Q: What must states do to comply with the Treasury's new regulations on cash flow?

A: States comply with the regulations primarily by signing a Treasury-state agreement. The agreement stipulates how a state receives federal funds and how it tracks and reports interest liability for those funds to the financial management service of the Treasury. The agreement also specifies which federal programs will be included and their funding technique.

States have some latitude to include programs other than the major federal assistance programs that must be covered by the agreement. They can lower the dollar threshold for determining what is a major program for their state.

The agreement also identifies those direct costs related to calculation of interest and the development of clearance patterns for which the state will be reimbursed.

Q: Will the Treasury reimburse states for what they spend to comply with the new regulations? Isn't there a $50,000 cap on the costs for which the Treasury will reimburse a state?

A: The [cash management act] permits the Treasury to pay states only for the direct costs they incur in calculating and reporting interest. The states may also be eligible for reimbursement for other costs from other federal programs that the Treasury does not control.

The regulations do mention a $50,000 limit on direct costs that Treasury will reimburse the states. However, the $50,000 is merely a benchmark beyond which the burden of proof for states becomes tougher for receiving a reimbursement for these costs. A state has to make the case that it would be unable to develop clearance patterns or calculate interest without incurring costs above the $50,000 benchmark.

Q: Will states have difficulty complying with the regulations and will they have to make expensive changes to their accounting systems?

A: Our experience in talking with the states is that most of them seem to be able to meet the new requirements.

The regulations are designed to make it as easy as possible for states to comply without changing their accounting systems. The rules do this primarily by allowing states to use estimation techniques to track funds. Because we emphasize the use of estimation and sampling, we believe that most states are able to comply with the regulations without making major systems changes.

Basically, we are sensitive to the danger of states having to make great systems changes. We're not requiring that. And we don't want that to be necessary. Of course, states are constantly improving their own cash management, independent of their dealings with the federal government. So as they do this, they will find better ways of complying with these regulations.

We believe we have written a set of regulations that incorporate principles of good cash management for states and the federal government without spelling out a lot of detail regarding how things are to be run.

Q: Do the regulations eliminate the routine, or systematic, use of reimbursable funding by states?

A: The regulations do not eliminate the routine use of reimbursable funding. What the regulations say is that the federal government will not pay interest when there is the systematic use of reimbursement as a funding technique by a state after June 30, 1994.

In the meantime, we will evaluate whether systematic reimbursable funding is a fair and equitable funding technique. However, reimbursable funding is essentially something we do not believe meets the requirements of equity, or efficiency needed to carry out the cash management act.

We don't think it is fair that a party would be able to force the federal government to pay interest without giving it the opportunity to pay the funds on time. It would be like a credit card company not sending you a bill for three months, then suddenly demanding interest for those three months.

Reimbursable funding is most unfair to states. It means that states must put up their own money for federal programs before receiving the federal money. With that in mind, the State-Federal Cash Management Reform Task Force recommended that reimbursable funding should be eliminated.

These regulations still require the federal government to pay interest to states when normal funding techniques break down and states have to front their own money for federal program purposes.

For example: Late passage of federal appropriation bills, late apportionment of federal funds, late grant awards, and late obligational authority will result in interest to states if they front their own money for federal programs.

Q: What is the three-day rule? Can it be waived if a state needs additional time?

A: The basic principle is that recipients of federal funds should not ask for the money before they actually need it. In other words, a state should not ask for federal funds more than three days before the state makes a payment. This is a historical standard under which federal agencies were supposed to be releasing their payments.

The Treasury has made it clear that it will not expect a state to do something that it finds impossible to do. So if a state has a problem with this rule for a particular program, the issue is negotiable on a program-by-program basis. That is something that would be worked out in the state's agreement with the Treasury.

Q: In general, are the regulations fair to states?

A: The regulations are fair to states. The rules promote the timely disbursement of federal funds. Prior to the act, states had little or no say over how or when federal funds were paid. The act makes states a partner with the Treasury's financial management service in determining how funds actually get to states.

