Centers for Disease Control and Prevention
An Appropriate Methodology Is Needed for Determining Administrative Costs Attributable to the Agency for Toxic Substances and Disease Registry Gao ID: GAO-10-610R May 20, 2010This letter formally transmits and summarizes an oral briefing we gave on April 12, 2010, in response to House of Representatives Explanatory Statement, 155 Cong. Rec. H2113 (daily ed., Feb. 23, 2009), accompanying the Omnibus Appropriations Act, 2009 (Pub. L. No. 111-8, 123 Stat. 524) (2009). GAO was directed to review the indirect costs the Agency for Toxic Substances and Disease Registry (ATSDR) paid the Centers for Disease Control and Prevention (CDC). Specifically, our objectives were to (1) describe CDC's methodology for determining and allocating indirect costs to bill ATSDR for administrative services and (2) determine if the methodology CDC uses to bill ATSDR appropriately considers relevant laws and guidance.
We found that CDC had charged ATSDR approximately $12.1 million annually for indirect costs each year since 2004. This was the amount calculated for fiscal year 2004 using the methodology CDC implemented in fiscal year 2002. We also found that CDC's approach to determine indirect costs to charge ATSDR did not appropriately address relevant laws or guidance. Specifically, CDC had not calculated the actual costs of providing services to ATSDR as required under the Economy Act. Also, it had not updated its approach to use an appropriate methodology with current cost information and assumptions as called for by relevant guidance. Under the Economy Act, ATSDR must reimburse CDC for the "actual cost" of providing the services, which generally includes all direct and indirect (e.g., overhead) costs. Other relevant guidance for calculating indirect costs states that entities should (1) use and consistently follow costing methodologies or cost finding techniques most appropriate to the operating environment to accumulate and assign costs; (2) document managerial cost accounting activities, processes, and procedures; and (3) periodically evaluate indirect costing methods. Because CDC had not used an appropriate documented cost methodology, it is not possible to determine whether ATSDR may have been overcharged or undercharged for the administrative services provided by CDC. In April 2010, CDC awarded a task order for a new indirect cost study. The contractor is expected to provide CDC with a final report no later than 270 days following the award of the task order, and the task order requires that the new indirect cost methodology comply with relevant laws and guidance.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Kay L. Daly Team: Government Accountability Office: Financial Management and Assurance Phone: (202) 512-9312GAO-10-610R, Centers for Disease Control and Prevention: An Appropriate Methodology Is Needed for Determining Administrative Costs Attributable to the Agency for Toxic Substances and Disease Registry
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GAO-10-610R:
United States Government Accountability Office:
Washington, DC 20548:
May 19, 2010:
The Honorable Dianne Feinstein:
Chairman:
The Honorable Lamar Alexander:
Ranking Member:
Subcommittee on Interior, Environment, and Related Agencies:
Committee on Appropriations:
United States Senate:
The Honorable James P. Moran:
Chairman:
The Honorable Michael K. Simpson:
Ranking Member:
Subcommittee on Interior, Environment, and Related Agencies:
Committee on Appropriations:
House of Representatives:
Subject: Centers for Disease Control and Prevention: An Appropriate
Methodology Is Needed for Determining Administrative Costs
Attributable to the Agency for Toxic Substances and Disease Registry:
This letter formally transmits and summarizes an oral briefing we gave
on April 12, 2010, in response to House of Representatives Explanatory
Statement, 155 Cong. Rec. H2113 (daily ed., Feb. 23, 2009),
accompanying the Omnibus Appropriations Act, 2009 (Pub. L. No. 111-8,
123 Stat. 524) (2009). A copy of our briefing slides is enclosed. GAO
was directed to review the indirect costs the Agency for Toxic
Substances and Disease Registry (ATSDR) paid the Centers for Disease
Control and Prevention (CDC). Specifically, our objectives were to (1)
describe CDC's methodology for determining and allocating indirect
costs to bill ATSDR for administrative services and (2) determine if
the methodology CDC uses to bill ATSDR appropriately considers
relevant laws and guidance. To address these objectives, we:
* identified and reviewed applicable sections of laws and guidance;
[Footnote 1]
* obtained and reviewed relevant documents, including the studies
related to CDC's indirect cost methodology that was implemented in
fiscal year 2002;[Footnote 2]
* reviewed relevant reports from the Department of Health and Human
Services Office of the Inspector General and financial statement
auditors;
* obtained and reviewed schedules and interagency agreements
documenting the indirect costs charged to ATSDR for fiscal years 2002
through 2010; and:
* interviewed CDC and ATSDR officials and staff.
