Chapter 5: Financial Management

This Chapter discusses issues related to requesting and using CDBG funds. Recipients should review this Chapter carefully and refer to it as necessary to ensure financial management compliance. The various chapter components include: 

• Financial Management Systems and Practices
• Requesting CDBG Funds and Reporting on Activity Status
• Grant Administration Funds
• Program Income and Recaptured Funds

Financial Management Systems and Practices

Your financial management system must provide for accurate, current, and complete disclosure of the financial activities related to the CDBG project.

General Expectations

If you use a cash basis accounting system, you are not required to use an accrual system under the CDBG program.

Your records must adequately identify the sources and uses of funds for CDBG projects. The records must contain information pertaining to the CDBG award and authorization, obligations, unobligated balances, assets, liabilities, outlays and income. All local effort (or other funds) must be documented in the same manner as CDBG funds and be incorporated into the project financial records. You must maintain separate records that readily identify the revenues and expenditures of CDBG and local funds.

You must adequately safeguard all funds, property and other assets through effective internal control and accountability and ensure that they are used solely for the purposes authorized. Your financial management system must provide for a comparison of actual outlays with budgeted amounts and show the relationship of financial information to program performance.

You must adopt procedures to minimize the amount of cash on hand (guideline is $500 maximum if held for ten (10) working days or longer) and the time elapsing between receipt of funds from IEDA and disbursement for project activities. You should make requests for funds – called “draws” – from IEDA as close as possible to the time of disbursement, through a procedure that ensures funds are expended within 10 working days of receipt.

Recipients must draw funds on CDBG project activities at least every six (6) months. Every six (6) months, funds should be drawn on both the CDBG activity AND grant administration. Failure to meet this requirement may result in a non-compliance finding at project monitoring.

You should inform your contractors there might be a 4- to 6-week delay between their submission of an invoice and receipt of payment. Best practice is for the recipient to establish a line of credit to pay invoices while waiting for reimbursement from the State.

Allowable Costs

Recipients must have a procedure for determining the reasonableness and allowability of costs in accordance with OMB Circular 2 CRF Part 200, “Principles for Determining Costs Applicable to Grants and Contracts”. This circular provides the principles under which costs are allowable and makes the recipient responsible for grant administration through sound management practices and expenditures in compliance with the contract. Recipients must ensure all costs are reviewed for allowability under the principles adopted by IEDA from 2 CFR Part 200, the Housing and Community Development Act of 1974 as amended, state administrative rules and your CDBG contract.

2 CFR Part 225 describes cost allowability. Costs incurred in CDBG projects are allowable only under the following conditions:

• The CDBG contract with IEDA has been properly executed.
• Administrative and exempt activity costs are incurred on or after the date of receipt of an award letter authorizing such costs or after the effective date of the CDBG contract.
• All other costs are incurred only after all necessary environmental requirements have been completed, the recipient has received a Release of Funds letter, and all applicable special conditions have been satisfied.
• Costs are accounted for in accordance with generally accepted accounting principles and are not prohibited by federal, state or local laws; costs conform to any limitations or exclusions set forth in OMB circulars or other governing regulations as to types of amounts of cost items.
• Costs are authorized in the award made by IEDA and based on the project as defined in the application or otherwise approved as project modifications by IEDA.
• Costs are incurred for activities eligible under the CDBG program and are necessary and reasonable for the performance and administration of the award.
• Costs must be documented in your accounting records (e.g. by invoices, vouchers, etc.).
• Costs are accorded consistent treatment; a cost may not be assigned to the CDBG program as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the program as an indirect cost.
• Costs may not be included as a cost or used to meet cost sharing or matching requirements of any other federal award except as specifically provided by federal law or regulation.
• Costs must be the “net of applicable credits” (i.e., discounts or price adjustments must be deducted from the total costs charged).

