Interest Charges on Deficit Sponsored Fund Balances

Presented to SPOC: 12/18/03

Author: Beverly A. Simmonds
Director, Office for Sponsored Programs
beverly_simmonds@harvard.edu

For questions about the policy, please contact Judy McSweeney

Last Updated: March 27, 2006

Background

Deficit sponsored fund balances result in significant costs to Harvard University 's "Central Bank." In FY02 and FY03 deficit sponsored fund balances resulted in approximately $2.42M in costs to the Central Bank. While the Central Bank does earn interest on non-federal fund credit balances, net earnings to the bank on such balances during the same time period were $.46M, leaving a net cost to the bank of approximately $1.96M.

There are three primary factors contributing to deficit sponsored fund balances, each of which results in costs to the Central Bank:

• Overspent Accounts: expenses exceed either the obligation or the income credited to the fund.
• Advance Accounts: expenses charged to the account that cannot be reimbursed until the award is finalized and removed from advance status.
• Late Reimbursements: sponsors do not reimburse in a timely manner.

In order to mitigate such costs to the Central Bank, and to ensure strong financial accountability at the local level, interest on deficit sponsored fund balances will be assessed as described below.

Overview

• Interest will be assessed against four types of deficit fund balances:

• Dead Accounts : any sponsored fund with anticipated and obligated end dates three months old or greater where expenses exceed available funds (obligation plus carry-forward) or income by $1,000 or greater.
• Active Overspent Accounts : active awards with anticipated and obligated end dates greater than three months in the future where expenses exceed available funds (obligation plus carry-forward) or income by $10,000 or greater.
• At Risk Accounts : accounts in advance status with a start date of 120 days old or greater and where expenses are $75,000 or greater.
• Aging A/R : [to be developed]
• Interest charges will be assessed monthly at the annual simple interest rate set annually by the University (currently at 5.1% annually).
• Interest credits will continue to be earned on Non-federal Exchange (NE) and Gift (NG) funds with credit balances (see "Interest Income Paid on Non-Federal Sponsored Funds" policy).
• Interest charges will be calculated monthly and processed manually by OSP
• Interest charges will be levied against unrestricted School/Department funds; interest charges may not be levied against any sponsored awards.

Policies and Procedures: General

1. Enactment of Policy
   The "Interest Policy Group" (IPG), a subgroup of SPOC, met in fall of 2003 and winter/spring of 2004 to discuss and refine the policy for charging interest to sponsored awards with deficit fund. Beginning 3/1/04, interest will be charged on deficit fund balances on "Dead Accounts." Interest policies regarding Overspent Active Accounts will be implemented 6/1/04, and the Advance Account component of the policy will be effective 9/1/04.
2. Amendments to Interest Policies and Procedures
   Periodically the processes and methods affecting interest charges on deficit sponsored fund balances will be evaluated by the Vice President for Finance, tub financial officers and OSP staff. Any proposed changes to policies or processes affecting sponsored funds will be presented to SPOC members for advice and comment prior to their implementation. The interest rates used will be based on the rates used by General Accounting, which are reassessed annually.
3. Interest Rate
   Interest charges will be assessed monthly at the annual simple interest rate set annually by the University. The current annual rate for deficits is 5.1%, which will be charged at .00425% per month against all eligible funds as outlined above.
4. Eligible funds and ranges
   FG funds (Federal Grants and contracts) in the 100000-199999 range NE funds (Non-Federal Exchange Accounts) in the 200000-249999 range NG funds (Non-Federal Sponsored Gifts) in the 250000-299999 range
5. Exclusions
   Financial Aid awards will be excluded from this policy, owing to the manner in which they are reimbursed from sponsors.
6. Data Source
   All relevant data are taken from OSP's current system of record.
7. Calculation of Deficit Fund Balances
   A deficit fund balance exists when current to-date expenditures exceed available funds. Available funds are defined as the greater of: (a) the account group budgeted amounts plus carry-forward (i.e., total obligated plus carry-forward), and (b) income to-date plus adjustments to-date. Overexpenditures are calculated at the account group level.
8. Account to be Debited
   Each tub will identify one unrestricted account to which interest charges will be debited and will provide the main account's 33-digit string to OSP. Interest charges are levied against the tub/org holding the main account; if the deficit fund balance is the result of overexpenditure on a part-of account, it is appropriate for the tub/org incurring the charge to transfer this charge to the tub/org holding the overspent part-of account using object code 7632.
9. Recipient of Interest Income
   Interest charges made against tub accounts will be credited to the Central Bank.
10. Processing Interest Charges
    Monthly, OSP will generate a report listing all deficit sponsored fund balances currently eligible for interest charges, which will be distributed electronically to the tubs for review at the beginning of every month. Journals to clear overexpenditures must post no later than the last day of each month to avoid an interest charge. For each fund eligible for an interest charge on the last business day of the month, OSP will enter the tub-identified account string and debit amount into an ADI (automated data interface) template file. After month-end close, OSP will then send the ADI file to the FAD-OFS accounting office, where Joe DeCristoforo or his staff will upload the file, which posts the transaction to the General Ledger.
11. Viewing or Reporting Interest Charges
    Interest charges may be viewed or reported by using either a Detail Listing report or a Summary Actuals report. Select your tub(s), the appropriate fund, and object code 7630 for the period of choice. You may run the Interest Policy report for your area in CREW.
12. Appeals and Expense Entry Corrections
    For occasions when you wish to appeal an interest expense, or you feel that an interest expense has been incorrectly entered, please contact the OSP Financial Services representative assigned to your school or tub. Should the charge need to be reversed, the OSP staff will submit a correcting journal, using object code 4473, to OFS.

Policies and Procedures: Specific Deficit Balance Types

1. Dead Accounts - Funds Eligible to be Assessed Interest
   Sponsored funds with obligated and anticipated end dates of two months old or greater, as of the first business day of the current month, with deficit balances of $1,000 or more (see #7, "Calculation of Deficit Fund Balances" above), will be eligible to generate an interest charge that will be assessed after month-end close unless the fund balance is brought below the -$1,000 thresh hold in the interim (in which case no interest charge will be levied). As a result, interest charges will only be made against deficit fund balances of $1,000 or more with obligated and anticipated end dates three months old or greater.
2. Active Overspent Accounts - Funds Eligible to be Assessed Interest
   To allow for pre-award spending, only those active overspent accounts with anticipated and obligated end dates greater than three months into the future will be eligible for interest charges. Of these, active accounts with deficit balances of $10,000 or more of available funds (see #7, "Calculation of Deficit Fund Balances" above), as of the last business day of the current month, will generate an interest charge. As with Dead Accounts, Active Overspent Accounts will be distributed the first day of each month to help tubs identify and address problematic accounts.
3. At risk Accounts
   All advance accounts that are 120 days old or greater as of the last business day of the month, and that have $75,000 or more in expenditures, will be brought to the next bi-monthly Financial Oversight Committee for review, discussion and remediation. Any advance account that continues to show on the list at the following bi-monthly Financial Oversight Committee meeting will incur an interest charge. Transfers of PIs (and their awards) from other institutions may be considered as exclusions to the policy on a case by case basis. On the first business day of each month a listing of all active Advance Accounts will be distributed to help tubs identify and address potential problems related to Advance Accounts older than 120 days.
4. Aging A/R
   To be developed.