The regulations solve the major problem of states not receiving their money on time. Also, the regulations incorporate a lot of good ideas from states and allow them much latitude in selecting for approval which funding techniques to use.

The Treasury has also included states in the process of deciding what systems federal agencies should use to distribute funds to states. We think states should view the act almost like their own bill of rights for receiving federal funds.

Q: Will states as a group receive more or fewer federal funds under the new regulations? Will states, in general, receive more interest than they pay or less?

A: The regulations will have no effect on the amount of federal funds going to states in aggregate or individually.

Regarding the exchange of interest, some states will receive more than they have to pay, while others will have to pay more than they receive. That depends on their accounting techniques.

The choice of funding techniques can make it possible for zero interest exchange by getting federal funds to the states when state payments clear their banks.

Q: Are Pell Grants affected by these regulations? And if so, why?

A: The Pell Grant program is one of the top 19 programs in dollar value. Its coverage is delayed until the beginning of a state's 1995 fiscal year in consideration of the difficulty many states have expressed in tracking this program.

It is covered because state universities and colleges which receive Pell Grant funds are part of state governments. The regulations apply to both the state interest liability and the federal interest liability for this program.

We should note that interest being returned to a program for program purposes, such as with Pell Grants, does not exempt a program from coverage under the act. A state would still have to choose an appropriate funding technique for the program. And the federal government would still be liable for interest if it did not pay the state on time.

Q. Do you have any estimates available regarding the time and money it will take for states to makes the required systems changes to comply with the regulations?

A: We are not aware of systems changes that the states have to make to meet the cash management act's requirements.

Q: Some state officials have said that the explanatory notes accompanying the regulations in the Sept. 24 issue of the Federal Register go beyond what the actual regulations say. Are those explanatory notes also binding?

A: The preamble, or explanatory notes, contains our response to comments from states and federal agencies about the regulations when in proposed form.

At the same time, the preamble explains the reasons for changes between the proposed and final rules.

It is the regulations that are binding.

We are not aware of any differences between the preamble and the final regulations.

Q: and A:

States are charged with running many programs mandated and funded by the federal government, resulting in a flow of about $150 billion a year from federal agencies to states.

A perennial complaint of states is that existing cash management laws are inherently unfair. For example, states are routinely required to front cash for programs and then wait to be paid back by the federal agency responsible for the program.

Through most of the 1980s, a task force of state and federal officials grappled with rewriting those cash management regulations. The task force's goal was to ensure efficiency and equity for states as well as the federal government.

As a result, Congress passed and President Bush approved the Cash Management Improvement Act of 1990. In September, the U.S. Treasury released the final regulations for the new law.

In general, the new rules dictate who receives the interest earned on federal funds. The rules are designed to discourage states from drawing federal funds before spending the money an to prevent federal agencies from sitting on funds that states are entitled to receive.

The regulations will take effect July 1 or the beginning of a state's coming fiscal year, whichever is later. In general, state officials stay the rules are an improvement. However, controversy remains.

The National Association of State Auditors, Comptrollers, and Treasurers recently said the new rules, in their current form, "will work undue financial and administrative hardship on the states." This will occur, the group says, primarily because the rules eliminate reimbursable funding. The accounting device would let states front their own money on federally mandated programs and collect interest on those funds.

John McGuire has been with the Treasury's financial management service since 1987. He has been responsible for coordinating the implementation of the cash management act since its passage in 1990.

McGuire has been manager of the service's state programs branch since it was created in December 1991 to monitor the act. In this role, he has supervised the writing of the final regulations and the subsequent training of states and federal agencies.

The branch is charged with supervising and improving the cash management between the federal government and the states, acting as liaison between them when any issues arises over federal funds disbursements.

McGuire discusses the new cash management regulations, including their effect on reimbursable funding, with staff reporter Dean Patterson.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.