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Report on California Approach to Education and Implementation of OMB 2 CFR200

Publication date: 
Wednesday, July 26, 2017

As part of SCG’s work to support a healthy nonprofit ecosystem, we recently concluded a year-long initiative to educate California state government and local officials about new federal contracting rules on indirect cost reimbursement, known as the Office of Management and Budget (OMB) Uniform Guidance. You can read the report below from our partner California Strategies regarding our work in leading this collaborative effort in and beyond our sector. 


Among the challenges nonprofits face in providing high-quality service and producing strong outcomes to their work, managing the limited overhead allowed by most private and government grant and contracts is one of the toughest. Over the past several years, there have been efforts to explain how the “overhead myth” – that the best nonprofits operated with the least overhead – hampers service delivery, jeopardizes nonprofits’ sustainability and ultimately reduces the impact of public and private funding and to find collaborative solutions that will strengthen nonprofit organizations. In December 2014, the federal Office of Management & Budget released an important document related to this issue: 2 CFR 200, known as the Uniform Grants Guidance. These new grantmaking oversight rules were meant to reduce administrative and fiscal burdens on nonprofits receiving federal grants; clear up conflicting rules and regulations; streamlining auditing practices; improving data processing; and updating reporting guidelines for grant recipients.

In January 2015 – immediately after release of the Uniform Grants Guidance – California Strategies began working at the request of the Weingart Foundation and the California Association of Nonprofits (CalNonprofits), as part of the Full Cost Initiative, to ensure that state and local governments in California understood the Uniform Grants Guidance and were implementing it appropriately. The funder partnership for this work included Weingart Foundation, the California Wellness Foundation and the California Community Foundation. Aligned with the work focused on government, another branch of the Full Cost Initiative worked with philanthropy to promote full-cost funding practices among private funders. This work was led by Southern California Grantmakers, Northern California Grantmakers and San Diego Grantmakers. In July 2016, Southern California Grantmakers assumed the role of project manager for several interested foundations in furthering the work with government by California Strategies to conduct its statewide education and outreach. These foundations included the Weingart Foundation, Annenberg Foundation, PIMCO Foundation, California Community Foundation, and the James Irvine Foundation. 

Below is an account of the collective steps the project partners took in response to the challenges and opportunities specific to California. Accompanying this report as attachments are examples of research, background and communications materials produced to support the effort. Those materials are cited in the report where they are relevant.

INITIAL PHASE: Defining the issue’s importance and assessing degree of understanding California Strategies began its work by identifying the central issues involving the Guidance, both at a national and state level. We first explored other states’ efforts (in particular New York and Illinois) and then interviewed leadership at California State agencies, the Department of Finance and Joint Legislative Audit Committee to understand the level of understanding and extent of state knowledge about the Guidance. We also researched which state agencies distributed the most federal pass-through grants and analyzed the local distribution of State and Federal grants to determine where the Guidance’s impact would be greatest (Attachment A). Additionally, California Strategies researched the non-profit and government communications that served as education outreach to determine how each sector was describing the Guidance, its regulatory changes and recommendations for compliance.

Based on this initial research and discussions with Weingart Foundation and CalNonprofits, California Strategies recommended pursuing compliance of state and local governments through the Executive Branch and State Controller, an independently elected office, rather than taking a
more unpredictable legislative route. To disseminate information about the Uniform Grants Guidance further, we also suggested working with California Association of Government (CSAC Institute), California League of Cities, California Department of Finance, California State Operations Agency and California Health and Human Services Agency.

As an initial step, in spring of 2015 California Strategies produced a white paper to address a gap in the education effort about the Guidance: outreach to the public sector that defined the issues in language written for a public-sector audience. The white paper, “Full Cost Funding Initiative: Aligning Foundations, Government & Nonprofits for Strong Outcomes,” described the Nonprofit Overhead Project’s work (to provide context about what was happening in the nonprofit and philanthropic sector regarding the Guidance and indirect cost issues) and highlighted key information about the Guidance (Attachment B). The paper included: the Guidance’s changes to government regulations; a breakdown of government grants and contracts in the state to demonstrate the impact of government funding on nonprofits; opportunities for alignment among government, nonprofits and foundations; background on work by other states to implement the changes (based on our initial research); details about CalNonprofits’ technical assistance to the non-profit sector through the Nonprofit Overhead Project; and the work by the grantmakers’ associations to educate foundations about the importance of allowing for nonprofit overhead.

