Modify OMB Circular A-87 to provide a fee-for-service option in lieu of cost reimbursement. (2) OMB should modify Circular A-87 to give states and localities the option of electing a fixed fee for service in lieu of the current method of administrative and overhead cost reimbursement. This approach would fix the rate of administrative costs for individual states and localities based on each jurisdiction's experience, but allow total fees paid to increase or decrease in proportion to program expansion and contraction. The measure to which administrative costs are most sensitive (e.g., the number of clients, number of payments, program costs expended) would be determined for individual programs. The actual administrative costs would be ascertained for individual states and localities for a base period, and expressed as a percentage or unit cost of the measure identified.[Endnote 3] Administrative fees would be paid in the form of a lump sum from each program by applying this percentage or dollar amount to the selected program measure for each year.[Endnote 4] Although states or localities would have to absorb any deficits in relation to actual costs, they would retain any savings that they could develop through efficient management practices. This would maximize incentives for cost containment and efficiency and provide an opportunity for gainsharing by more efficient jurisdictions. An administrative fixed fee system reduces expenses by eliminating costly preparation and submission of allocation plans and indirect cost proposals, as well as by eliminating the applicability of federal requirements for maintaining cost records and reporting, and federal audits of administrative costs. Further, the fixed fee approach ensures that future changes in administrative funding are proportionate to program growth, increasing the predictability of federal costs and concentrating precious resources on service delivery. The system would also provide new incentives for cost efficiencies in states and localities. We estimate half the governments will elect the fee for service option, leading to federal savings of $3.3 billion over five years. Endnotes 3. Base period levels would have to be adjusted for one-time nonrecurring costs (such as major information system development) that would otherwise skew or misrepresent the true, ongoing administrative burden. 4. Fee adjustments would be used to take into account inflation and program changes.
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