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Letter Head: Tom Torlakson, State Superintendent of Public Instruction, California Department of Education

June 1, 2011

To: Executive Directors, Child Care and Development Programs

2010–11 Year-End Reporting Reminders and 2011–12 Child Care and Development Contract Changes

The purpose of this letter is to remind contractors of the due dates and reporting requirements for the fiscal year ending June 30, 2011, and to inform contractors of changes to Child Care and Development contracts and reporting procedures beginning July 1, 2011. Please share this letter with your agency staff, as the information will be useful in both closing Fiscal Year (FY) 2010–11, as well as preparing for FY 2011–12.

2010–11 YEAR-END REPORTING

CONTRACTS OR CONTRACT AMENDMENTS:

All original contracts and any remaining contract amendment(s), with the exception of CalWORKs Stage 2 and Stage 3 amendments, for FY 2010–11 must be signed and returned to the Contracts Office by June 30, 2011, in order to be valid. Child Development Fiscal Services (CDFS) cannot make payments for amendments that have not been signed and returned.

FINAL REPORTS:

Final attendance and fiscal reports are due in the CDFS office by July 20, 2011. Postmarks do not qualify as receipt dates. A delinquent report results in withholding any remaining apportionments due for FY 2010–11. Additionally, apportionments for FY 2011–12, beyond the initial 25 percent payment, will be withheld until the agency has complied with this contract requirement.

SUPPORT CONTRACT REPORTS:

Support contracts such as Child Care Initiative, Repair and Renovation, or Local Planning Council contracts also require a final fiscal report (form CDFS 9529) by the July 20, 2011, deadline if the contract period ends June 30, 2011 (refer to the face sheet of your contract(s) for the contract end date). If the contract is for multiple years, please ensure that expenditures made in prior years are included on the Expenditures Incurred in Prior Years line of this report.

RESERVE ACCOUNT ACTIVITY REPORTS:

The Reserve Account Activity Report for FY 2010–11, which is due by July 20, 2011, requires support documentation in the form of a copy of the contractor’s general ledger report page(s) that reflect the cash balances maintained in the Child Development Reserve Account. Please ensure the beginning balance for FY 2010–11 reported on the Reserve Account Activity Report matches the prior year’s ending balance per the FY 2009–10 Reserve Account Status Report supplied by CDFS. Additionally, expenditures from the Reserve Account must match income reported on appropriate service contract reports. Incorrect or missing Reserve Account Activity Reports, as well as missing support documentation, will constitute a delinquent report, resulting in the withholding of advance apportionments for the next fiscal year as well as any payments due for the current year. Please contact your fiscal analyst if you have any questions. Form CDFS 9530-A is available online at Reporting Forms (Fiscal Year 2010-11).

Alternative Payment (AP) and CalWORKs contractors should note that while the Reserve Account Activity Report is available online, it cannot be filed online but must be mailed to and received by CDFS by July 20, 2011. If you have any questions, please contact your fiscal analyst.

REVISED REPORTS:

Final reports must be received by the deadline of July 20, 2011, to avoid being delinquent; however, revisions to final reports may be submitted later under limited circumstances. Please refer to the Child Development Attendance and Fiscal Reporting and Reimbursement Procedures handbook (referred to as the Greenbook) regarding the due dates for revised reports for various programs. The Greenbook (DOC; 542KB; 89pp.) is available online at the CDFS Web site.

CLOSE-OUT FOR CONTRACTS WITH SPECIAL FUNDS:

Assembly Bill 1610 (Chapter 724, Statutes of 2010) amended Education Code, Section 8450, to re-instate a five percent cap on Child Development center-based reserve accounts. The five percent cap is calculated as five percent of the total contract maximum reimbursable amounts (MRAs) contributing to the center-based reserve account. Any funds in excess of the five percent cap are referred to as “Special Funds” and were incorporated as part of the 2010–11 contract MRAs. Contractors were required to spend the entire amount of Special Funds within their contract by the end of the contract year.

