Rules and Procedures for Funds Transfers

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 205

RIN 1510-AA41

Rules and Procedures for Funds Transfers

AGENCY: Treasury, Fiscal, Financial Management Service.

ACTION: Final rule; amendment.

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SUMMARY: This rule amends the regulations implementing the Cash

Management Improvement Act of 1990 (CMIA), which governs the transfer

of funds between the Federal Government and the States under Federal

programs. It narrows the scope of CMIA implementation by excluding

certain State-level entities that are fiscally or legally independent

of the central State authorities.

DATES: This rule is effective July 1, 1994, and is applicable July 1,

1994, or the first day of a State's 1995 fiscal year, whichever is

later for a given State.

FOR FURTHER INFORMATION CONTACT: Gary Grippo, 202-874-6955.

SUPPLEMENTARY INFORMATION:

Background

This rulemaking is authorized by the Cash Management Improvement

Act of 1990 (CMIA), Public Law 101-453, codified at 31 U.S.C. 3335,

6501, and 6503. The purpose of CMIA is to ensure greater efficiency,

effectiveness, and equity in the exchange of funds between the Federal

Government and the States.

On September 24, 1992, the Financial Management Service (FMS)

issued regulations at 31 CFR part 205 to implement CMIA. 57 FR 44272,

September 24, 1992. Subsequently, when the effective date of CMIA was

delayed by the Cash Management Improvement Act Amendments of 1992,

Public Law 102-589, the FMS revised the rules at 31 CFR part 205 to

change the implementation date. 57 FR 60676, December 21, 1992. The

regulations finally took effect on July 1, 1993, or the first day of a

State's 1994 fiscal year, whichever was later for a given State.

The CMIA statute defines the term ``State'' to mean ``a State of

the United States, the District of Columbia, a territory or possession

of the United States, and an agency, instrumentality, or fiscal agent

of a State * * *'' (31 U.S.C. 6501). [Emphasis added.] The implementing

regulations refined this definition to specify the meaning of a State

agency or instrumentality: ``A State agency or instrumentality is any

organization or component unit of the State reporting entity as defined

by Generally Accepted Accounting Principles'' (31 CFR 205.3). This

regulatory definition, however, has caused problems for States and

Federal agencies because it includes autonomous State-level entities

that are legally or fiscally independent of the Governor, Treasurer,

and Comptroller.

Accordingly, the purpose of this amendment to 31 CFR part 205 is to

narrow the scope of CMIA implementation by excluding certain State-

level entities that are fiscally or legally independent of the central

State authorities. This amendment responds to the concerns of States,

Federal agencies, and independent State-level entities, such as public

benefit corporations and institutions of higher education.

Definition of State Agencies and Instrumentalities

The existing regulation defines a State agency or instrumentality

to be any organization or component unit of the State reporting entity,

as defined by Generally Accepted Accounting Principles (GAAP). This

rulemaking narrows that definition to exclude: (1) Component units of a

State, and (2) institutions of higher education, hospitals, and

nonprofit organizations.

The existing definition causes problems for States because it

includes entities that are legally independent of the State executive

or fiscally independent of the State Treasurer and Comptroller. It

therefore makes States responsible for organizations over which they

have no control, financially or otherwise.

This rulemaking, accordingly, narrows the definition of State

agencies and instrumentalities based on the principles of legal and

fiscal control. First, it excludes component units of a State, such as

public benefit corporations, which are by definition legally

independent of the primary State government. The distinction between

component units of a State and the primary State government is taken

directly from GAAP, specifically Statement No. 14 of the Governmental

Accounting Standards Board, ``The Financial Reporting Entity.''

Second, this rulemaking excludes certain entities that are likely

to be fiscally independent, if not legally independent, by excluding

institutions of higher education, hospitals, and nonprofit

organizations. This exclusion is based on the dichotomy established by

the Office of Management and Budget Circulars on grant administration.

Circular A-102 applies to States per se, while Circular A-110 applies

to institutions of higher education, hospitals, and nonprofit

organizations.

Pass-throughs

Both changes to the definition of State agencies and

instrumentalities exclude particular entities from the scope of CMIA,

but do not necessarily exclude from CMIA all Federal funds that flow to

those entities. That is, these changes should not be construed to

exempt Federal funds that pass from a covered State entity to an entity

that would be excluded by this rulemaking. For example, if a State

Department of Education draws down Federal funds and then passes them

on to a State institution of higher education, the funds would be

subject to CMIA while they were in accounts of the State Department of

Education.

