HSB 642 (LSB 5536XD (3) 91)

SENATE/HOUSE FILE _____

BY  (PROPOSED DEPARTMENT OF ADMINISTRATIVE SERVICES BILL)

A BILL FOR

An Act relating to indirect costs charged to state-funded grants, and including applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  NEW SECTION.  8.13  Uniform limit on indirect costs charged to state-funded grants.
   1.  Purpose.  The purpose of this section is to establish a uniform statewide limit on indirect costs charged to state-funded grants to ensure that public moneys are directed primarily to program services and deliverables, to promote transparency, and to provide consistent administration across departments and establishments.
   2.  Definitions.  As used in this section, unless the context otherwise requires:
   a.  “Direct cost” means a cost that can be identified with or directly assigned to a particular final cost objective, program, project, or activity with a high degree of accuracy. “Direct cost” includes but is not limited to salaries and wages of personnel working on the program, associated fringe benefits, program supplies and materials, program-specific equipment, program-required participant insurance, travel necessary for program objectives, program-required participant support costs, and programmatic subawards.
   b.  “Grant” means a state-funded monetary award provided by a department or establishment for the purpose of carrying out a public program, project, or service, whether provided through contract, grant agreement, cooperative agreement, or other funding instrument. “Grant” does not include a loan, tax expenditure, or procurement contract for goods or routine services purchased for the state’s direct use.
   c.  “Grantee” means a recipient of a grant, including but not limited to a nonprofit organization, local government, tribal government, public or private institution of higher education, or for-profit entity.
   d.  “Indirect cost” means a cost that is incurred for a common or joint objective and cannot be identified with a particular final cost objective, program, project, or activity without disproportionate effort. “Indirect cost” includes but is not limited to the allocable portion of general administration and general expenses such as executive management, accounting, auditing, budgeting, human resources, procurement, payroll, insurance, utilities for general administrative space, depreciation or use allowances on buildings and equipment used for general administration, facility operation and maintenance for general administrative space, and information technology services supporting general administrative functions.
   e.  “Total grant amount” means the total dollar amount of state moneys obligated to the grantee under a grant, as stated in the fully executed grant or funding agreement, inclusive of all budget categories and any amendments.
   3.  Indirect cost cap.
   a.  The aggregate amount of all indirect costs charged to a grant shall not exceed five percent of the total grant amount.
   b.  A department or establishment shall not approve a budget or reimbursement request that would cause a grantee’s cumulative indirect costs to exceed five percent of the total grant amount.
   c.  A grantee shall not do any of the following:
   (1)  Reclassify an indirect cost as a direct cost for the purpose of circumventing the cap imposed under this subsection.
   (2)  Charge an indirect cost on top of a direct cost that includes an allocable share of indirect costs.
   d.  A department or establishment shall not waive the cap imposed under this subsection unless expressly authorized by law that references and exempts the grant from this subsection.
   4.  Budgeting and documentation.
   a.  Each grant budget must separately identify indirect costs and direct costs. The budget narrative must describe the basis for the grantee’s indirect cost calculation and certify compliance with the cap imposed under this section.
   b.  A grantee shall maintain records sufficient to substantiate all indirect costs charged to a grant, including the methodology used to allocate indirect costs across funding sources, and shall retain the records for at least ten years after final payment or closeout, or longer if required by the grant agreement.
   c.  If a grantee allocates indirect costs across multiple funding sources, the allocation methodology must be reasonable, consistently applied, and compliant with generally accepted cost allocation principles. The grantee shall document the methodology and make it available to the department or establishment awarding the grant upon request.
   5.  Administration and oversight.
   a.  A department or establishment shall incorporate the requirements of this section into each grant solicitation and agreement.
   b.  A department or establishment shall review a proposed grant budget for compliance with this section prior to awarding the grant and shall monitor indirect costs charged during the grant period.
   c.  A department or establishment shall implement controls to prevent payment of indirect costs in excess of the cap imposed under this section, including rejection or adjustment of an invoice or reimbursement request that would exceed the allowable maximum.
   d.  The department of management shall adopt rules pursuant to chapter 17A to implement and administer this section. The office of grants enterprise management of the department of management shall issue implementation guidance, including standardized definitions, examples, and sample budget templates, to promote uniform application of this section.
   6.  Remedies.
   a.  Indirect costs charged in excess of the cap imposed under this section are disallowed.
   b.  A department or establishment shall recover any amounts paid for disallowed indirect costs through offsets against future payments under the grant, repayment by the grantee, or other means provided in the grant agreement and applicable law.
   c.  As a condition of continued funding, a department or establishment may require a grantee that exceeds the cap imposed under this section to implement a corrective action plan and revised allocation methodology to ensure future compliance.
   7.  Lower cap authorized.  A department or establishment may adopt a stricter limit on indirect costs than established in this section for particular grants if authorized by law or if necessary or desirable based on funding conditions, provided such limit is stated in the grant solicitation and agreement.
   8.  Federal moneys.  To the extent a grant includes federal moneys that contain explicit requirements concerning indirect costs, the federal requirement applies to the portion of the grant funded with federal moneys.
    Sec. 2.  APPLICABILITY.  This Act applies to grants awarded or amended on or after July 1, 2026. A department or establishment, as defined in section 8.2, shall, to the extent practicable, modify an existing grant upon amendment to conform to this Act.
EXPLANATION
The inclusion of this explanation does not constitute agreement with
the explanation’s substance by the members of the general assembly.
   This bill provides that indirect costs, as defined in the bill, charged to a state-funded grant awarded or amended on or after July 1, 2026, must not exceed 5 percent of the total grant amount and prohibits a department or establishment from approving a budget or reimbursement request that would exceed that limit unless expressly authorized by law. A grantee is prohibited from reclassifying an indirect cost as a direct cost and from charging an indirect cost on top of a direct cost that includes an allocable share of indirect costs. For purposes of Code chapter 8, a department or establishment is an executive department, commission, board, institution, bureau, office, or other agency of state government, that uses, expends, or receives any government funds, excluding the courts and the general assembly.
   A grant budget must list indirect costs and direct costs separately and a budget narrative must explain the basis for the indirect cost calculation. A grantee must maintain records related to indirect costs for a minimum of 10 years. An allocation method that allocates indirect costs across multiple funding sources must be reasonable, consistent, and compliant with generally accepted cost allocation principles. The methodology must be documented and provided to the department or establishment upon request.
   The bill requires a department or establishment to incorporate the provisions of the bill into each grant solicitation and agreement, ensure grant budgets are compliant, and implement controls to prevent payment of indirect costs in excess of the cap. The department of management (DOM) must adopt rules to implement the bill and DOM’s office of grants enterprise management must issue implementation guidance to promote uniform application of the bill.
   The bill requires a department or establishment to recover amounts paid for disallowed indirect costs through offsets against future payments under the grant, repayment by the grantee, or other means provided in the grant agreement and applicable law. A department or establishment may require a grantee that exceeds the cap to implement a corrective action plan and revised allocation methodology.
   The bill authorizes a department or establishment to adopt a lower cap on indirect costs under certain circumstances if the cap is stated in the grant solicitation and agreement. The bill’s provisions do not supplant federal requirements for federal moneys included in a grant.