Upon close-out of FY 2010–11 center-based contracts with a reserve, contractors will be billed for any funds in excess of the five percent cap. Transfers to reserve accounts at year-end will only be allowable up to the five percent cap.

CalWORKs BILLINGS:

Agencies will be invoiced for any over-advanced CalWORKs contract funds, based on their final June report. This invoice will be sent to the agency pre-audit in order to facilitate the unencumbrance of unearned CalWORKs contract funds prior to receipt of the audit. Agencies that need to revise their June reports may do so by September 30, 2011. An invoice that becomes ninety days delinquent will result in a withholding of all future apportionments.

PROCESS TO APPLY FOR CONTINGENCY FUNDS:

Pursuant to Education Code (EC) section 8222.1, CDE shall reallocate funds as necessary to reimburse AP programs (excluding CalWORKs) for actual and allowable costs incurred for additional services. An AP contractor may apply for reimbursement of up to three percent of their contract amount, or for a greater amount subject to the discretion of the Department, based on availability of funds. Applications may be submitted as early as May 1, but no later than
September 30, 2011. The CDE will approve or deny applications submitted pursuant to the above EC section, and will
not consider applications received after September 30 of the current calendar year for additional costs incurred during the 2010–11 fiscal year.

The CDE will distribute reimbursement funds for each approved application within 90 days of receipt of the application, if it was filed between May 1 and July 20 of the current calendar year. Applications received after July 20 are not subject to the 90 day requirement for the distribution of funds. If requests for reimbursement pursuant to this section exceed available funds, the CDE will assign priority for reimbursement according to the order in which it receives the applications. Funds received by an AP contractor pursuant to this section that are not substantiated by the program’s annual audit or a final report must be returned to the CDE. Billings for contingency funds are not subject to the appeal process.

2011–12 CHILD CARE AND DEVELOPMENT CONTRACT CHANGES

CONTRACT FUNDS:

Senate Bill (SB) 70 (Chapter 7, Statutes of 2011) added Education Code Section 8263.2 requiring the CDE to reduce the maximum reimbursable amounts (MRAs) of contracts for the Preschool Education Program, the General Child Care Program, the Migrant Day Care Program, the Alternative Payment Program, the CalWORKs Stage 3 Program, and the Allowance for Handicapped Program by 15 percent. When applying these reductions to 2011–12 contracts, the CDE first considered the contractor’s performance and reduced under-earning contracts to an amount proportional to need. Reductions to under-earning contracts offset the 15 percent MRA reductions, and the remainder was applied to all contracts. SB 70 also required the CDE to make other changes that affect contract MRAs, such as eliminating eligibility for 11 and 12 year olds, reducing reimbursement to license-exempt providers to 60 percent of the family home rate, and reducing the income eligibility limit to 70 percent of the state median income. These reductions will be applied to relevant contracts on a percent to total basis (percentage of contract MRA to total program funding).

The CDE began issuing direct service and support contracts for 2011–12 on June 1, 2011, based on the Governor’s May Revise. Specific details regarding contract reductions will be included in a separate letter attached to the contracts. If the final appropriation in the Budget Act results in further reductions, contracts will be amended to reflect any change in each program’s appropriation.

FISCAL YEAR 2011–12 BUDGET ACT:

It is uncertain whether or not the FY 2011–12 State Budget will be signed on time. However, contractors should sign and return their contracts to the Contracts Office promptly, as apportionments cannot be made without a signed contract. In the absence of a signed State Budget, contractors who require a short-term loan for operating expenses may contact their CDFS fiscal analyst to request a letter be sent to their financial institution confirming that a contract with CDE has been signed.

FIVE PERCENT CAP ON CENTER-BASED RESERVE ACCOUNTS:

Assembly Bill 1610 (Chapter 724, Statutes of 2010) amended Education Code, Section 8450, to re-instate a five percent cap on Child Development center-based reserve accounts. The five percent cap will be recalculated for fiscal year 2011–12 based on the maximum reimbursable amounts (MRAs) contributing to the center-based reserve in 2011–12. Upon close-out of FY 2011–12 center-based contracts with a reserve, contractors will be billed for any funds in excess of the five percent cap. Agencies are encouraged to evaluate their earnings in comparison to projected net reimbursable costs throughout the year and determine if it would be beneficial to increase spending.

