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January 10, 2001

Ms. Cynthia L. Johnson, Director
Cash Management Policy and Planning Division
Financial Management Service
401 14^th Street, SW, Room 420
Washington, D.C. 20227

Dear Ms. Johnson:

Thank you for the opportunity to provide comments on revisions to regulations implementing the Cash Management Improvement Act of 1990 (CMIA). These proposed revisions contained in the "Notice of Proposed Rule Making" titled Rules and Procedures for Efficient Federal-State Funds Transfers make great strides to simplify the complex rules related to funds transfers while also extending additional flexibility to the states.

In large part, the National Conference of State Legislatures (NCSL) supports the proposed revisions to regulations implementing the Cash Management Improvement Act of 1990. NCSL specifically lauds efforts by the Financial Management Service (FMS) to: 1) raise the default dollar thresholds, which determine the programs subject to CMIA; 2) eliminate restrictions on allowable funding techniques and expand allowable funding techniques to include reimbursable funding, and; 3) increase the refund transaction exemption threshold to $50,000. We agree that these changes will reduce the administrative burden of compliance on states while providing enhanced flexibility to states in their efforts to comply with proposed and existing CMIA regulations.

In addition, NCSL has several concerns that we would like to share with the Financial Management Service regarding proposed changes contained in the NPRM:

1. Disallowed Fund Transfers (Section 205-15(b)): While we applaud efforts by the FMS to address disallowed fund transfers, not currently addressed in CMIA regulations, NCSL is opposed to the proposal on disallowances included in the NPRM.

Section 205.2 of the proposed rule defines disallowances as "costs incurred by a State which the Federal program agency determines to be costs which should not be charged to the Federal Government either because the funds were used for other than Federal assistance program purposes or the amount of the funds used for Federal assistance program purposes was improper." Section 205.15 of the proposed rule adds a provision expressly recognizing that disallowances are subject to the CMIA's interest provisions. This provision states "...if a Federal program agency disallows a State expenditure, a State will owe interest from the day that Federal funds associated with the disallowance are credited to a State account to the day the funds are credited to the Federal government."

The proposal appears on its face to be inequitable as the proposal makes no provision for cases in which a federal disallowance or deferral is ultimately ruled in favor of a State. An additional section or language should be added to the NPRM that expressly addresses this issue, making provision for interest payments to the states when disallowances are ultimately overruled by administrative or judicial action.

Further, the imposition of interest from the day funds are transferred to the states through the day that funds are credited back to the federal government are excessive and unduly harsh. The identification and resolution of disallowed transfers may take months and often years. NCSL strongly urges the FMS develop an alternative to the proposed rule, which would instead assess interest penalties from the date that states are notified that fund transfers have been disallowed until the date the funds have been credited back to the federal government. Conversely, language addressing federal interest payments to the states as a result of ruling in the favor of states should also be imposed from the date that the federal government has been notified that its disallowance is overruled.

2. Federal Block Grants (Section 205.25). NCSL has concerns about the application of the CMIA to certain federal block grants in the proposed rule. Section 205.25 conflicts with the federal legislation that established the Social Services Block Grant (SSBG), the Child Care Development Fund (CCDF) and the Temporary Assistance to Needy Families (TANF) Block Grant.

In the case of the SSBG, NCSL believes that the federal government should not regulate state funds that states choose to appropriate for activities also funded by the SSBG. The SSBG does not require any state contribution in order for a state to be entitled to receive the SSBG block grant. According to the 2000 Green Book, published by the U.S. House of Representatives Ways and Means Committee (with jurisdiction over this statute), "federal funds are available to states without a state matching requirement." Regulating the state funds in this manner is tantamount to establishing a matching requirement.

The CMIA should not address how or when a state expends state funds for services that are also funded by the SSBG since there is no federal requirement for any state funds outlined in the legislation establishing the SSBG. Furthermore, SSBG is a funding source to address broad federal goals; it is not a program. The regulation as it stands would alter legislative intent of the SSBG and create new costly administrative burdens for state and local government. Given the precarious nature of SSBG funding at the present time, this could create a new unfunded mandate on the states.

The way the proposed regulations deal with the TANF and CCDF grants is especially problematic, and conflicts with the enabling legislation establishing these programs.

