[Federal Register Volume 63, Number 204 (Thursday, October 22, 1998)]
[Proposed Rules]
[Pages 56591-56594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28230]
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LEGAL SERVICES CORPORATION
45 CFR Part 1628
Recipient Fund Balances
AGENCY: Legal Services Corporation.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would revise the Corporation's rule on
recipient fund balances to provide the Corporation with more discretion
to determine whether to permit a recipient to maintain a fund balance
up to 25% of its LSC support for a particular reporting period. It also
adds additional requirements and limitations applicable to waiver
requests and the use of fund balances. Finally, the rule is
restructured for clarity and for consistency with other LSC
regulations.
DATES: Comments should be received on or before December 21, 1998.
ADDRESSES: Comments should be submitted to the Office of the General
Counsel, Legal Services Corporation, 750 First St. NE., 11th Floor,
Washington, DC 20002-4250.
FOR FURTHER INFORMATION CONTACT: Suzanne Glasow, Office of the General
Counsel, 202-336-8817.
SUPPLEMENTARY INFORMATION: The Operations and Regulations Committee
(Committee) of the Legal Services Corporation's (LSC) Board of
Directors (Board) met on September 11, 1998, in Chicago, Illinois, to
consider proposed revisions to the Corporation's rule governing
recipient fund balances, 45 CFR Part 1628. The Committee adopted this
proposed rule for publication in the Federal Register for public
comment.
There is no statutory provision that limits the amount of a fund
balance an LSC recipient may carry over from one year to another. In
1980, the General Accounting Office (GAO) released a report finding
that, because LSC grantees were not required to return funds not
expended by the end of the year, some grantees had relatively large
carryovers when compared to their total grants. The GAO report
recommended that the Corporation ``should closely monitor the
expenditure of funds by grantees to minimize year end fund carryovers
and adjust subsequent year funding of grantees with excess fund
balances.'' In response to the report, the Corporation took various
actions to regulate recipient fund balances that culminated in the
promulgation of the current rule. See LSC memoranda (December 18, 1980
& March 18, 1982), grant conditions, Instructions (Instruction 83-4, 48
FR 560), and 45 CFR Part 1628 (49 FR 21331, effective on June 20, 1984,
and corrected at 49 FR 23056, June 4, 1984).
Generally, this proposed rule is intended to provide the
Corporation with more discretion to determine whether to permit a
recipient to maintain a fund balance up to 25% of its LSC support for a
particular reporting period and sets forth the requirements and
limitations applicable to waiver requests and the use of fund balances.
Finally, the rule is restructured for clarity and consistency with
other LSC regulations. A section-by-section analysis is provided below.
Section 1628.1 Purpose
This section is substantively revised. Provisions have been deleted
or moved to other parts of the rule because they do not constitute
statements of the purpose or function of the rule. The purpose of this
rule is to delineate the Corporation's policies and procedures
applicable to recipient fund balances. In addition, the rule's policies
and requirements are intended to ensure the timely expenditure of LSC
funds for the effective and economical provision of high quality legal
assistance to eligible clients.
Section 1628.2 Definitions
The proposed revisions to this section are intended to clarify or
update the meaning of the terms or to make them consistent with other
LSC regulations.
The term LSC Support is revised to clarify that it means the sum of
the recipient's LSC carryover funds from the prior fiscal year, the
amount of the recipient's LSC grant for the year in question, and any
LSC derivative income earned by the recipient during the year in
question. The reference to derivative income is revised to be
consistent with the definition of the term in Part 1630.
The proposed definition of fund balance amount is intended to
clarify that the term means the excess of LSC support over expenditures
as determined by the recipient's annual audit. Additional language in
the current definition is proposed to be deleted because it does not
constitute a statement of the meaning of the term.
No revisions have been proposed for the definition of the term fund
balance percentage.
The definition of recipient is proposed to be revised to reflect
current law which limits grants for financial assistance to those
authorized by Section 1006(a)(1)(A) of the LSC Act. The definition is
consistent with the definition of the term in many of the rules
promulgated by the Corporation since 1996.