We conducted this performance audit from August 2009 to April 2010, in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
In summary, we found that CDC had charged ATSDR approximately $12.1
million annually for indirect costs each year since 2004. This was the
amount calculated for fiscal year 2004 using the methodology CDC
implemented in fiscal year 2002.
We also found that CDC's approach to determine indirect costs to
charge ATSDR did not appropriately address relevant laws or
guidance.Specifically, CDC had not calculated the actual costs of
providing services to ATSDR as required under the Economy Act. Also,
it had not updated its approach to use an appropriate methodology with
current cost information and assumptions as called for by relevant
guidance. Under the Economy Act, ATSDR must reimburse CDC for the
"actual cost" of providing the services, which generally includes all
direct and indirect (e.g., overhead) costs. Other relevant guidance
for calculating indirect costs states that entities should (1) use and
consistently follow costing methodologies or cost finding techniques
most appropriate to the operating environment to accumulate and assign
costs; (2) document managerial cost accounting activities, processes,
and procedures; and (3) periodically evaluate indirect costing
methods. Because CDC had not used an appropriate documented cost
methodology, it is not possible to determine whether ATSDR may have
been overcharged or undercharged for the administrative services
provided by CDC. In April 2010, CDC awarded a task order for a new
indirect cost study. The contractor is expected to provide CDC with a
final report no later than 270 days following the award of the task
order, and the task order requires that the new indirect cost
methodology comply with relevant laws and guidance. See the enclosure
for additional information on the results of our work.
We made recommendations to the Director of CDC to assist the agency in
providing a reasonable basis for indirect costs charged and to assist
the Congress and agency officials in making decisions about allocating
federal resources.
In commenting on a draft of our briefing slides, officials at CDC and
ATSDR agreed with our recommendations and provided technical comments
that we incorporated as appropriate.
We are sending copies of this report to the appropriate congressional
committees, to the Director of CDC and the Administrator of ATSDR, and
to other interested parties. This report will also be available at no
charge on our Web site at [hyperlink http://www.gao.gov]. Should you
or your staff have any questions concerning this report, please
contact me at 202-512-9095 or dalykl@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report were
Sabrina Springfield, Assistant Director; Jehan Abdel-Gawad; F. Abe
Dymond; Jean Mathew; Donell Ries; Ivy Wu; and J. Mark Yoder.
Signed by:
Kay L. Daly:
Director:
Financial Management and Assurance:
Enclosure:
[End of section]
Centers for Disease Control and Prevention:
An Appropriate Methodology Is Needed for Determining Administrative
Costs Attributable to the Agency for Toxic Substances and Disease
Registry:
Briefing for the Subcommittees on Interior, Environment, and Related
Agencies, Committees on Appropriations, United States Senate and House
of Representatives:
April 12, 2010:
Overview:
* Background;
* Objectives;
* Scope and Methodology;
* Results;
* Conclusions;
* Recommendations for Executive Action;
* Agency Comments and Our Evaluation;
* GAO Contact and Staff Acknowledgments.
Background:
The Centers for Disease Control and Prevention (CDC) is one of the
major operating components of the Department of Health and Human
Services (HHS). Its mission is to promote health and quality of life
by preventing and controlling disease, injury, and disability. CDC
accomplishes its mission by working with states, communities, and
other partners to monitor health, detect and investigate health
problems, conduct research, implement prevention strategies, promote
healthy behaviors, foster safe and healthful environments, and provide
leadership and training.
The Agency for Toxic Substances and Disease Registry (ATSDR), another
component of HHS, was created by the passage of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, more
commonly known as the Superfund law. The agency is charged with
evaluating the human health effects of exposure to hazardous
substances.