To set the stage for partnerships and collaborations among the public sector, nonprofits and the philanthropic community, the white paper also outlined five goals for collaboration across all levels of California government: ensuring full compliance of the new regulations; aligning all
three sectors to improve service and program outcomes; creating greater stability for nonprofits that receive government grants; avoiding unnecessary duplication of documentation/reporting to save time and money; and developing best practices for auditing and compliance.

In conjunction with the government education outreach by California Strategies, Weingart Foundation worked with Elizabeth Boris at the Urban Institute to recast a national analysis involving the nonprofit sector through a California-specific lens (Attachment C). Findings included: about two-thirds of California nonprofits report limits of 10 percent or less for program and general overhead expenses; 69 percent of nonprofits in California reported that failure of government to cover full program costs is a problem (versus just 54 percent nationally); and in
general California nonprofits reported higher levels of problems and issues with government grants and contracts than their national counterparts. Weingart Foundation’s leadership enabled an enriched collaboration that Southern California Grantmakers coordinated.

Weingart led one additional and extremely important effort: garnering support for implementing the Guidance’s regulations by the Los Angeles (LA) County Board of Supervisors. During the Fall of 2015, Weingart and other partners engaged with the Board of Supervisors – specifically
Board Chair Hilda Solis and her office – to highlight the importance of the Guidance, its potential impact on LA County nonprofits and how providing for reasonable overhead costs can enable nonprofits to operate better and produce stronger outcomes. This engagement included 
holding a meeting with Supervisor Solis about the Guidance and indirect cost issues, attended by LA County nonprofits and foundations as well as by the Urban Institute’s Boris. It resulted in a motion in November by supervisors Solis and Sheila Kuehl, which was pass unanimously by the full Board, to develop recommendations on implementing the Guidance, in consultation with county nonprofits and philanthropies, and to advocate to State leaders about implementing the Guidance appropriately (Attachment D).

The passage of the motion also provided an opportunity to speak about the issue more broadly through a coordinated communications strategy, which included an Op-Ed in the Los Angeles Daily News by Supervisor Solis and Weingart President and CEO Fred Ali (Attachment E); several blog posts by LA thought leaders, including at Huffington Post; and other social media outreach. Finally, this work in LA County informed the State and CSAC efforts and outreach approaches.

SUPPORTING THE STATE: Bringing clarity to statewide directives.

At the state level, it was critical to educate leaders at the agencies and departments most involved with grantmaking and contracts, notably the Department of Finance, the State Controller and the California State Operations Agency. During the summer and fall 2015, California Strategies, Weingart Foundation and CalNonprofits met and corresponded with leadership in all three agencies. We fostered a strong champion in the Secretary of the State Operations Agency, and she and her staff were able to refine our message further and help reinforce the Guidance’s importance to the Department of Finance. This led to the Department issuing a Finance Letter in November to State agencies outlining the Guidance’s requirements and encouraging training for relevant employees – a broad and far-reaching way to address all of California’s State government (Attachment F).

With State-level agencies largely aware of and beginning to follow the Guidance’s requirements, throughout 2016 California Strategies and other partners shifted our focus to the following statewide offices to ensure full implementation of the Guidance:

  • The State Controller’s Office in its capacity as the State’s compliance agency for local governments. We worked with the State Controller to ensure that local governments were complying with the Guidance’s regulatory changes. We also served as a resource to the Controller’s Office as it reworked its aggregation of local data.
  • State Administrative Manual (SAM). We worked with the Department of Finance to put indirect cost language in the government manual for all agency use in Requests for Proposals (RFP) and Requests for Qualifications (RFQ), clarifying indirect costs and ensuring federal compliance.
  • Health and Human Services Agency. We offered to build a partnership with the agency to bring together a working group of county and state affiliated organizations to ensure awareness, consistency of interpretation and fuller understanding of indirect cost issues.


Cal Nonprofits added an important informational element during this time frame that focused on how nonprofits manage their overhead rates. Their survey of California nonprofit executives examined experiences with indirect costs and the Guidance; experiences with overhead included in foundation grants; how they discuss the need for overhead with funders; and how indirect cost rates influence their management decisions. Their findings provided California-specific data to bolster arguments about the need to address the indirect cost issue and the Guidance’s regulatory changes. It was first presented at a conference in November 2016 and published by the Association for Research on Nonprofits and Voluntary Action in March 2017. In addition, for the nonprofit community, CalNonprofits has held numerous webinars and in-person workshops across the state on the issue, training nonprofits on understanding and calculating the full cost of their services, as well as how to more effectively get these costs funded.

