WASHINGTON - New regulations governing the annual $150 billion in federal funds that flow to the states are unfair, a group representing state accountants charges.
A detailed analysis released on Wednesday by the National Association of State Auditors, Comptrollers, and Treasurers says the regulations "will work undue financial and administrative hardship on the states," primarily through elimination of so-called reimbursable funding.
But the rules, which are scheduled to go into effect tomorrow, will likely be postponed until next year under a bill passed by Congress that President Bush is expected to sign.
Under a mandate from the Cash Management Improvement Act of 1990, the U.S. Treasury devised the rules to improve the efficiency and fairness of the transfer of funds from federal agencies to states, officials say.
The rules primarily will dictate who receives the interest earned on federal funds. They are designed to discourage states from drawing the funds before actually spending the money, and to prevent federal agencies from sitting on funds that states are entitled to receive.
Published in the Sept. 24 issue of the Federal Register, the final regulations will be enforced by the U.S. Treasury.
The analysis says the major objection to the rules is that at the end of June 1994 they will eliminate the use of reimbursable funding, a practice under which states first pay for federally funded programs and then bill the federal government.
Helena Sims, director of the Washington office of the state accountants association, explained that some states' accounting systems are designed to use this practice because it is easier to calculate the previous or actual costs of a program than the future or anticipated costs.
"Some states will be put in a very difficult position if this [provision of the regulations] is not changed," Sims said.
In general, the group has three distinct criticisms of the provision eliminating reimbursable funding.
First, the group said, the provision would effectively eliminate the right of states to collect interest on funds they routinely put up in advance of collecting federal funds. Consequently, only federal agencies would collect interest on federal funds routinely held too long.
"By prohibiting reimbursable funding. it appears that a state's entitlement to interest could be questioned when it fronts its own funds for a variety of reasons." the group said in its response to the regulations.
State officials say this guts the notion of fairness that the regulations are intended to ensure. "We are all in favor of good cash management. But this issue cuts to the heart of the equity question," said one state deputy controller.
Second, the group said that if the provision is not changed, the states that rely heavily on reimbursable funding will have to make costly systems changes. In some cases, these costs could run into the millions of dollars for systems that must be totally revamped, state officials said.
According to a recent informal survey conducted by the association, 80% of the states with available cost estimates said their direct costs for complying with the new regulations will exceed $30,000. The regulations previously stipulated that the federal government would pay at least that much to states for their systems changes.
That figure has since been changed to cap of $50,000 in the final regulations. Sims said it is likely that most of those states would say their costs would also exceed $50,000.
Third, the group argued that the new regulations containing the provision to eliminate reimbursable funding simply contradict the original intent of the 1990 legislation.
The elimination of reimbursable funding "is not in keeping with the letter and spirit of the Cash Management Improvement Act of 1990," association President Harvey Eckert said in a letter sent to the Treasury with the group's reaction to the rules.
Despite that criticism, however, Eckert generally praised the regulations overall. "With one notable exception, [the Treasury] has developed a framework in which the [Cash Management Improvement Act] can be equitably implemented," he said.
Another association official said Treasury officials seem willing to reconsider the issue, which he said was encouraging.
Under the bill passed by Congress, the effective date of the new rules would be postponed until July 1, 1993, or the beginning of a state's next fiscal year starting in 1993, whichever comes later.
The bill had not reached the White House by late yesterday and may not be signed before the rules go into effect. However, state and local officials say they expect Bush to sign the measure, immediately postponing the new rules.