TRANFERS BETWEEN GENERAL CHILD CARE AND STATE PRESCHOOL CONTRACTS FOR 2011–12 & 2012–13:

During the year, an agency may find its projected services or needs have changed and they need to transfer funds between their General Child Care (CCTR) and California State Preschool Program (CSPP) contracts. In 2011–12, an agency will have two opportunities to request a transfer of funds and amend their CCTR and CSPP contracts. The first opportunity will be between January 1 and January 15, 2012; during this period, the agency may request a transfer of funds for its 2011–12 contracts and its 2012–13 contracts. The final opportunity to request a transfer of funds will occur between May 1 and
May 15, 2012; during this period, the agency may request a transfer of funds for its 2011–12 contracts only. CDFS will not accept any requests to transfer funds for 2012–13 during the May transfer period.

To request a transfer the agency must submit a letter to their assigned CDFS fiscal analyst. CDFS has created three standardized letters that agencies can use for their transfer requests. These letters can be found on the CDFS Web site after July 1, 2011.

For more information, please see the Greenbook section titled, “California State Preschool Program.” The CDFS Greenbook can be found on the CDFS Web site.

VOLUNTARY/TEMPORARY TRANSFER OF FUNDS:

California Education Code Section 8275.5 allows for a voluntary and temporary transfer of funds between over-earning contractors and under-earning contractors with alike contract types (i.e. CCTR to CCTR) in order to fully utilize child care and development funding. Contractors will self-identify as an over- or under-earner and submit a transfer request that includes an amount of contract funding they expect to be able to temporarily release or accept. Local Planning Council (LPC) designees or a LPC subcommittee group is charged with facilitating the transfer of funds between contractors and submitting requests to the CDE.

The first opportunity to request a voluntary/temporary transfer of funds will be between November 1 and November 15, 2011; the final opportunity will be between May 1 and May 15, 2012. For more information on voluntary/temporary transfers of funds, please visit the Local Child Care and Development Planning Councils Information page or the 2011–12 Greenbook section titled, “Voluntary/Temporary Transfer of Funds.” The CDFS 2011–12 Greenbook can be found on the CDFS Web site after July 1, 2011.

AUDITS AND INVESTIGATIONS DIVISION REMINDERS AND CHANGES

NEW AUD FORMS:

Visit the Audits and Investigations Division (A&I) Web site for Contracting Agencies Audit Guidelines and view links to the new Audited Attendance and Fiscal Reports (AUD forms) and Instructions for fiscal year 2010–11. Audits submitted with obsolete AUD forms may be rejected. The AUD forms for fiscal year 2009–10 will remain on the A&I Web site for an additional year.

REMINDERS:

The following audit requirements of the CDE Audit Guide, referenced by section number, are important to discuss with your certified public accountant and your affected staff:

  • Ensure that the audit engagement letter between the agency and the CPA states that the audit will be performed in accordance with the CDE Audit Guide (see Section 160.C.2) and identifies the date that the final audit report must be submitted to the A&I (due dates in Section 210).
  • Except for child development (CD) program contractors on conditional status, the A&I may grant a CD contractor a one-time-only per year, 30-calendar-day extension of the audit due date, provided the inability of the contractor to submit the audit by the due date was beyond the fault and control of the contractor. The extension request due date and instructions for submission are specified in Section 212.

  • Section 310.A provides an overview of the AUD forms. Also, see page 2 of the AUD General Instructions (Form AUD 1000) on how to complete the AUD forms.

  • Preparation of the Audited Reserve Account Activity Report (Form AUD 9530-A) is explained in Section 355, including how the reserve account form AUD 9530-A data aligns with form CDFS 9530 data. Detailed instructions for preparing the AUD 9530-A are included as the last two pages of the AUD form instructions.