For the TANF program, requiring a proportional drawdown of federal funds and MOE funds does not recognize the different ways that the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) allows state and federal funds to be spent. It also does not recognize the substantial policy change differentiating a state maintenance of effort requirement (MOE) under the TANF program from a state matching requirement under the previous Aid to Families with Dependent Children program (AFDC). The PRWORA statute and subsequent regulations give states substantial flexibility and broad decisionmaking authority in how funds are spent. The statute and regulations clearly give states a wide range of choices on how to use these funds and ascribes different requirements to recipients depending on which funding stream is used. In certain circumstances, funding choices will impact whether a family is subject to the five year lifetime limit on public assistance or not. Programs to meet some of the goals of TANF may not need income-eligibility requirements depending on which funding stream is used (TANF or MOE). As a result, there are policy consequences in funding decisions. These regulations would constrain the policy choices that states are allowed under the statute.

For example, in order to choose some policy results, some activities must be 100% funded by MOE in separate state programs under the law. It would be an unnecessary burden on states-and certainly conflict with goals of the block grant-to require states to reconcile the spending of federal and state funds during the fiscal year as opposed to at the end of the fiscal year. The authorizing legislation already requires state MOE funds to be expended by the end of the year. States should be able to expend and draw down these funds without regard to the proportional drawdown requirement.

In general, the application of CMIA rules to the TANF block grant has also created additional burdens on the states. For example, states do not receive any credit for the creation of rainy day funds in state law - these funds are perceived of as "unobligated," even if they are designated for a particular purpose.

The regulations raise special concerns regarding Child Care and Development Fund, CCDF. The CCDF is comprised of three funding streams - mandatory, matching and discretionary. Each funding stream is different and the regulations do not take these differences into account.

NCSL believes that only the matching funds should be subject to the proration of state/federal expenses under CMIA. Mandatory and discretionary funds do not have a state matching requirement. Mandatory and related MOE funds should be exempt from a proportional drawdown requirement. The discretionary funding stream should not be constricted because of state funding decisions for child care.

While states often make no special effort to assign earliest costs to the federal share in order to gain a cash flow advantage, the grant's terms and conditions allow for budgetary and programmatic flexibility. Furthermore, many automated drawdown systems do not have the capability to consider state expenditures in calculating drawdown requests. In such cases, a proportional drawdown requirement would create an unnecessary burden and additional direct costs.

Overall, Section 205 would be difficult to apply to these newer block grant programs that have multiple funding source requirements and have multiple listings in the Catalog of Federal Domestic Assistance (CFDA). Often, these funding sources serve the same program initiatives or services. For example, similar services may be funded by a combination of multiple CFDAs such as CFDA number 93.588 (Temporary Assistance for Needy Families), CFDA number 93.575 (Child Care and Development Block Grant), and CFDA number 93.596 (Child Care Mandatory and Matching Funds for the Child Care and Development Fund). Within a reporting period, these federal programs could have varied funding ratios for both federal and state dollars due to maintenance of effort (MOE) and matching funds requirements.

In fact, as NCSL has worked with the states regarding the use of TANF and CCDF funds, we have observed that federal fiscal policies regarding how these funds are accounted are acting to constrain policy choices. This is clearly not the intent of the FMS. Unfortunately, the effect of the application of the CMIA in this manner, especially in the use of MOE funds, contradicts the flexibility inherent in the block grant. When policy choices are limited, the ability to achieve the best possible outcomes for children and families is also limited. NCSL would welcome the opportunity to consult with FMS before the issuance of the Final Rule regarding the applicability of CMIA rules to these block grants.

3. Definitions (Section 205.2). NCSL also has concerns regarding certain definitions in Section 205.2, which are addressed in the comments of the National Association of State Human Finance Officers, with which we concur. The definitions of administrative costs, disbursement and indirect costs are too vague and need further attention.

In light of these remaining concerns NCSL requests follow-up meetings with the FMS subsequent to your review of comments on the NPRM.

Finally, we appreciate your efforts to consult with state and local elected officials and their representative national organizations as you have proposed this rule. Executive Order 13132 on Federalism urges "all [federal] agencies to consult with state and local government elected officials and their representative national organizations on the development of regulations and legislative proposals that have federalism implications." Further, E.O 13132, urges that this consultation allow for both meaningful and timely input on these regulatory proposals. Your efforts, and that of your staff, to consult with NCSL and other representative national organizations of state and local elected officials is commendable and stands as an example to other agencies.

We applaud FMS efforts to clarify and simplify issues related to cash management and funds transfers and appreciate the opportunity to provide detailed comments on the NPRM. Should you have additional questions or require additional information please contact Gerri Madrid (202-624-8670) or Sheri Steisel (202-624-8693) in our Washington office.

Sincerely,

Senator Derryl McLaren, Iowa
Chair, AFI Federal Budget and Taxation Committee
National Conference of State Legislatures