Section 1628.3 Policy
This proposed section sets out the Corporation's policies governing
recipient fund balances. Several provisions in this section are found
in other sections of the current rule. They have been moved to this
section because they are statements of policy and are more
appropriately included here. In addition, procedural provisions in the
current rule have been removed from this section and transferred to the
section on procedures.
Paragraph (a) states that recipients may automatically retain a
fund balance up to 10% of their LSC support. Paragraph (b) clarifies
that recipients may request a waiver from the Corporation to maintain a
fund balance up to 25% of their LSC support. Paragraph (c) states that
the Corporation has discretion to grant a waiver under paragraph (b)
and clarifies that the Corporation's decision to grant a waiver must be
based on the criteria found in Sec. 1628.4(e).
Public comments, citing the practice of nonprofit corporations to
retain higher fund balances, urged raising the 10% and 25% caps or
eliminating the 25% cap altogther. The LSC Inspector General, on the
other hand, expressed concern that large fund balances create the risk
of fraud or defalcation of funds. Another comment cautioned that
appropriated funds should generally be expended within the
appropriation period for the badly needed provision of legal assistance
for eligible clients.
The Committee decided it needs more information before deciding
this issue and seeks public comment on what the appropriate level of a
permissible fund balance should be and what constitutes the normal
operating practice of nonprofit and government entities with regard to
fund balances.
Paragraph (d) requires that any fund balance in excess of what is
permitted by this rule must be returned to the Corporation. The
Corporation has discretion to determine, after consultation with the
recipient, whether the repayment of an excess fund balance should be
made in a lump sum or in pro rata deductions from the recipient's grant
checks for a specified number of months.
Paragraph (e) clarifies that the recovery of an excess fund balance
does not constitute a termination pursuant to Part 1606.
Paragraph (f) clarifies that funds from one-time or special purpose
grants may not be carried over as part of a recipient's fund balance.
Instead, any expended funds from such grants remaining after the
termination date of
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the grant must be returned to the Corporation.
Section 1628.4 Procedures
This section sets out the procedures applicable to recipient fund
balances. It has been revised to provide the basis on which the
Corporation will exercise its discretion to grant a waiver of an excess
fund balance and sets forth requirements that are intended to ensure
careful oversight by the Corporation of a recipient's fund balance. All
procedural requirements in the current rule have been moved to this
section.
Paragraph (a) sets out the obligation of a recipient whose fund
balance is in excess of the 10% ceiling to request a waiver from the
Corporation within 30 days of the issuance of the recipient's final
audit. The current rule requires that the statement be provided to the
Corporation within 120 days of the close of the recipient's fiscal
year. This is changed to link the deadline for the waiver request to
the audit submission date rather than the end of the recipient's fiscal
year. This will allow for periodic changes in the required submission
dates for audits without a need to revise this rule. This paragraph
also clarifies that, unless the recipient seeks and is granted a waiver
to maintain a fund balance over the 10%, the funds will be recovered by
the Corporation.
Paragraph (b) clarifies that the Corporation will review
recipients' final audits, fund balance statements and any requests for
waivers and will provide written notice to any recipient whose fund
balance amount is due and payable to the Corporation. The written
notice will include the method of repayment of any funds to be
recovered.
Paragraph (c) sets out the procedures for requesting a waiver of
the 10% ceiling. Generally, a recipient must specify its fund balance
amount, the reasons the fund balance has accrued, the recipient's plan
for the use or reserve of the fund balance within the current grant
year and the circumstances justifying the retention of the fund
balance.
A new provision is proposed for this paragraph that would require a
recipient who seeks a waiver to retain a cash reserve to replace or
update the recipient's information technology systems pursuant to
paragraph (e)(4) of this section to submit a Technology Investment Plan
(TIP) that outlines how and when the funds would be used to improve the
recipient's Information Technology resources. See discussion of
paragraph (e)(4) below.
Paragraph (d) prohibits a recipient from expending an excess fund
balance prior to receiving approval of its waiver request.