  • The AUD forms are required for subcontracts, except from subcontractors that operate CD programs for school districts (Section 350). The contractor is responsible for providing an audit by its subcontractor that includes the AUD forms for any subcontracts (Section 210.D).

  • When AUD forms report start up expenses (service level exemption), the audit must include a Schedule of Reimbursable Start-Up Expenses (Section 330). Note that part-year Migrant Programs also may contain close-down expenses that would be reported in the same manner as start-up expenses.

  • Include in the audit report a Combining Statement of Activities (Section 310.C). Revenues reported on the Combining Statement of Activities must be traceable to individual CDE contracts in the revenue section of the respective AUD form.

  • When CDE reporting requirements differ from those of Generally Accepted Accounting Principles (GAAP), e.g., for depreciation, a Reconciliation of CDE and GAAP Expense Reporting is required (Section 310.D).

  • Cost Allocation Guidance is provided as Exhibit B to Chapter 700 (Section 718).
COSTS DISALLOWED IN CHILD DEVELOPMENT AUDITS:

Following are examples of costs disallowed in audits of CDE child development programs. When costs are disallowed by CPAs or the A&I, the CDE will not reimburse those costs. Each example is followed by a bracketed citation to identify the applicable requirement in the contract Funding Terms and Conditions (FT&C). Reference the FT&C for the CD programs at CDFS Web site.

  • Payroll costs for salaries and benefits are disallowed when a contractor does not adequately support its claim for reimbursement, e.g., does not maintain time sheets that indicate the actual amount of time spent (performing direct cost activities) in each program per day for multi-funded employees. (FT&C, § VI.E).
  • The following costs are disallowed, as they are specifically prohibited by the contract – this is only a partial list (FT&C, § V.G):
    • Bad debts, except parent fees if collection attempts are adequately documented.
    • Amusement and entertainment.
    • Idle facilities for full-year programs, e.g., office or classroom used for storage.
    • Fines and penalties.
    • Bonuses not part of a collective bargaining agreement.
    • Costs incurred outside the contract period, but not audit fees (FT&C, § V.H).

  • Costs are disallowed if they are not reasonable and necessary to the performance of the contract (FT&C § V.A), for example:
    • Granite counter tops in kitchen and bathrooms.
    • Cellular telephones for employees’ spouses and children.
    • High-end office furnishings.

  • Depreciation is disallowed when claimed on (a) assets purchased with public funds, (b) donated assets, or (c) idle or excess facilities (FT&C, § III.A).

  • When a contractor lacks prior written approval from the Child Development Division, costs are disallowed for:
    • Renovation and repairs (FT&C, § III.F), or subcontracts (FT&C, § IV.C) of $10,000 or more.
    • Equipment purchases in excess of $7,500 per item (FT&C, § III.C).

  • Rent is disallowed (FT&C, § II.P):
    • On property owned by the contractor. An expense may be claimed only as depreciation or use allowance.
    • On property owned by affiliates, officers or other key personnel of the contractor or their families, unless the contractor obtains (and claims no more than) a fair market rental cost estimate from an independent appraiser licensed by the California Office of Real Estate Appraisers.
  • In general, claims for reimbursement are disallowed if there is insufficient documentation to support the claim, e.g., no paid invoice or receipt to support an expense. The contractor has the burden of proof. (FT&C, § VI.E).

For additional information, contact the CDE Audits & Investigations Division at 916-322-2288.

ANALYST CASELOAD ASSIGNMENTS:

Please be aware that some analyst caseload assignments have changed. Most agencies will continue to report to the same CDFS analyst.

WEBSITE LINK TO CDFS FORMS:

Contractors are requested to always use the most current CDFS report forms. Beginning July 1, 2011, please recycle any report forms that you may have made copies of, and use only the forms located at CDFS Web site.

If you have any questions about a specific contract or need clarification about any topic covered in this letter, please contact your assigned CDFS analyst.

Sincerely,

Original signed by Phyllis A. Savage


Phyllis A. Savage, Staff Services Manager III
Child Development and Nutrition Fiscal Services
Fiscal and Administrative Services Division

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