2 CFR Part 225 also describes costs that are allocable. Costs are allocable if they are treated consistently with other costs incurred for the same purpose in like circumstances (i.e., recipients must treat costs consistently for all grant programs); are incurred specifically for the CDBG program; benefit both the CDBG program and other work and can be distributed in reasonable proportion to the benefits received; or, are necessary to the overall operation of the organization, although a direct relationship to any particular cost objective cannot be drawn.

Employees paid in whole or in part from CDBG funds or whose time is to be credited to the project as community financial support must prepare timesheets showing the time they worked on the assisted activity each pay period. The recipient must maintain a payroll analysis showing the time and pay associated with CDBG funds.

Expendable personal property costing less than $5,000 in the aggregate may be purchased without prior approval from IEDA. Such purchases must meet all other tests of allowability. Equipment with a purchase price of $5,000 or more in the aggregate (“non-expendable personal property”) requires the written approval of IEDA prior to purchase (2 CFR 200.439(b)(2) & (5). This condition is considered satisfied when such equipment is specifically referenced in the contract (in the project description or budget). For the use of equipment not purchased with federal funds, allowable use or depreciation charges may be allowed. See 2 CFR Part 200 for guidance on determining “allowable” charges.

Interest costs that can be construed as reasonable and necessary for the delivery of CDBG activities and projects are considered project related and eligible. Interest costs are considered reasonable and necessary if the eligible project could not be implemented without incurring the interest costs. Related legal fees and bonding costs are also eligible.

General Accounting Procedures

Recipients must use a financial management system that assures proper and efficient administration of CDBG funds. Three basic principles should guide the development of your financial management system:

1. Procedures should be formalized so they can be applied consistently.
2. Procedures should be designed to ensure adequate internal control of funds.
3. Financial transactions should be documented so they can be clearly tracked in an audit.

Regardless of the financial management system used, separate accounting records must be maintained for CDBG funds to distinguish them from all other funds. CDBG revenues and expenditures must be readily identifiable in your accounting records.

Recommended Accounting Documents

Your financial management system should include the following accounting documents (or their equivalent):

4. Cash Receipts Journal: A journal to record the receipt of all funds applied to the project. The journal should include the date funds were received, the amount of funds received, the source of funds and the accounts into which funds were assigned. Each receipt should be listed separately.
5. Cash Disbursement Journal: A journal to record all checks issued for payment of program costs, including the date of payment, the payee, the check number, the amount and the program and expense account to which the charge was made.
6. General Ledger: A ledger maintained to summarize monthly cash receipts and disbursements for each activity included in the project.
7. Journal Entry Vouchers or General Journal: Records showing explanations and amounts of adjustments to the general ledger accounts.
8. Fixed Assets Ledger: A listing of all fixed assets acquired with CDBG funds.
9. CDBG Federal Cash Register: A record of draws (requests for funds), federal checks, EFT’s, received and balance of CDBG funds.

Please note that financial entries should be supported with source documentation, such as invoices, purchase orders, canceled checks, etc. At a minimum, the invoice will be uploaded to IowaGrants.gov with CDBG reimbursement requests. Other source documentation should be uploaded as well when you have it.

Internal Controls

HUD defines internal controls as “the combination of policies, procedures, job responsibilities, personnel and records that together create accountability in an organization’s financial system and safeguard its cash, property, and other assets.”

Internal controls ensure that resources are protected from waste and mismanagement. They also ensure that resources are used for authorized purposes in a manner consistent with applicable laws and regulations. Basic internal controls can include:

• An organizational chart describing responsibility of personnel involved in financial transactions
• Written definition and delineation of duties among key personnel involved in financial transactions
• An accounting policy and procedures manual that includes approval authority for financial transactions and guidelines for controlling expenditures and procedures for recording of transactions
• Adequate separation of duties so that no one individual has authority over a financial transaction from beginning to end
• Periodic comparisons of financial records to actual assets and liabilities (i.e., reconciliation), and in cases where discrepancies are found, corrective action must be taken to resolve such discrepancies

Audits

Recipients should know if a CDBG project will require an audit. 2 CFR 200.501 states that if a community has received more than $750,000 in federal funds (from all sources) in a given fiscal year, then the community must have a single audit. Audits are to be completed in accordance with Generally Accepted Government Auditing Standards (GAGAS). IEDA will provide a Single Audit Form each year to determine whether an audit is necessary.

