BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 2435 (Hernandez) - Education Finance: Indirect Cost Rates.
Amended: June 27, 2012 Policy Vote: Education 7-1
Urgency: No Mandate: No
Hearing Date: August 6, 2012 Consultant: Jacqueline
Wong-Hernandez
This bill does not meet the criteria for referral to the
Suspense File.
Bill Summary: AB 2435 requires the California Department of
Education (CDE), 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 CDE for each district,
unless federal or state law requires a lower cost rate.
Fiscal Impact: This bill has no direct fiscal impact on the
state, since any potential funding distribution would occur
within a program and a set amount of grant funding already
dedicated to that program.
Background: The United States Department of Education has
approved a delegation agreement with the department that
authorizes the CDE, 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.
Proposed Law: AB 2435 requires the California Department of
Education (CDE), or any other state agency that administers a
grant or allocation of federal or state funds to an LEA to allow
an indirect cost rate that is not less than the indirect cost
rate established by CDE for each LEA, unless federal or state
law requires a lower cost rate. This bill defines "school
district" as applied to these provisions, to encompass other
LEAs.
AB 2435 (Hernandez)
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Staff Comments: The CDE determines the indirect cost rate for
each LEA, and the LEAs retain that indirect cost rate for
administering various activities. 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.
This bill requires the CDE or any other agency administering a
state or federal grant or allocation to allow individual LEAs to
retain for indirect costs related to that specific grant or
allocation, (at a minimum) the level of funding allowed by their
respective indirect cost rates. The total amount of funding
would not change, but the LEA would entitled to reserve a
minimum share of every grant amount for its indirect costs, thus
potentially shifting expenditures from direct services to
administration.
Currently, absent federal or state requirements that specify an
indirect cost rate (or that there be no indirect cost allowed)
the CDE or another administering agency can set the indirect
cost rate for the specific grant. For example, if the CDE
believes that such a grant will result in minimal actual
indirect costs, it may set the rate for that grant lower than an
LEA's general indirect cost rate.
This bill removes the CDE's discretion to require that more of a
grant's funds be spent on direct services, by setting the
general indirect cost rate as a floor in applicable grants. This
may make some grants more attractive to LEAs, if they believe
their indirect costs will be fully covered. However, every
future instance in which the CDE (or other agency) is prohibited
from setting a lower indirect cost rate for a grant allocation,
is an instance in which direct services will be reduced in favor
of higher funding for indirect administrative costs.