Service and Storeroom Activities

Policy Statement

Self-supporting funds are managed as businesslike operations with the objective of generating sufficient revenue from sales to finance all costs associated with the activities. A number of storerooms and service facilities have been established at the University of Illinois System to provide services and supplies to the system units, including sponsored programs administered by the system. Many of these sponsored programs are federally sponsored; as a result, the system must comply with federal costing principles for service centers as outlined in the Code of Federal Regulations (Uniform Guidance). Service activities with no charges to federal projects are also subject to federal regulations, since they charge other system funds whose expenditures are part of the Facility & Administrative (F&A) rates charged to federal projects. In addition, as a major state-supported research university, state regulations as outlined in the state Legislative Audit Commission University Guidelines must be followed.

Each unit is responsible for the management of its service activities, including the establishment and documentation of each user fee or markup. Rates should be reviewed annually with a formal rate calculation performed at least once every two years. The majority of this policy outlines acceptable ways for determining costs, calculating allowable recharge rates, and maintaining appropriate adjusted fund balances in the associated service center funds.

Reason for the Policy

Proper oversight is essential to uphold the system’s fiduciary responsibility to manage the funds in a consistent and compliant manner. This policy is designed to provide guidance to ensure the system complies with the requirements of the federal costing principles for service centers as outlined in the Code of Federal Regulations (Uniform Guidance) and state Legislative Audit Commission University Guidelines. This policy outlines methods for service center managers to use when identifying costs, setting rates, and charging users.

Applicability of the Policy

Service activities (centers, facilities and storerooms) are established primarily to meet the programmatic needs of the academic community, and usually provide goods or services to multiple system customers. In certain situations, state of Illinois agencies and organizations affiliated with the system may also be customers of these service activities. They are associated with entity codes 3100 (Communications and Computing Services) and 3110 (Plant and Service Operations), and are distinguished from auxiliary operations (fund types 3J and 3M) that provide services to students, faculty and staff and departmental activity funds (fund type 3Q) that provide services primarily to non-system users.

This policy applies to Storeroom and Service Fund Type 3E, summarizing these regulations and outlining methods service center managers should use when identifying costs, setting rates, and charging users. For over-arching policy related to non-3E fund Types, please see 22 Self-Supporting/Revenue Generating Activities.

Rate Setting Cost Principles

In general, the following costing principles are to be followed for service and storeroom activities:

• Rates must be established to recover no more than the allowable costs of providing the service or good.
• Rates must be established for each individual service or good, unless the usage basis for a group of related services/goods are the same.
• Rate calculations must be based on actual historical costs (or projected costs in the first year of operations). Costs included in the rate calculation are operating costs of the service activity, equipment depreciation expense, inventory-related costs (cost of goods sold), and in rare circumstances, the facility/building depreciation (see below for approval requirements). In addition, adjustments for accumulated adjusted fund balance amounts that are over or under the 60-day working capital limits must be included as part of the rate calculation.
• Federal costing principles allow service centers to maintain Adjusted Fund Balances of no more than 60 days of normal operating expenses at year end. Balances in excess of this amount should be eliminated over a period of time, normally 2 years.
• The usage basis for the service or good is based on actual historical usage (or projected usage in the first year of operations) including all users of the service or good, regardless of whether or not a free or discounted rate will be applied.
• The resulting rate (total costs divided by total users) is the maximum rate to be charged to internal users.
• External users may be charged more than the fully-costed rate, but external users should be a minimal component of the user population, or unrelated business income tax (UBIT) may be owed by the system. Note that Sponsored Projects are considered internal users.
• Rates should be reviewed annually by the unit with a formal rate calculation performed at least once every two years. Rate calculations and supporting documentation must be maintained on-file by the unit and are subject to periodic review by university administrators, as well as university, state, and federal auditors.

This policy is intended to provide as much information as possible to assist service center managers with rate calculations and related accounting procedures. However, since it is not possible for a policy to address every potential situation or nuance, service center managers are encouraged to contact System Government Costing for guidance and assistance with rate calculations. In addition, this office has developed worksheets and reports for service center managers to use (see the Resources section of this policy for more detail).

