CDBG funds must be in compliance with applicable laws, rules, and regulations.

2 CFR Part 200 also requires that grantees take reasonable measures to safeguard personally identifiable information (e.g., social security or bank account numbers) and other information designated to be sensitive by HUD or the state, consistent with applicable federal, state, and local laws regarding privacy and obligations of confidentiality.

Financial Management Checklist

Exhibit II-D ‘Checklist - Financial Management of Grants’ provides a checklist of those items, which should be in place when undertaking a CDBG project. These items are helpful in preparing your Financial Management file.

Internal Controls

Internal controls refer to the combination of policies, procedures, defined job responsibilities, personnel, and records that allow a grantee (or subrecipient) to maintain adequate oversight and control of its cash, property, and other assets.

The soundness of any grantee's financial management structure is determined by its system of internal controls. Specifically, the main goals of internal controls are to:

• Ensure resources are protected against waste, mismanagement or loss.;
• Ensure that accounting information is accurate and reliable; and
• Ensure resources are used for authorized purposes and in a manner consistent with applicable laws, regulations, and policies.

As part of an effective internal control system, one person will be designated, the Responsible Administrator, as the primary person at the grantee organization responsible for the overall financial management of a CDBG project. This person should be familiar with their organization's present accounting system. Refer to 2 CFR 200.303 for more information.

Accounting Records

Each grantee should determine the accounting procedures that will assist in providing accurate and complete financial information. Grantees are required to maintain accounting records that sufficiently identify the source and use of the CDBG funds provided to them. All records must be supported by source documentation.

The grantee may have CDBG accounting records fully integrated into an existing accounting system. Grantees may also have partially integrated records into an existing system; however, ledgers should be developed to provide the required accounting information for the CDBG grant. Separate records eliminate potential conflicts with the grantee's usual record keeping systems.

At a minimum, a grantee's accounting system must:

• Clearly identify all receipt and expenditure transactions of the grant; and
• Provide for budgetary control by tracking expenditures and accrued obligations by approved activity

DOLA staff and the grantee's auditors should be able to readily trace all transactions through the accounting system at any time during the grant period of performance or after grant close-out.

Budget Controls

The grantee must be able to report expenditures for each approved activity. A record of the account balances must be maintained for each approved activity that accounts for expenses accrued as well as obligations that have been incurred but not yet been paid out.

Source Documentation

Accounting records must be supported by source documentation. Source documentation includes items such as cancelled checks, paid bills, payrolls, time and attendance records, contract documents and other paperwork

Allowable Costs

Any cost incurred must be allowable per 2 CFR 200.402 -202.475. It is a grantee's responsibility to ensure that CDBG funds are spent only on those costs which are approved in Exhibit B in the Grant Agreement.

The grantee must establish policies and procedures for determining cost reasonableness, allowability, and allocability of costs per CPD Notice 13-07. 

Direct and Indirect Costs

There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect cost in order to avoid possible double charging of Federal awards.

Direct Costs

Direct costs are those costs that can be identified specifically with a particular award or activity relatively easily with a high degree of accuracy. Identification with the Federal award rather than the nature of the goods and services involved is the determining factor in distinguishing direct from indirect costs of Federal awards. A few examples are:

• Salaries and benefits for a housing rehab case manager
• Rental assistance check paid directly to a landlord
• Mileage reimbursement for staff (for home visits or construction site interviews)
• Contractor payments for construction of a public facility

Indirect Costs

Indirect costs are those that have been incurred for shared or common objectives and cannot be readily identified with a particular final cost objective. A few examples include:

• Rent, utility, insurance, maintenance and other expenditures related to shared space
• Administrative and executive team functions that support multiple program areas

Purchases, transportation and staff expenses that benefit multiple program areas. To seek reimbursement for incurred indirect costs, a grantee may use the federal de minimus rate or present a current Cost Allocation Plan approved by a federal agency.

Note: DOLA will not review or approve Cost Allocation Plans, but rather will rely on documentation that the Cost Allocation Plan has already been approved.