Excluded Entities With Accounts in the Central State Treasury

Finally, clarification may be needed for cases where an excluded

entity maintains its bank accounts in the central State treasury, which

is part of the primary State government and therefore ostensibly

subject to CMIA. As a general rule, accounts in the central State

treasury against which an excluded entity disburses funds to program

recipients or contractors would not be covered by CMIA. If, for

example, a State university maintains an account in the State treasury,

keeps Federal funds in it, and issues checks to students against it,

the provisions of the CMIA regulation would not apply.

Rulemaking Analysis

E.O. 12866: It has been determined that this regulation is not a

significant regulatory action as defined in Executive Order 12866.

Therefore, a Regulatory Assessment is not required.

Regulatory Flexibility Act: Since no notice of proposed rulemaking

is required for this regulatory action, the provisions of the

Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.

Notice and Comment

The FMS issues this final rule without prior notice and without a

comment period, in accordance with 5 U.S.C. 553(b)(B). The FMS has

determined that a notice of proposed rulemaking is unnecessary and

contrary to the public interest.

The FMS makes these determinations based on meetings and

correspondence with Federal agencies and States, which have urged the

FMS to change the definition of State agencies and instrumentalities.

Forty States expressed unanimous concern about the definition at four

regional roundtable discussions. Twenty-six States indicated in survey

responses that there were legal and practical impediments to complying

with the regulation. Virtually all States and Federal agencies,

moreover, have written to the FMS to voice concerns about the existing

definition.

Prior notice-and-comment on this rulemaking is unnecessary because

all affected parties support it. States, Federal agencies, and

independent State-level entities without exception have urged the FMS

to narrow the definition of State agencies and instrumentalities. Since

this rulemaking responds to the universal position of all parties

subject to the regulation, prior notice and a comment period are not

necessary.

The determination that notice-and-comment is contrary to the public

interest is based on the following considerations. First, the existing

definition of State agencies and instrumentalities, if implemented,

could result in serious damage to State governments and to independent

State-level entities, such as public benefit corporations, public

authorities, and public institutions of higher education. This

definition would place Governors and other officials of the primary

State government in positions of legal and financial responsibility for

entities that are by law independent. States and independent State-

level entities have appealed to the FMS that the implications of this

definition are financially and legally untenable.

Second, the existing regulatory definition could threaten the

stability of the CMIA program by forcing States into either default or

noncompliance. A State is in default of CMIA when it does not enter

into a Treasury-State Agreement with the FMS to implement CMIA. Some

States have indicated that they can not execute an agreement under the

existing regulation because they would be binding entities they do not

control legally or fiscally. Other States may enter into agreements on

behalf of such entities but can not ensure compliance with what has

been negotiated. The potential for both default and noncompliance is

considerable under the current regulation and could undermine the

implementation of sound cash management practices required by CMIA.

Finally, the existing regulation would result in unnecessary costs

to the Federal Government and potential financial harm to States. Under

the current regulation, States would incur added costs to modify the

unique accounting system of each independent State entity. A State

covering six independent entities, for example, would have additional

costs that are six times those incurred by the State to adapt the

central State accounting system to implement CMIA. These duplicative

costs must either be charged to the Federal Government, or absorbed by

the States, with but marginal benefits to the CMIA program.

List of Subjects in 31 CFR Part 205

Grant programs, Grant administration, Intergovernmental relations,

Electronic funds transfers.

Issuance

For the reasons set forth in the preamble, 31 CFR part 205 is

amended by this final rule as follows.

PART 205--[AMENDED]

1. The authority citation for 31 CFR part 205 continues to read as

follows:

Authority: 5 U.S.C. 301; 31 U.S.C. 321, 3335, 6501, 6503.

2. The definition of the term ``State'' in Sec. 205.3 is revised to

read as follows:

Sec. 205.3 Definitions.

* * * * *

State means a State of the United States, the District of Columbia,

the Commonwealth of Puerto Rico, the Commonwealth of the Northern

Mariana Islands, American Samoa, Guam, the Virgin Islands, and an

agency, instrumentality, or fiscal agent of a State so defined, but

does not mean a local government or an Indian tribal government.

(1) A State agency or instrumentality is any organization of the

primary government of the State financial reporting entity, as defined

by Generally Accepted Accounting Principles, excluding institutions of

higher education, hospitals, and nonprofit organizations.

(2) A fiscal agent of a State is an entity that pays, collects, or

holds Federal funds on behalf of the State in furtherance of a Federal

program, excluding private nonprofit community organizations.

* * * * *

Dated: May 27, 1994.

Michael T. Smokovich,

Acting Commissioner.

[FR Doc. 94-13406 Filed 5-31-94; 8:45 am]

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