CDC provides administrative services to its internal organizational
units and to others, including ATSDR.[Footnote 3] These services
include budget formulation, accounting, procurement, information-
technology services, human-resources management, facilities
management, security services, and telecommunications.
CDC charges a fee to ATSDR and others to recoup its costs for
providing these services, which it considers indirect costs.[Footnote
4]
In the Explanatory Statement accompanying the Omnibus Appropriations
Act, 2009, the committee directed GAO to review the indirect costs
paid by ATSDR to CDC.[Footnote 5]
In the related House report, it was noted that the amount charged by
CDC to ATSDR has represented over 16 percent of ATSDR's annual budget
authority. Also, the report noted that CDC announced plans to
recommission a study to update the way it determines administrative
costs. Furthermore, the committee directed that the results of the
study be reported immediately for decision-making purposes on ATSDR's
appropriation.[Footnote 6]
[End of section]
Objectives:
Our objectives were to:
* describe CDC's methodology for determining and allocating indirect
costs to bill ATSDR for administrative services, and,
* determine if the methodology CDC uses to bill ATSDR appropriately
considers relevant laws and guidance.
[End of section]
Scope and Methodology:
To address the objectives, we:
* identified and reviewed applicable sections of laws and guidance to
assess CDC's indirect cost methodology;[Footnote 7]
* obtained and reviewed relevant documents, including CDC's indirect
cost studies that related to the methodology implemented in fiscal
year 2002, to gain an understanding of CDC's indirect cost methodology;
- We did not validate the fiscal year 2002 methodology or
the data, which were last updated in fiscal year 2004,
because CDC did not maintain related documentation;[Footnote 8]
* reviewed relevant reports from the HHS Office of the Inspector
General and financial auditors to identify any previously reported
weaknesses in CDC's fiscal year 2002 indirect cost methodology;
[Footnote 9]
* obtained and reviewed schedules and interagency agreements
documenting the indirect costs charged to ATSDR for fiscal years 2002
through 2010 to determine trends;
* interviewed CDC officials, including the Chief Financial Officer,
the Director of the Financial Management Office (FMO), and the Deputy
Budget Director within FMO, to obtain an understanding of the indirect
cost methodology; and;
* interviewed ATSDR and CDC staff responsible for monitoring the costs
charged by CDC to obtain additional details about the methodology.
We conducted this performance audit from August 2009 to April 2010, in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Results:
CDC Continues to Charge ATSDR for Administrative Services Based on a
Calculation That Has Not Been Updated since Fiscal Year 2004:
CDC's fiscal year 2002 methodology used various factors and
assumptions to accumulate and allocate indirect costs to both internal
and external entities and programs for which it provided
administrative services.
CDC officials stated that after fiscal year 2004 they ceased using the
methodology to calculate indirect costs because they believed the
methodology was no longer appropriate due to changes made to the
organizational and budget structures and was not needed to allocate
indirect costs for its internal management purposes.
As a result, CDC has charged ATSDR approximately $12.1 million
annually for indirect costs each year since 2004. This was the amount
calculated for fiscal year 2004 using its methodology.
CDC Does Not Use an Indirect Cost Methodology That Appropriately
Addresses Relevant Laws and Guidance:
The CDC approach used to determine indirect costs to charge ATSDR did
not appropriately address relevant laws or guidance. Specifically, CDC
had not calculated the actual costs of providing services to ATSDR
under the Economy Act. Also, it had not updated its approach to use an
appropriate methodology with current cost information and assumptions
as called for by relevant guidance.
Under the Economy Act, the requesting agency must reimburse the
servicing agency for the "actual cost" of providing the services,
which generally includes all direct and indirect (e.g., overhead)
costs funded out of the performing agency's currently available
appropriations that bear a significant relationship to providing the
goods or services. When determining the reimbursable actual costs
under the Economy Act, agencies should apply reasonable and
appropriate methodologies that meet these minimum requirements.