Administrative Costs

There are two types of administrative costs: General Administration Costs (GACs) and Activity Delivery Costs (ADCs). GACs are those costs associated with implementation of the grant. These costs may include salaries for personnel who assist full or part time to the grant, supplies used for grant activities, and the cost of administrative services provided by other agencies. ADCs are those costs directly related to the implementation of grant activities.

General Administration Costs (GACs)

General Administrative costs may include, but are not limited to, the following categories:

• Salaries, wages, and related costs of the Grantee's staff engaged in activities associated with the general administration of the CDBG program, including general management, general legal services, accounting, and auditing.
• Travel costs incurred in carrying out the general management of the program.
• Administrative services performed under third-party contracts, including contracts for such services as general legal services, accounting services, and ad services.
• Costs for goods and services related to the general management of the program, including rental and maintenance of office space, insurance utilities, office supplies, and rental or purchase of office equipment.
• Costs incurred in providing information and resources to individuals, families, and households in the LMI group, and to citizen organizations participating in the planning, implementation, or assessment of the Grantee's program.

In documenting administrative costs, grantees should keep in mind:

• All general administration costs charged to the project must be documented through timesheets, purchase orders, or invoices.
  • Contracted grant consulting must be documented with the contract, including payment terms and all accompanying invoices.
  • Invoices for time and materials contracts must include timesheets.
• For those projects directly administered by the grantee, employees paid in whole or in part from CDBG funds should prepare timesheets indicating the hours worked for each pay period.
  • Timesheets must show the exact hours each individual worked on the project, the hours worked on non-CDBG projects, the date on which the work was performed, and a description of the work performed.
  • The employee and the employee's supervisor must sign the timesheet.

Activity Delivery Costs (ADCs)

Activity Delivery Costs are any allowable costs incurred by the grantee for implementing and carrying out eligible CDBG activities. All ADCs are allocable to a CDBG eligible activity that meets a national objective, including direct and indirect costs integral to the delivery of the final CDBG- assisted activity. ADCs are not Administration or funds used for the general operations of CDBG programs, but rather the costs incurred to achieve a specific eligible activity and meet a national objective.

Activity Delivery Costs may include, but are not limited to:

• Costs for completing a project specific environmental review and publication.
• Engineering/design/architectural services for a specific project
• Marketing for a specific CDBG program
• Development of program guidelines and application documents.
• Applicant intake/assistance, staff time to sit with applicants to fill out an application or collect income and application documentation.
• Costs of labor standards and section 3 requirements, such as weekly payroll review, employee interviews and documenting labor hours.

Non-CDBG Project Funds

Grant records should account for all funds committed to the project. The receipt and expenditure of the funds should be carefully documented. If leveraged funds are derived from a source outside the local government, project records should identify the source and amount.

Asset Management

Grantees who maintain real or personal property paid in whole or in part with CDBG funds are required to properly manage these assets and to ensure that the assets continue to be used for their intended purposes in accordance with the CDBG regulations and 2 CFR 200.310-.316.

Grantees must maintain appropriate records of their assets, whether in their possession or in the possession of a subrecipient organization. Specifically:

• In the case of real property, meaning land and any improvements to structures on the land, grantees must maintain a current real property inventory, updated at least biannually. In cases where the grantee is maintaining land, grantees should also describe the intended reuse of the land and the timeframe for improving the land so that it meets a CDBG national objective.
• For personal property, grantees should maintain a fixed assets ledger that includes the following: a description of the property; any identifying information such as a serial number; the funding source (grant number); the acquisition date and cost; the federal share of the cost; and the location, use, and condition of the property; and disposition data. Grantees are required to conduct a physical inventory of personal property biannually to ensure that the property is being maintained in good condition and that there are procedures in place to prevent loss, damage, or theft of the property.

Grantees must maintain records that properly document the disposition of any CDBG-funded property. It should be noted that real property purchased or improved with CDBG funds in excess of the Small Purchase Threshold (currently $250,000) must continue to meet the CDBG national objective approved for the project for at least five years after close-out of the grant that funded the property purchase or improvement. Should the recipient choose to change the use of property, they must contact DOLA to ensure that proper procedures are followed. Failure to do so can result in payback of the grant award.

