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Cash Management Improvement Act of 1990.

The CMIA exemplifies how state and finance officials and their federal counterparts can work together to increase overall efficiency and reduce costs relating to the transfer of nearly $150 billion in funds between the federal and state governments.

In 1983, under the general auspices of the National Association of State Auditors, Comptrollers and Treasurers (NASACT), a federal-state task force was appointed to review the equity question of how federally funded programs were being managed in terms of the actual receipt and expenditure of program funds. The 12-member task force comprised six senior officials from the federal government, including Treasury, Office of Management and Budget, Health and Human Services, and others, and six state officials, including state controllers, treasurers and program agencies. The early deliberations of this group resulted in a June 1983 Memorandum of Understanding, the provisions of which reflected the goodwill by all parties to find an equitable approach to intergovernmental cash management.

As the task force continued to examine the exchange of funds between federal government agencies and their state counterparts, pilot tests were conducted in 1984-85 to review new transfer procedures and interest calculations. In 1990, after seven years of study, debate, argument and negotiation by the task force, Congress passed the Cash Management Improvement Act (Pub L No. 101-453).

Legislated Equity

The announced purpose of the Cash Management Improvement Act of 1990 (CMIA) is to streamline the transfer of nearly $150 billion in funds between the federal and state governments. The act requires that interest be paid by one party to the other if funds are received late or if funds are withdrawn too early. Although its purpose is not to determine who is at fault and to keep score by means of calculating and exchanging interest, that is a fundamental provision of the act. Keeping score was seen as a necessary evil in order to ensure that both sides worked hard at what was the driving principle behind the legislation: to ensure greater efficiency, effectiveness and especially equity in the exchange of funds between the federal government and the states, insofar as federally assisted programs are concerned. The start date for implementation of the CMIA is October 24, 1992.

The Transfer Processes

The task force examined various methods by which federal funds could be transferred and tracked between the federal agencies and the states. The particular method selected, which can vary among the states, and further among state programs, will determine the extent of the interest calculation and exchange. The method selected will be negotiable, to some extent, within the individual U.S. Treasury/state agreements. While states can presumably submit their own plans relative to the federal funds transfer process, the three methods discussed below have been identified and tested to some degree; these will be used by most of the states.

The Zero Balance Method. Identified by the task force previously as "checks paid," the zero balance method provides that federal funds be drawn down for program disbursement as the state checks or warrants are presented to the bank for payment. The receipt of federal funds at the state level coincides exactly with the time that the issued checks are presented to the bank for payment, thereby eliminating the float period. This method assumes that the states' accounting systems have the ability to track each federal receipt, both when it is received in "good" funds at the state's bank, and when the related state check or warrant is issued and redeemed at the state's bank. The authors believe that most states, without major modifications to their current systems (which, in most cases, will not qualify for federal reimbursement), will be unable to track federal funds to this degree. Under this method, there would be no calculation or exchange of interest since the receipt and disbursement of federal funds would be coincident (and also assuming that any state using this method was not fronting federal program expenditures with state funds).

Estimated Clearance. The second method, estimated clearance (or delay of drawdown), provides that federal funds be drawn down to pay for program disbursements based on the estimated clearance patterns of the state-issued checks or warrants. This method requires that the states be able to document historical patterns of check clearance by program (or possibly combination of programs), since the Treasury assumes there are measurable differences in the clearance patterns of checks depending on the program recipient. Similar to the zero balance method, it would not be necessary to calculate and exchange interest, since there would be a presumption that the receipt and disbursement processes would be relatively the same (and assuming again that the state was not fronting federal payments).

Preissuance Funding. The preissuance funding (or checks issued-interest remitted) method provides that state agencies draw down federal funds prior to issuing state disbursements. This method will likely be used by states, such as Oregon, that have statutory or constitutional provisions requiring that federal funds, or any funds, be received and accounted for before state payments can be made. Clearly, adoption of this method means that interest will be calculated from the date the federal funds are drawn down to the date the checks or warrants are redeemed at the state's bank or electronic funds transfers (EFTs) are made.

Federal Implementation

CMIA draft regulations were published July 22, 1991; comments were received from many states, as well as interested organizations; and the proposed regulations were published on March 23, 1992, with a comment period through May 7, 1992. In June, legislation was introduced in Congress which would delay the implementation of the CMIA in order to allow states time to make the changes required for compliance with the law. As of mid-August, the final regulations had not been issued by the Treasury and the pending legislation was expected to be enacted in the fall.

In the absence of final regulations, and because the October 24, 1992, start date was approaching, both the federal government and the states have been frantically reviewing programs and attempting to determine the most cost-effective way to implement the act's provisions. At the federal level, Treasury has been meeting with the major program agencies to discuss the act and to review potential problems. Under the act's equity provisions, if federal agencies do not process states' requests for funds in a timely manner, they will be liable to pay interest to the states. Since any interest payments may come out of their administrative limitations, federal agencies have a strong incentive to provide timely transfers of federal funds to the requesting states.