[Footnote 10]
Other relevant guidance[Footnote 11] for calculating indirect costs
states that entities should:
* use and consistently follow costing methodologies that consider
current cost information and assumptions or cost finding techniques
most appropriate to the operating environment to accumulate and assign
costs;
* document managerial cost accounting activities, processes, and
procedures; and;
* periodically evaluate indirect costing methods because operations,
program funding levels, and requirements change over time, and
therefore long-standing methods, if unchanged, may result in an
inappropriate allocation of costs.
Based on its analysis of select changes in factors and assumptions
used in the fiscal year 2002 methodology, ATSDR asked CDC to
reevaluate the indirect cost it was scheduled to be charged for fiscal
year 2009.
CDC officials told us that ATSDR's analysis did not include or update
all of the factors and assumptions used in the fiscal year 2002
methodology.
However, because CDC had not used an appropriate documented cost
methodology, it is not possible to determine whether ATSDR may have
been overcharged or undercharged for the administrative services
provided by CDC.[Footnote 12]
CDC officials told ATSDR that no adjustment would be made to the
amount it charges ATSDR until a new indirect cost allocation
methodology is developed and implemented.
In December 2009, CDC issued a request for quotations to contractors
for the development of a new indirect cost methodology. CDC awarded a
task order dated April 6, 2010, for a new indirect cost study. The
contractor is expected to provide CDC with initial recommendations for
an indirect cost model no later than 120 days following the award of
the task order and a final report no later than 270 days following the
award of the task order. The task order requires that the new indirect
cost methodology comply with relevant laws and guidance.
[End of section]
Conclusions:
CDC has continued to charge ATSDR the same amount for indirect costs
since fiscal year 2004. Without an appropriate indirect cost
methodology using current cost information and assumptions and
adequate documentation as called for by relevant guidance, the
indirect costs charged by CDC for providing administrative services to
ATSDR cannot be substantiated. Furthermore, it cannot be determined
whether the amounts paid by ATSDR reasonably approximate actual costs,
as required by statute.
We believe CDC's plan to develop a new indirect cost methodology is a
step in the right direction. As CDC moves forward to develop and
implement its new methodology, it will be crucial that the methodology
be periodically evaluated because operations, funding levels, and
requirements change over time.
[End of section]
Recommendations for Executive Action:
Because of the importance of having an appropriate methodology in
place to provide a reasonable basis for the indirect costs charged and
to assist the Congress and agency officials in making decisions about
allocating federal resources, we recommend that the Director of CDC:
* continue efforts to develop and implement an appropriate methodology
for identifying and allocating actual costs, including direct and
indirect costs to ATSDR, that is in compliance with federal-statutes
and relevant guidance;
* document its cost methodology and its process for determining the
amount charged to ATSDR; and;
* reevaluate its indirect cost methodology on a regular basis to ensure
that it is adequately identifying and allocating current indirect
costs.
[End of section]
Agency Comments and Our Evaluation:
We provided a draft of this product to CDC and ATSDR for review and
comment.
On April 7, 2010, CDC's Acting Director Executive Secretariat provided
us with comments on the draft product.
In their comments, CDC and ATSDR agreed with our recommendations
and provided technical comments that we incorporated as appropriate.
[End of section]
GAO Contact and Staff Acknowledgments:
GAO Contact:
Kay Daly, (202) 512-9095 or dalykl@gao.gov.
Staff Acknowledgments:
In addition to the contact named above, staff members who made key
contributions to this report include Sabrina Springfield, Assistant
Director; Jehan Abdel-Gawad; F. Abe Dymond; Jean Mathew; Done!! Ries;
Ivy Wu; and J. Mark Yoder.
[End of section]
[End of Enclosure]
Footnotes:
[1] Economy Act, 31 U.S.C. §§ 1535-1536; Chief Financial Officers Act
of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990); Federal
Financial Management Improvement Act of 1996, Pub. L. No. 104-208,
div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30,
1996); Federal Acquisition Regulation, subpart 17.5; Federal
Accounting Standards Advisory Board, Statement of Federal Financial
Accounting Standards No. 4: Managerial Cost Accounting Concepts and
Standards for the Federal Government (July 31, 1995); GAO, Managerial
Cost Accounting Practices: Implementation and Use Vary Widely across
10 Federal Agencies, [hyperlink,
http://www.gao.gov/products/GAO-07-679] (Washington, D.C.: July 20,
2007); and Association of Government Accountants, Managerial Cost
Accounting in the Federal Government: Providing Useful Information for
Decision Making, Report No. 22 (September 2009).
