BILL ANALYSIS Ó SENATE COMMITTEE ON EDUCATION Alan Lowenthal, Chair 2011-2012 Regular Session BILL NO: AB 2435 AUTHOR: Hernandez AMENDED: April 26, 2012 FISCAL COMM: Yes HEARING DATE: June 20, 2012 URGENCY: No CONSULTANT:Daniel Alvarez SUBJECT : Education finance: indirect cost rates. SUMMARY This bill requires the State Department of Education (SDE), or any other state agency, that administers a grant or allocation of federal or state funds to a school district, to allow an indirect cost rate that is not less than the indirect cost rate established by SDE for each district, unless federal or state law requires a lower cost rate. BACKGROUND The United States Department of Education (USDE) has approved a delegation agreement with the department that authorizes the SDE, as the recognized agency to establish indirect cost rates for the state's local educational agencies (LEAs). Indirect costs are agency-wide general management costs (i.e., activities for the direction and control of the agency as a whole). General management costs consist of administrative activities necessary for the general operation of the agency, such as accounting, budgeting, payroll preparation, personnel services, purchasing, and centralized data processing. ANALYSIS This bill requires the State Department of Education (SDE), or any other state agency, that administers a grant or allocation of federal or state funds to a school district, to allow an indirect cost rate that is not less than the indirect cost rate established by SDE for each district, unless federal or state law requires a lower cost rate. Specifically, this bill: AB 2435 Page 2 1) Defines "direct cost" as a cost that provides measurable, direct benefits to a particular program of an agency, including, but not limited to, salaries and benefits of teachers and aides, costs of purchasing textbooks and instructional supplies, and costs for providing pupils with counseling, health services, and transportation. 2) Defines "indirect cost" as the agency-wide, general management cost of the activities for the direction and control of the agency as a whole, including, but not limited to, administrative activities necessary for the general operation of the agency, as specified. 3) Defines "indirect cost rate" as the indirect cost rate established by SDE for each school district. STAFF COMMENTS 1) Need for the bill . The State Department of Education determines the indirect cost rate for each local educational agency (LEA). This indirect cost rate is typically less than ten percent, and this rate covers such general operating costs as accounting, budgeting, personnel services, purchasing, payroll and data processing. However, LEAs cannot cover their operating costs when the indirect rate allowed for certain grants and allocations are less than the SDE determined rate. If LEAs cannot cover these operating costs, they cannot operate programs that provide important services for students and families without putting the LEA at financial risk. 2) According to State Department of Education , "General management costs are necessary for any program to exist. For instance, all programs will use the business office at one time or another for services such as contracts, purchasing, payroll checks, and personnel management. Without the benefit of an indirect cost rate, there would be no standard way for each program to contribute its share of the general management costs without spending a lot of staff time having to 'time account' to each activity. By using an AB 2435 Page 3 indirect cost rate, LEAs have a standardized, efficient way to recover a share of general management costs from individual programs." Proponents of this measure argue that the SDE, as well as other state agencies sometimes arbitrarily specify an indirect cost rate for grant programs that is neither specified in law or is lower than the established indirect cost rate established by the SDE. 3) Federal and state law often delineate the amount of indirect costs or administration either the state or LEAs can utilize from a grant allocation. For example, under the state After School Education and Safety program, school districts are limited to expending no more than five percent of their grant amount for administration. As drafted, this measure singles out the utilization of SDE established indirect cost rates for school districts only. However, the SDE establishes indirect cost rates for school districts, county offices of education, charter schools, and joint power authorities where applicable. Therefore, staff recommends amendments (1) if technically necessary, clarify Section 2 of this measure should be added to Title 2, division 2 part 20, chapter 3, article 2 of the education code, and (2) amend Section 2 of this measure to clarify for purposes of this section (i.e., EC § 33329) "school district" includes school districts, county offices of education, and other identified educational agencies or entities. 4) According to the Assembly Appropriations Committee , this measure would result in no additional Proposition 98 costs to implement. The majority of state and federal grants specify the amount school districts can utilize for administration. If a federal or state grant specifies the rate a district can utilize for administration, this bill requires districts to use that rate. SUPPORT AB 2435 Page 4 California County Superintendents Educational Services Association Los Angeles County Office of Education San Francisco Unified School District OPPOSITION None on file