When an audit is required, there are several things to be aware of. First, in arranging for audit services, recipients must follow procurement policies and requirements. Second, the audit must be completed, and the report submitted to the Federal clearinghouse designated by OMB, within the earlier of either thirty (30) days after receipt of the auditor’s report or thirteen (13) months after the end of the audit period. Finally, the costs of audits made in accordance with the applicable regulations are allowable charges to federal programs.

Receipt and Disbursement of Funds

A critical factor in requesting and expending federal funds is the timing of receipt and disbursement of funds. Since CDBG funds are released on a reimbursement basis for incurred costs, it is a best practice for a community to establish a line of credit to pay expenses. Funds may be drawn down only for immediate cash needs and no more than ten (10) working days may elapse between receipt of funds and disbursement by the recipient. IEDA uses a guideline of $500 maximum cash on hand following the 10-day limit in determining non-compliance. In cases of non-compliance, IEDA reserves the right to convert the recipient to a mandatory reimbursement system, where the recipient expends its own funds and then requests federal funds to cover the expenditure.

Requesting CDBG Funds and Reporting on Activity Status

Recipients request CDBG funds report both expenditures and report project status using the IowaGrants.gov GAX form. A copy of this form and the instructions are included in the appendix to this Chapter. The GAX form is also available in IowaGrants.gov.

When requesting funds, recipients must submit the electronic claims form and upload the sign GAX form in IowaGrants.gov. In addition, please complete the Contract Activity Status section of the report, including the Status of Special Conditions, included in the IowaGrants.gov electronic claims form.

You should not automatically request CDBG funds in the amount needed to cover all expenses when portions of those expenses will be paid with local or other funds. Rather, CDBG funds should be drawn down proportionately. Requests for funds are to be made on an accrual basis.

The contract between IEDA and the CDBG recipient requires that requests for CDBG funding, or draws, be made at least every six (6) months from the time the contract is executed. It is critical that CDBG funds be requested in a timely manner, to ensure compliance with HUD requirements. Be sure to factor in time at the local level (i.e., City Council) to prepare and approve the draw requests. 

Funds must be drawn down for each activity in whole dollar amounts. Requests should be in amounts of no less than $500 unless a final draw request.

Requests must be signed by the contract signatory, or by an officer or employee of the recipient designated by the contract signatory and whose attested signature and designation letter are on file at IEDA. See Chapter 1 for more information on designating alternate signatories. Alternate signature forms must be uploaded to electronic documents in IowaGrants.gov.

Claims for expenses must be made in the appropriate fiscal year. Recipients should submit claims for reimbursement for the fiscal year by June 30 of each year. Claims should not include expenses incurred over multiple fiscal years.

IEDA staff will review draw requests for completeness, accuracy, proper signature, and reasonableness in relationship to the status of the project. Deficiencies may result in the request not being processed; recipients may be asked to correct and resubmit the draw. If there is a minor deficiency, IEDA may correct it and notify you so that you can correct your records.

Recipients can anticipate a time lapse of 3-4 weeks between IEDA’s receipt of a request and the direct deposit of funds in the recipient's designated account.

IEDA will send the recipient the state warrant or separate notification that a direct deposit is occurring. Please note the date of deposit to verify the availability of funds. Typically, funds will appear in the account withing three business days from the date shown on the deposit notification. CDBG funds will be transferred to the account the city or county has previously set up with the State of Iowa. If you need to change the account where CDBG funds should be deposited, please contact Tammy Agey at 515.348.6153 or tammy.agey@iowaeda.com.

