Skip to main content
California Department of Education Logo

Indirect Cost Plan for Local Educational Agencies

Letter Head: Jack O'Connell, State Superintendent of Public Instruction, Phone number 916-319-0800

November 7, 2005

Dear County and District Chief Business Officials and Charter School Administrators:


We are pleased to announce that the United States Department of Education (ED) has approved an updated indirect cost allocation plan for California, which governs the methodology for determining indirect cost rates for California local educational agencies (LEAs). This is the result of the expiration of California's previous plan and negotiations for the new plan between ED and the California Department of Education (CDE). The new plan has as its basis California's previous indirect cost plan and again establishes the CDE as the cognizant agency for LEA indirect cost rates.

Type of Rate

The type of indirect cost rate remains consistent with our previous plan and is a fixed-with-carry-forward restricted rate. The indirect cost rate is computed and "fixed" for a specific period on the basis of an estimate of that period's level of operations. Once the actual costs of that period are known, the difference between the estimated and actual indirect costs is "carried forward" as an adjustment to the new calculation. This puts any adjustments to the rate in a future period and allows LEAs to avoid having to file amended federal reports when actual indirect costs vary from estimated indirect costs.

The rate is "restricted" in accordance with Education Department General Administrative Regulations (EDGAR), Parts 75 and 76 of Title 34 of the Code of Federal Regulations, and is valid for both state and federal programs, including federal grant programs that have a statutory requirement prohibiting the use of federal funds to supplant nonfederal funds.

Approval and Use of the Rate

Consistent with past practice, all school districts and county offices of education, and those joint powers agencies (JPAs) that request it, will annually be assigned an indirect cost rate based on their unaudited actual data submission. Once approved by the CDE, the rate will be used to recover indirect costs in the second subsequent fiscal year. For example, the following is a time line of how 2004–05 data produces rates for use with 2006–07 programs:

  • LEAs submit 2004–05 unaudited actual data to the CDE by October 15, 2005.
  • The CDE reviews the data and releases the approved rates in early 2006.
  • The rates are used to budget and recover indirect costs for 2006–07.
Changes to the Rate Calculation

To ensure California's compliance with federal indirect cost guidelines, certain changes were incorporated into the new plan. These changes, which are outlined below, will be effective with the 2005–06 unaudited actual data and are based on guidance in the federal Office of Management and Budget Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments:

  • Expenditures for capitalized equipment, specifically objects 6400 and 6500, will be excluded entirely from the indirect cost rate calculation. For purposes of the indirect cost process, these costs are considered one-time or distorting in nature.
  • The Foundation Special Revenue Fund (Fund 19) and the Foundation Permanent Fund (Fund 57) will be added to the indirect cost rate calculation. These funds are used to account for LEA resources received from gifts or bequests that may be used for purposes that support the LEA's program(s).

Analysis shows that removing capitalized equipment and adding the "Foundation" funds to the indirect cost rate calculation should have a relatively minor effect on the indirect cost rate for most LEAs.

Charter Schools

New to this plan, all charter schools will annually be assigned an indirect cost rate based on one of the following criteria:

  • A charter school whose data is included as an integral part of its approving LEA's indirect cost data is eligible to use the LEA's indirect cost rate. Currently, this means that a charter school with unaudited actual data reported in its approving LEA's general fund (Fund 01) is eligible to use the LEA's indirect cost rate.
  • Starting with 2005–06 unaudited actual data, which will establish indirect cost rates for use with 2007–08 programs, a charter school that files the Standardized Account Code Structure (SACS) General Fund (Fund 01) unaudited actual data separate from its approving LEA's data (i.e., the charter school files SACS data under its own county-district-school code) will be assigned a rate based on its own charter school data. The rate calculation will be done on SACS Form ICR, similar to how it is done for other LEAs.
  • All other charter schools with unaudited actual data not covered by either of the above two bullets will be assigned an indirect cost rate that represents a statewide average restricted indirect cost rate. (Over the last five years this rate has been between 4.75 percent and 5.75 percent.)

Also, as part of the new plan it is anticipated that the Charter Schools Special Revenue Fund (Fund 09) and the Charter Schools Enterprise Fund (Fund 62) will be added, as appropriate, to the indirect cost rate calculation. Further information will be forthcoming and any changes made in regards to adding funds 09 and 62 to the indirect cost rate calculation will be effective with 2006–07 data or later.

Rates for Non-LEAs

New to this plan, for indirect cost purposes the CDE may assign an indirect cost rate to a non-LEA that receives funding from the CDE, as long as the non-LEA receives little or no funding directly from any federal agency. (A non-LEA that receives funding directly from a federal agency would apply to that agency for a rate.) Examples of non-LEAs covered by this new plan are private schools, consortia, not-for-profit entities (other than charter schools), and other public or private organizations.

Non-LEAs requesting a rate from the CDE will be assigned a rate that represents a statewide average restricted indirect cost rate. (As mentioned previously, over the last five years this rate has been between 4.75 percent and 5.75 percent.) This option will be used on a case-by-case basis and is subject to the CDE's approval.

Memorandum of Understanding

During plan negotiations between ED and the CDE, a number of specific accounting issues were discussed, including how to account for paid unused leave for retiring or terminating employees, post retirement heath benefits, subaward accounting, and the monitoring of time distribution policies and substitute systems for time accounting. At the request of ED, these issues were addressed in a separate Memorandum of Understanding (MOU) on California's indirect cost methodology. The CDE is currently preparing guidelines for the implementation of the MOU and will issue another letter as soon as they are finalized. It is anticipated that the implementation guidelines, which will be in the form of updated procedures for the California School Accounting Manual (CSAM), will be effective with 2006–07 data or later.

Other Indirect Cost Issues

During preparation of the indirect cost plan and MOU, both CDE and LEA staff raised numerous questions about the indirect cost process. While the majority of the issues were resolved and included in the indirect cost plan and MOU, CDE continues to research issues, such as possibly expanding object codes to provide more detailed indirect cost information and using a basis other than the classroom unit allocation factor to determine the administrative portion of maintenance and operations in the indirect cost rate calculation. We will keep you informed of these other issues, and anticipate any associated changes will be effective with 2006–07 data or later.

Additional Information

For additional information about the indirect cost rate calculation, or the more general indirect cost process, please refer to Procedure 915, Indirect Cost Rate, of the 2005 edition of CSAM, which can be accessed on the CDE's Web site at Also available on the Web at is an indirect cost Frequently Asked Questions (FAQ) document and the latest listings of approved indirect cost rates.

If you have questions or need assistance with the new indirect cost plan, please contact the Office of Financial Accountability and Information Services at 916-322-1770 or by email at


Scott Hannan, Director
School Fiscal Services Division

Last Reviewed: Friday, February 02, 2024

Recently Posted in Accounting