[Busmgrs] Proper Treatment of retirement Incentive Payments

[RYAN Debby]

Subject: RE: Proper Treatment of Retirement Incentive Payments

Based upon recent federal audit findings, the Oregon Department of Education (ODE) received a letter from the U.S. Department of Education (USED) related to the issue of severance costs, specifically retirement incentive payments that are provided to encourage employees to leave their employment.  State and Local Education Agencies (SEAs/LEAs) may be mistakenly concluding that certain retirement incentive payments are fringe benefits that can be charged to federal programs, rather than "abnormal or mass severance pay."  As a result, some SEAs and LEAs are not obtaining the required prior approval to charge retirement incentive payments to federal programs.  Prior approval to charge such costs must be obtained from the USED or other cognizant federal agency.

 The USED has requested the ODE provide information on the prior approval requirement to our LEAs and subgrantees.  The following guidance should be incorporated into your policies, procedures and practices.

Office of Management and Budget (OMB) Circular A-87 (Cost Principles for State and Local Governments; see link below) establishes standards for determining costs on federal awards carried out through grants, cost reimbursement contracts and other agreements.  Attachment B of the Circular addresses selected items of cost and Paragraph 8.g. provides the criteria for severance pay as follows:

     1.)     Payments in addition to regular salaries and wages made to workers whose employment is being terminated are allowable to the extent that, in each case, they are required by (a) law, (b) employer-employee agreement or (c) established written policy.

      2.)     Severance payments (but not accruals) associated with normal turnover are allowable.  Such payments shall be allocated to all activities of the governmental unit as an indirect cost.

      3.)     Abnormal or mass severance pay will be considered on a case by case basis and is allowable only if approved by the cognizant federal agency.

 Attachment A of the Circular contains the principles for determining allowable costs.  Paragraph B.1. of Attachment A explains the meaning of the phrase "approved by the cognizant federal agency" as follows:

     'Approval or authorization of the awarding cognizant federal agency' means documentation evidencing consent prior to incurring a specific cost.  If such costs
     are specifically identified in the Federal Award document, approval of the document constitutes approval of costs.  If the costs are covered by a state/local wide
     cost allocation plan or an indirect cost proposal, approval of the plan constitutes the approval.'

 A Guide for State, Local and Indian Tribal Government provides assistance to government units in applying the principles and standards of OMB Circular A-87.  This publication was issued by the U.S. Department of Health and Human Services as the OMB Circular A-87  implementation guide (also known as ASMB C-10; see link below) and is applicable to grants and contracts awarded by all federal agencies.  In the section entitled "Questions and Answers on Attachment B", Item 3-13 provides the following definition of "severance pay" and reiterates the need for prior approval:

      1)    Mass severance or termination benefits would include all expenses associated with the event.  This would include: lump sum payments that may be linked to years of service, increased pension benefits such as granting additional years or eliminating penalties for early retirement, payments of unused leave and the cost of any other incentive offered to employees as an incentive to leave government service, such as buy-outs.

      2)    The cost of these special termination benefits must be determined and prior approval of such costs must be obtained from the federal cognizant office prior to claiming these costs directly or indirectly against federal programs.  The requests for prior approval, at a minimum, must demonstrate the reasonableness and allocability of such costs to federal programs.

 This additional information and guidance should clarify the requirements for charging retirement incentive payments to federal awards.  Please contact Tomas Flores at (503) 947-5753 or tomas.flores at state.or.us<mailto:tomas.flores at state.or.us> if you have any questions.

 Links:

 http://www.whitehouse.gov/omb/circulars/a087/a87_2004.html#8

 http://rates.psc.gov/fms/dca/asmb%20c-10.pdf

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