Policy
FIACCT 12-06_00 Internal Service Funds – Federal Retained Earnings Requirements
Effective: July 1, 1994
Revised: December 30, 2015
Purpose
To define state policy for compliance with the Office of Management and Budget (OMB) 2 CFR, Chapter II, Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) federal regulations regarding retained earnings balances in Internal Service Funds (ISFs).
Policy
A. ISFs may not accumulate retained earnings beyond the amount approved by the federal negotiator of the Statewide Cost Allocation Plan. Federal regulations allow retained earnings balances of up to 60 days of total cash expenses for a fiscal year in each ISF if the retained earnings balances can be supported by a cash flow analysis of the ISF’s billing cycle. The total cash expenses exclude non-cash items like depreciation and federally unallowable expenditures.
B. The Division of Finance shall calculate the retained earnings balance according to federal regulations of each ISF annually and shall inform the ISF and the department’s executive director when it has reached excessive retained earnings levels. The ISF shall then inform the Division of Finance how the ISF plans to correct the federal excess retained earnings balance. Federal regulations allow an ISF to decrease rates, give rebates back to the appropriate agencies, or refund the federal portion of the excess to the federal government. ISFs must receive approval from their department’s executive director and /or the ISF Rate Review Committee, as applicable, before taking any of these actions.
C. In order to minimize the effect on retained earnings of imputed interest on average cash balances as required by federal regulations, ISFs should minimize their cash balances to only be equal to the working capital cash needs of the fund. Negative cash balances will be allowed, but cash balances should be positive on average when possible. ISFs should not maintain cash balances in excess of their working capital cash needs.
D. The federal portion of excess retained earnings from accumulated imputed interest will be refunded out of the ISF.
E. ISFs should not accumulate large deficit retained earnings balances. Adjustments to rates to recover past losses should be done in a timely manner. Federal regulations also require this and long term deficit retained earnings balances may be disallowed by the federal negotiator of the Statewide Cost Allocation Plan.
Procedures
Responsibility
Action
Internal Service Funds
When requested, explain plans to the Division of Finance to correct
any federal excess retained earnings balances. Obtain approval from
the ISF Rate Review Committee or Department Executive Director
prior to adjusting rates or giving rebates of excess revenues back to
the appropriate agencies. Obtain approval from the Division of
Finance to refund the federal portion of any excess balances to the
federal government.
Division of Finance
Calculate ISF retained earnings according to federal regulations annually. Request an explanation of any federal excess retained
earnings balances and monitor progress in reducing the retained
earnings balance. Calculate the federal portion of any excess retained
earnings and return to the federal government when necessary.