Governmental Cost Recovery

Source: http://ops.fhwa.dot.gov/publications/fhwahop09028/chap_2.htm

I have heard the mantra again and again “we don’t make a profit” meaning, if we charge for services it’s only on a cost recovery basis.

Yet I just read that Inyo COE charges a flat 7% to its charter schools for providing business services.  If a charter school now receives significantly more funding under the Local Control Funding Formula, is the county office of education charging too much?  Inyo COE actually admits that the fees it receives in excess of its costs are directed toward other activities.

The California government code and the California Schools Accounting Manual (CSAM) don’t provide a comprehensive last word on these issues.  However there’s more than enough information to easily grasp legislative intent.  To understand this intent, here’s a thought experiment.

Imagine that you set up a separate fund just for, say, duplicating services.  Every work order is charged out to users.  At year end you certainly don’t want to be in a situation where you have under-charged and you have a negative fund balance.  But what if you overcharge?  Say your expenses are $5 million and you earn $6 million?

Great, you think, I can spend that million dollars, say, on laptops for students.  But hang on a minute. Your work orders will have been charged to programs funded with federal funds and other grant funding.  Won’t those entities cry foul and say you are overcharging?  Won’t they accuse you of actually laundering their grant funds, and say that by overcharging you are in effect un-restricting and diverting some of their funds?  Yes, I maintain, they would make such a complaint.

The CSAM actually mentions the concept of over-charging.

A surplus or a deficit in an internal service fund may indicate that the funds and programs benefiting from the internal service activity are being over- or undercharged for the costs of the goods or services received from the internal service activity. [CSAM section 775]

So there you have it.  The CSAM sees a surplus as an indication of possible overcharging.  Therefore, if you overcharge one year you’ll need to leave the “profits” in the fund and possibly adjust your rates the next year.  That is unless you need to build a reserve for future equipment replacement or other capital needs.

This is exactly the concept applied to the Cafeteria fund.  Surpluses cannot be moved from the Cafeteria Fund to the General Fund.  Fund balances cannot exceed working capital needs and future equipment replacement requirements.

In my opinion Inyo County Office of Education’s charter schools are probably owed a refund.  I specifically object to the Inyo Register calling this a win-win.  In what way is overcharging charter schools serving high-needs students a win?