Grant Administration Funds

Recipients must work with an IEDA-certified Grant Administrator with prior training in the CDBG program area. Recipients should select an administrator in accordance with procurement requirements outlined in the Guide. Please note, there is no competitive procurement process required if the recipient chooses to contract general administrative services with the applicable Regional Planning Commission/Council of Government.

General administrative costs are paid for out of the general administration line item of the budget and cover expenses that ensure the project is in compliance with the HUD/CDBG program requirements. Administration is not the same as technical assistance or services; technical assistance costs move the project forward in some way (e.g., lead/asbestos inspection, writing bid specs, etc.), and the Recipient should procure for and enter into separate contracts for those services.

The following breakdown of grant administration costs is not all-inclusive. All costs must be allowable per Federal requirements.

• Overall program coordination (e.g., establishing financial accounting documents and systems, management, internal controls, and oversight responsibilities, etc.)
• Reporting to the IEDA (e.g., requests for funds, quarterly performance reports, etc.)
• Advertising and marketing (i.e., general information, public outreach) about the activity or project
• Direct costs and salaries of the recipient’s staff directly involved in the administration of the activity or project
• Indirect costs, such as office space rent, utilities, insurance, supplies, etc.
• Costs incurred in the procurement of 3rd party administrative services, technical services or in the procurement / purchase of any indirect costs noted above
• Internal monitoring and oversight of funded program activities
• Coordination and resolution of monitoring and/or audit issues
• Audit costs
• Environmental Review preparation (note: professional testing/abatement services are not considered grant administration; publication costs could be either grant administration or technical services)
• Assisting the Recipient with activities to affirmatively further fair housing
• Preparation and adoption of Administrative Plans

Administrative funds should be drawn at the following rates: no more than 20% of admin costs can be drawn down within the first 6 months of the grant period, and no more than 60% of total administrative costs can be drawn until project activities are at least 50% complete. Continuing, no more than 80% of total administration costs can be drawn down until project activities are 75% completed.

Program Income and Recaptured Funds

Definition of Program Income

Program income refers to income a recipient receives that is directly generated from the use of CDBG funds. Program income also includes funds generated by the use of other program income. Examples of program income include the following:

• Payments of principal and/or interest on loans made using CDBG funds (or program income funds);
• Proceeds from the disposition by sale or long-term lease of real property acquired, rehabilitated or constructed with CDBG funds (or program income funds);
• Interest earned on funds held in a revolving loan account; and
• Interest earned on program income pending its disposition.

Please note, per § 570.489(e)(2)(iv)(C), an exclusion allows a unit of general local government funded by a State to retain up to $100 per year in interest income on deposit of grant funds before disbursement of the funds for activities otherwise paid with CDBG funds. This is not considered Program Income.

Recaptured Funds

Recaptured funds are a different kind of program income and can be received from both open and closed grants. They represent funds that are recouped by recipients when a CDBG-assisted property is no longer the principal residence of the assisted homebuyer for the full affordability period.

Handling Program Income and Recaptured Funds

• If you receive program income and have an open CDBG grant: Program income must be used for the same activities from which it was generated, and all CDBG requirements remain in effect. All program income must be reported to IEDA and spent prior to drawing down any further CDBG funds. When program income is generated by projects that are only partially assisted with CDBG funds, the program income amount is pro-rated to reflect the percentage of CDBG funds used.
• If you receive program income and have no open CDBG grants: If you receive less than $35,000 of program income (cumulative of all closed CDBG grants) in HUD’s fiscal year of October 1 through September 30, it is considered miscellaneous revenue and may be used for any purpose deemed appropriate by the recipient. However, if recipients receive more than $35,000 of program income (cumulative of all closed CDBG grants) in HUD’s fiscal year of October 1 through September 30, then the full amount of that program income must be returned to IEDA.

De-Obligating Funds

De-obligated grants that do not achieve a National Objective must pay back any funds disbursed to IEDA in full, excepting only administrative and planning expenses. For any projects that do not achieve a CDBG National Objective, the payment of documented administrative funds will be capped at 50% of total budgeted costs for that purpose.