Nonexpendable Personal Property

Non-expendable personal property means tangible personal property having a useful life of more than one year and an acquisition cost of $500 or more per unit. Title to said property shall vest with the grantee. The state may reserve the right to transfer the title for nonexpendable personal property having a unit acquisition cost of $5,000 or more to the state or to a third party. Prior approval is required for acquisition.

When the grantee no longer needs the nonexpendable personal property with a unit cost of $500 or more for the original project or program, the grantee shall select one of the following methods to dispose of the property:

• Transfer the property to another state-sponsored activity within the same local government.
• Transfer the property to another State-sponsored activity within a different local government.  In which case, the transferor shall be reimbursed for its economic interest in the property by the local government receiving the property.  The amount of reimbursement shall be computed by applying the transferor's percentage of participation in the cost of the original program to the current fair market value of the property.

Retain the property for use by the grantee in a non-State sponsored activity in which case, the state shall be reimbursed for its economic interest in the property.  The reimbursement shall be computed by applying the State's percentage of participation in the cost of the original program to the current fair market value of the property.

When the property has been declared surplus by the local government, it may transfer to the State surplus property agency or disposed of by the established customary procedures of the local government.

Non-expendable personal property with a unit cost of less than $5,000 may be used for other activities without reimbursement if the property is no longer needed for the original activity or program.

Property records shall be maintained accurately and shall include:

• A description of the property.
• Manufacturer's serial number, model number or other identification number.
• Source of the property including grant or other agreement number.
• Percentage (at the date of grant close-out) of the state's participation in the cost of the project or program for which property was acquired.

Cash Depositories

Cash will be deposited and invested in accordance with Section 24-75-601, 24-75-605, and 24-75-701 of Colorado Revised Statutes (C.R.S.) 1973 as amended.  All funds deposited in your bank are subject to the Public Deposit Protection Act, C.R.S. 11-10.5-101.

CDBG funds shall be deposited in a separate account unless the grantee's accounting system is sufficient to account for commingling of funds.  The State may review the accounting system in place by the grantee and based upon standards prescribed within this section of this manual, shall approve or disprove the commingling of funds.

Consistent with the national goal of expanding the opportunities for minority business enterprises, grantees and sub-grantees shall be encouraged to use minority firms.

Bonding & Insurance

Sections 24-105-202, 38-26-105 and 38-26-106, C.R.S., shall apply to all grants that require the contracting (or subcontracting) for construction or facility improvements. These sections require:

A payment bond on the part of the contractor for payment of all amounts lawfully due when the contract price is more than $100,000.  A "payment bond" is one executed in connection with a contractor to assure payment as required by law of all persons supplying labor and material in the execution of the work provided for in the contract (See C.R.S. Section 38-26-105).  The bond shall be obtained from companies’ holding certificates of authority as acceptable sureties.  A certified or cashier's check or a bank money order may be accepted in lieu of a bond.

A performance bond on the part of the contractor for not less than on ‘half (2) of the total amount payable by the terms of the contract when the contract price is more than $100,000.  A "performance bond" is one executed in connection with a contract to secure fulfillment of all of the contractor's obligations under such contract (Section 38-26-106). The bonds shall be obtained from companies’ holding certificates of authority as acceptable sureties.  A certified or cashier's check or a bank money order may be accepted in lieu of a bond.

A bid guarantee is required for a grant that requires the contracting (or subcontracting) for construction or facility improvement.  A bid guarantee is required from each bidder equivalent to five percent (5%) of the bid price.  The "Bid Guarantee" shall consist of a firm commitment such as a bid bond, certified or cashier's check or a bank money order.

Where the block grant is to guarantee or insure the repayment of money borrowed by the grantee, the State, at its discretion, may require adequate bonding and insurance if the bonding and insurance requirements of the grantee are not deemed adequate to protect the interest of the State. Good business practices require adequate insurance coverage for liability and property damage.

While not required by any Federal statute, the State strongly recommends that its grantees explore the necessity of obtaining a “Fidelity Bond” for its employee/s that will cover at least the amount of CDBG funding that the grantee is responsible for under the terms of its contract with the state.