Modify OMB Circular A-87 for Fee-For-Service

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.