By February 2017, the outreach and education effort led to another important milestone: The State Controller issued a letter to all local agencies, both county and city, to ensure they were complying with the Guidance’s requirements (Attachment G). It also provided examples of how compliance could be achieved. Through this letter and the Budget Letter from a year earlier, the vast majority of agencies overseeing public dollars received information clarifying Guidance rules. The main issues remaining to be addressed were personnel training and interpretation. In March 2017, a coalition working on the Guidance issue traveled to Sacramento for a series of
meetings with key leaders. Members traveling included Chris Essel, President of Southern California Grantmakers; Fred Ali and Vy Nguyen of Weingart Foundation; Sarah Middleton from PIMCO; Russ Gould and Joanne Kozberg from California Strategies; and Jan Masaoka of CalNonprofits. This team met with the State Controller, the Governor’s Cabinet Secretary, the California State Association of Counties and the League of California Cities.

TRAINING THE COUNTIES: Fostering key partnerships

To balance the “top down” approach at the State level and address the interpretation and training issues, we also determined it would be critical to meet with and educate staff members who are involved regularly with public grant dollars, especially since most pass-through grants are ultimately distributed at the county level. California Strategies identified the California State Association of Counties (CSAC) as the most viable and effective partner for this work through it training institute, CSAC Institute. (Both CSAC and the League of California Cities informed their member about the Guidance via their newsletters, following our engagement with them.) CSAC was training its county members to comply with the Guidance, but we identified gaps: its emphasis was on compliance, indirect overhead was only a small part of the curriculum and the attendees in the audience were largely Northern California-based. 

Through our partnership with CSAC, CSAC’s faculty built a curriculum with Kay Sohl, Cal Nonprofits consultant. The training for county staff will take place at a convening in Southern California in summer 2017 and while focusing on the Guidance, it will emphasize building stronger relationships between government and the nonprofits that deliver its public services.

Given the size, number of nonprofits and amount of services provide in Los Angeles County, our efforts also continue to focus on ensuring the fullest implementation of the Uniform Guidance and on improving the partnerships between County government and nonprofits – a critical element to moving past overly restrictive overhead rates and burdensome accountability requirements. Included among this work has been:

  • The stakeholder group has been working with the County’s leadership and departments to seriously consider the concept of allowing nonprofits to negotiate a County-wide indirect cost rate specific to each organization’s needs, as allowed under the Guidance. This process, while promising, is still in an initial exploratory phase and would need ultimate approval from the Board of Supervisors. Should Los Angeles County allow nonprofits the option of a countywide indirect cost rate, it would be the first of its kind in the nation and serve as an important model.
  • Because of the stakeholder group’s involvement, the County’s Internal Services Department (ISD) held a half-day training on August 24, 2016 for nonprofits on the contracting process. The training provided the County an opportunity to reach out to nearly 1,500 nonprofits that currently hold a County contract or have expressed interest in responding to an RFP. This group also received a survey from the County to inform crucial next steps for implementation of indirect costs negotiation. This survey revealed that 89 percent of nonprofit respondents expressed interest in negotiating an indirect cost presentation from the County and 67 percent indicated interest in negotiating a local single indirect cost rate. This survey provided crucial feedback for County staff to inform possible implementation.


RECOMMENDED FUTURE ACTION AT STATE LEVEL: Ensuring clarity of interpretation, professional training and educational outreach

California Strategies recommends exploring the following strategies to move the agenda forward:

  • Continue dialogue with Controller Betty Yee. (Controller has the responsibility to audit local government compliance.)
  • Through the newly created Assembly Select Committee on Nonprofits, request a hearing on the issue of non-profit delivery of government services. This would broaden the issue to bring in the findings from the Urban Institute report (and have the author as a thirdparty source of information), capture partnership impediments, and compliance with OMB Guidance.
  • Health and Human Services Agency agreed to bring together a working group of county and state affiliated organizations to ensure awareness, consistency of interpretation and fuller understanding of indirect cost issues. CSAC was to bring together its affiliated organization as a prelude to the meeting with HHS. This remains a valuable step that should be pursued. Limitations of bringing the HHS offer to fruition: capacity of CSAC to organize pre-meeting and HHS responsibility for future of MediCal.
  • Continue to periodically meet with key state contacts to remind all parties that services to public would be better leveraged if government, foundations and non-profits worked cohesively.
  • In 2018, explore request to Joint Legislative Audit Committee to audit OMB Guidance compliance at the state. This could be done through the Assembly Select Committee or through a member of the Joint Legislative Audit Committee member.
  • Maintain relationship with CSAC on different issues. California League of Cities will follow CSAC’s lead on these issues.
  • Look to working with the national organizations of counties, cities, and state finance directors.
  • Invite Gubernatorial candidates early to speak at Southern California Grantmakers about the roles of foundations and nonprofits in providing services in the state.



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