Federal and State Requirements

Federal Uniform Guidance, 2 CFR 200.468 (formerly OMB Circular A-21, Section J. 47 ) outlines the federal requirements for calculating service center rates. The requirements include the following:

• Rates should consist of both direct costs and, if appropriate, an allocable share of indirect costs;
• Rates should be charged based on actual use of the services;
• Rates should be designed to recover not more than the aggregate cost of the services over a long-term period;
• Rates must not discriminate against federally-supported activities of the institution (i.e., federal users cannot subsidize non-federal users);
• Rates must be calculated at least biennially; and
• Rates must take into consideration over/under applied costs of the previous period(s).

The State Finance Act restricts the use of these funds to the support, maintenance, and development of the activity generating the revenue in the fund. In other words, expenditures are restricted to those necessary to fund the service or storeroom facilities that generate the revenue. The state Legislative Audit Commission University Guidelines allows partial support from state funds for storeroom and service activities, but the costs supported by state funds cannot be recovered in the recharge rate.

Although some differences between federal and state guidelines related to service centers exist, the differences can be managed by utilizing the costing and fund balance maintenance principles outlined in this policy. Federal guidelines outline that, typically, no more than two months' working capital can be accumulated as a "surplus," while the state allows a cash balance sufficient to meet the entity's working capital needs, which simply stated is the entity's high month or average monthly expenditures. In addition, federal regulations do not permit the cost of capital asset expenditures as an allowable cost to be included in the rate calculations; instead, only equipment depreciation expense may be included in recharge rates.

Basic Costing Principles for Service Activities

In general, rates must be established to recover no more than the allowable and related costs of providing the good or service. Costs typically include:

• Operating costs of the service activity
• Equipment depreciation expense
• Inventory-related costs (cost of goods sold)
• Adjustments for over/under recovery of costs

More detail on each of these categories of cost is included in the next section.

Total allowable costs are divided by the estimated number of units in order to determine the maximum recharge rate for system customers. Typically, established rates must be uniformly charged to all system users. Where preferential rates or free services are provided to some users, rate calculations are based on billing at the full cost, and the resulting under recovery must be subsidized by unit funds and not otherwise recovered through increased rates.

Service centers should operate under the break-even principle. Variances beyond break even limitations within a two-year period must be reviewed and resolved as prescribed in the Federal and State Requirements section of this policy. Costs and users must be segregated by service or product line, so that the revenues related to one activity are not subsidizing another activity. Costs and revenues as well as adjusted fund balances should be analyzed on a per-service basis.

Units should review and adjust rates as necessary on an annual basis. Biennial formal rate calculation documentation of user fee or markup calculations must be available for review upon request by university administrators, as well as university, state, and federal auditors.

Any exceptions must be approved in advance by the Senior Associate Vice President for Business and Finance and the relevant responsible administrator under whose jurisdiction the service activity operates.

Related Policies and Procedures

Fund Management
Identifying Costs
Setting Rates
Adjusted Fund Balances and Over/Under Recoveries
Documentation Requirements
Calculations
Billings
Reviews & Approvals

Resources

System Government Costing provides Business Objects Web Intelligence reports, Excel spreadsheet templates, job aids, and a web-based Service Activity Basics Certification Training Course to assist with rate calculations and determining adjusted fund balances and their allowable limits, in addition to over/under recoveries.

Business Objects Web Intelligence reports and Excel templates:

• "Equipment Depreciation.wid"
• "Expenditures and Transfers.wid"
• "Fund Balance.wid"
• "Salaries and Wages.wid"
• "Service Activity Rate Calculation Template.xlsx"
• "Storeroom Markup Rate Calculation Template.xlsx"

The job aids and other training materials are available at Government Costing - Service Activities Resource Page.

The web-based Service Activity Basics Certification Training Course is at OBFS Certification Program page.

Business Objects Web Intelligence reports are available at Government Costing - Service Activities. In addition, the Business Objects Web Intelligence reports and the Excel spreadsheet can be obtained by contacting System Government Costing.

Last Updated: May 15, 2019