What is cost allocation?
Cost allocation is an accounting term used to describe the process of charging a cost, or a group of costs, to the funding sources that receive the benefit of the services received. Usually, the cost includes the direct costs of services provided, such as program staff, as well as the indirect or back-office costs of providing services, such as information technology and human resources. In most cases the Legislature allows the department to use a portion of the tax or fee revenue to pay for administration.
What are direct and in-direct costs?
What is the cost allocation project?
The purpose of the cost allocation project is to ensure the Oregon Department of Revenue (DOR) is performing a fair accounting of the true cost of administering all revenue streams with the goal of aligning the General Fund/Other Fund budget. These costs include direct and indirect or back-office costs for administration.
How is this project being accomplished?
In July 2024, DOR contracted with an outside consultant, MGT Impact Solutions, LLC (MGT), to evaluate the agency's cost allocation methodology that is used to determine administrative (back-office) and direct costs of the 63 revenue streams currently managed by the agency.
MGT is currently reviewing DOR's data and holding interviews with DOR's divisions and sections to make recommendations on modernizing the cost allocation methodology.
Why is DOR doing this project?
As the result of audit findings, and at the request of the Legislative Fiscal Office, DOR's cost allocation methodology requires review and updating. Additionally, the department administers more tax and fee revenue streams than it did the last time the cost allocation methodology was reviewed. As a result, the state's General Fund may be subsidizing the administrative costs of Other Fund programs. The standard practice across state agencies is that each Other Fund revenue stream must be self-supporting, including any revenue needed to pay for indirect costs.
How is cost allocation currently happening?
DOR collects on 63 revenue streams, including some taxes and fees levied by local jurisdictions. The revenue from the revenue streams is deposited into the state of Oregon's General Fund or Other Fund accounts according to statute.
Each revenue stream statute, whether General Fund or Other Fund, directs whether DOR may charge administrative costs and in some cases the statute details how much DOR may use to pay for administrative costs. The programs range from complex and heavily administered tax programs, such as personal income tax, to small programs such as Hazardous Substance.
Costs that are included in the administration of a program include:
- Personal Services (e.g., salaries and other payroll expenses)
- Services & Supplies (e.g., postage, printing, equipment, Attorney General costs)
- Capital Outlay (e.g., systems furniture)
The current cost allocation methodology is based on a prior time keeping system that identified the amount of time employees dedicated effort toward individual revenue streams and does not include new revenue streams added over the past five to 10 years.
Project Timeline
Additional project information
DOR hosted a virtual open house on October 15, 2024 for our external partners who may have an interest in the outcome of this work. For those unable to attend, see our recording and our presentation.