[2] We did not validate CDC's fiscal year 2002 methodology or the
data, which were last updated in fiscal year 2004, because according
to CDC officials, the documentation was destroyed in accordance with
the agency's record retention policies.
[3] Others include programs that are not funded by CDC's direct
appropriation, such as Vaccines for Children (VFC) and the President's
Emergency Plan for AIDS Relief (PEPFAR). VFC is a federally funded
program that provides vaccines at no cost to children who might not
otherwise be vaccinated because of an inability to pay. CDC buys
vaccines at a discount and distributes them to grantees. PEPFAR is a
federally funded program administered by the Department of State and
its mission is to prevent and treat HIV/AIDS in other nations.
[4] Indirect costs are costs that are not specifically identifiable
with any output and may include costs for general administration,
research and technical support, and operations and maintenance for
buildings and equipment.
[5] House of Representatives Explanatory Statement, 155 Cong. Rec.
H2113 (daily ed., Feb. 23, 2009), accompanying the Omnibus
Appropriations Act, 2009 (Pub. L. No. 111-8, 123 Stat. 524) (2009).
[6] House Report 111-180, Department of the Interior, Environment, and
Related Agencies Appropriation Bill 2010 (June 23, 2009).
[7] Economy Act, 31 U.S.C. §§ 1535-1536; Chief Financial Officers Act
of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990); Federal
Financial Management Improvement Act of 1996, Pub. L. No. 104-208,
div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30,
1996); Federal Acquisition Regulation, subpart 17.5; Federal
Accounting Standards Advisory Board, Statement of Federal Financial
Accounting Standards No. 4: Managerial Cost Accounting Concepts and
Standards for the Federal Government (July 31, 1995); GAO, Managerial
Cost Accounting Practices: Implementation and Use Vary Widely across
10 Federal Agencies, [hyperlink,
http://www.gao.gov/products/GAO-07-679] (Washington, D.C.: July 20,
2007); and Association of Government Accountants, Managerial Cost
Accounting in the Federal Government: Providing Useful Information for
Decision Making, Report No. 22 (September 2009).
[8] According to CDC officials, the documents had been destroyed in
accordance with the agency's record retention policies.
[9] Department of Health and Human Services, Office of the Inspector
General, Identification and Allocation of Indirect Costs at the
Centers for Disease Control and Prevention, A-04-02-08001 (Washington,
D.C.: Dec. 31, 2003) and Department of Health and Human Services,
Report of Independent Auditors contained within the Fiscal Year 2008
Agency Financial Report (Nov. 13, 2008) and Fiscal Year 2009 Agency
Financial Report (Nov. 10, 2009).
[10] For a discussion of the reimbursement requirements under the
Economy Act, see GAO, Principles of Federal Appropriations Law, 3rd
ed. [hyperlink, http://www.gao.gov/products/GAO-08-978SP] (Washington,
D.C.: September 2008), vol. 3, ch.12.B.1.
[11] Federal Accounting Standards Advisory Board, Statement of Federal
Financial Accounting Standards No. 4: Managerial Cost Accounting
Concepts and Standards for the Federal Government (July 31, 1995);
GAO, Managerial Cost Accounting Practices: Implementation and Use Vary
Widely across 10 Federal Agencies, [hyperlink,
http://www.gao.gov/products/GAO-07-679] (Washington, D.C.: July 20,
2007); and Association of Government Accountants, Managerial Cost
Accounting in the Federal Government: Providing Useful Information for
Decision Making, Report No. 22 (September 2009).
[12] A lack of a methodology to determine the proper indirect costs
could also affect other entities that are charged indirect costs by
CDC.
[End of section]
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