Treasury also is documenting state payment restrictions that must be considered in implementing the act. It has initiated contact with all the states to request a single point of contact for coordinating implementation. It also has developed a model state agreement that can be tailored to each state's particular circumstances, and has begun to develop training programs for both the federal agencies and the states. The latter part of 1992 will be spent attempting to negotiate individual state agreements.

State Actions

The states have been trying to determine what they must do to meet the October 24, 1992, deadline. For some states, work began in earnest in 1991 with the publication of preliminary rules and regulations. At the outset, states were required to designate responsibility to a limited number of officials (one or two) to begin the coordination process at the state level. While the title of the act--Cash Management Improvement--clearly suggests a primary role for the state treasurer (at least in most states) the bulk of the work in meeting the act's provisions, in fact, revolves around the state's accounting processes and procedures. Thus, in most states, the chief operating official responsible for implementing CMIA is the state controller.

With state responsibility pinpointed, the usual scenario of steps has included the appointment of a working group of state agency officials to determine how the act's requirements will impact those state agencies with major federal assistance programs, and what processes and procedures they must change to track the receipt and disbursement of federal funds. This state agency evaluation includes identifying processing delays in recording receipts and disbursements, determining if there is interfund borrowing to cover federal disbursements, and identifying formal loans of state funds to federal programs. In order to promote improved cash management and comply with CMIA at the state agency level, it is clear that the following major changes will have to be made to the normal course of state business with respect to the receipt and use of federal revenues.

* Early disbursement of state funds at the program level will have to be identified and avoided.

* The drawdown of federal funds should match the actual clearance (or payment) by the state or its disbursement bank.

* States will have to identify and implement the use of electronic funds transfers to a much greater extent than has been done to date in most states.

* Agencies must be able to confirm the timely receipt and transfer of federal funds into state bank accounts.

* Negotiations with federal grantor agencies will have to begin to provide for the most frequent reimbursements possible.

* The allocation of expenditures will have to be determined as they occur to appropriate fund sources for federal programs that require both state and federal expenditures.

* How the state will provide for the actual calculation and tracking of interest must be determined.

Following reviews and revisions such as those identified above, each state will enter into negotiations with the U.S. Treasury for developing a Cash Management Agreement which will set forth all the specific terms and conditions between Treasury and the state as to how federal and state funds will flow and, if necessary, who will owe whom interest.

Conclusion

One of the major issues facing many states as the time of keeping score looms nearer is the need to make legislative changes to comply with the provisions of CMIA, particularly to pay interest to the federal government if warranted. Most state legislatures will not meet again until January 1993, months after the act is scheduled to take effect. Another concern is that most states will have to severely modify many of their financial systems to track the timing of federal funds, particularly the accumulation of check issuance and clearance information.

Despite the difficulties it has created, this legislation has been considered a milestone by many because it resulted from the joint efforts of state and federal officials, replacing the more normal route of states simply acquiescing to federal government mandates. Since both sides have to keep score, however, the required implementing procedures and regulations will be, for most states, complex and costly. When the act is fully implemented, better cash management at the federal and state levels will be a victory for the taxpayers.

GARY BRUEBAKER, director of cash management in the Office of the Oregon State Treasurer, is a member of GFOA's Committee on Cash Management. JACK KILEY, a consultant on treasury management located in Olympia, Washington, is an advisor to the cash management committee.

PERSPECTIVE: DID THE CMIA MISS THE MARK?

A number of the provisions in the draft regulations of the Cash Management Improvement Act which the states severely objected to were included nonetheless in the proposed regulations. In the states' opinions, these provisions missed the central theme and purpose of the act, namely equity on both sides, in favor of overly burdensome rules which ensure that some states would have to make costly modifications to their financial systems.

While acknowledging the continued problems which the states face in implementing the act, one also must acknowledge the fact that, without the efforts of the partnership, a unilateral federal prescription would have been levied on the states. In contrast, what has happened has been a good-faith effort on both sides, which exemplifies how the several states and their federal counterparts must work together to increase overall efficiency and reduce costs. When the act is fully implemented, better cash management at both levels will be a clear victory for the taxpayer.

Before that goal is achieved, however, there will be considerable consternation by those who must implement the "equity" provisions. Additionally, there are many state officials who remain unconvinced that any good will come out of this "bureaucratic labyrinth," particularly with having to keep score by tracking and trading interest payments. Some state officials continue to compare the act's provisions with Treasury's tax- exempt arbitrage regulations. But this is an unfair comparison, particularly for those people who have worked so diligently, and in good faith, at both levels of government. With the CMIA a compromise has been reached on a vexing problem which severely strained both levels of government. What is important now is that state and federal agencies are together seeking to do a more efficient job with billions of dollars in federal assistance payments.
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Title Annotation:includes related article
Author:Bruebaker, Gary; Kiley, Jack
Publication:Government Finance Review
Date:Oct 1, 1992
Words:2138
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