Paragraph (e) sets out the standards governing the Corporation's
decision to grant a waiver. A proposed substantive revision to this
paragraph establishes a different standard for determining whether to
grant a recipient a waiver to retain a 25% fund balance. The new
standard is intended to provide the Corporation with more flexibility
and discretion to decide whether recipients may maintain a fund
balance. Experience has shown that ``extraordinary circumstances'' is
too high a standard. The underlying rationale for regulating fund
balances is to ensure that recipients provide effective and economical
legal assistance. While prohibiting recipients from carrying over too
large a fund balance promotes this purpose, regulated use of carryover
funds under certain circumstances also promotes the same purpose. Based
on changing needs and the Corporation's experience with fund balances
since 1984, this proposed paragraph is intended to reflect both
generally and specifically the circumstances under which the
Corporation may grant a fund balance waiver.
The overriding standard to be considered by the Corporation is
whether the waiver would promote the statutory mandate that recipients
provide high quality legal services in an effective and economical
manner. In addition, the Corporation must consider 5 other factors. The
first factor is consideration of any emergencies or unusual or
unexpected occurrences or circumstances giving rise to the existence of
the excess fund balance. The reference to ``extraordinary
circumstances'' has been changed to ``circumstances'' to be consistent
with the rule's other changes to the standards proposed for determining
whether to grant a waiver. In addition, language providing examples of
extraordinary circumstances has been deleted.
No revisions are proposed for factor two which requires
consideration of any special needs of clients.
Factor three has been revised. The revision merges provisions in
the current rule which deal with compensated private bar programs. See
Sec. 1628.3(d) and Sec. 1628.4(d)(2). The current language is unclear
and somewhat inconsistent. It appears to require the Corporation to
grant a waiver for a cash reserve for compensated bar programs, while
at the same time, it gives discretion to grant the waiver because it is
granted only if there is a need for the cash reserve and after the
recipient makes a timely request. This proposed rule gives the
Corporation discretion to grant the waiver after consideration of
whether there is a need for the cash reserve.
Factor four is new and would give the Corporation discretion to
grant a waiver so that a recipient could retain a cash reserve to
replace or update the recipient's information technology systems. To
carry out its statutory responsibility to encourage the most efficient
and productive delivery of legal services possible, the Corporation
encourages programs to invest in technology such as computers,
networking equipment and advanced telephone systems. Investments in
such technology can significantly increase the capability of programs
to serve their clients effectively and efficiently. Computer based
systems can help recipients manage legal work more efficiently.
Improved technology can increase the efficiency and effectiveness of
intake and pro se and community legal education efforts to make legal
services more accessible. Access to the Internet can increase the
quality of legal work by facilitating coordination among advocates and
increasing access to available legal information and other pertinent
databases.
For programs to take advantage of such opportunities generally
requires significant purchases of hardware and software. The
Corporation believes that the best practice for management of
information technology is to replace computer and information
management technology on a regular, ongoing basis. Currently, however,
significant new technological capacities are developing at an extremely
rapid rate that suggest that radically transformative technology may
emerge periodically during the coming years. The unexpected development
and universal adoption of the world wide web as a principal instrument
of business and government is an example of such a development. Most
planners agree that for programs to keep up with these expanding
possibilities, they should be prepared to replace computer equipment
completely on a regular cycle, which may be as often as every three
years. There may be occasions, therefore, when normal incremental
upgrading of technological resources is not enough and a
disproportionately significant investment is required because of the
need to replace all the program's equipment and software.
Programs that plan to purchase large amounts of computer equipment
are often faced with the barrier that they can only maintain a fund
balance of 10% or less and cannot create a property replacement
reserve, if the
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resulting fund balance should exceed 10%. The Corporation proposes to
amend Part 1628 to allow it to waive the 10% ceiling so that, with
proper safeguards, recipients can maintain such a property reserve
fund. The Corporation believes that such a waiver for recipients to
update their equipment in an orderly and efficient manner will promote
more effective planning and will encourage more effective and efficient
delivery of services to clients.
The final factor considered by the Corporation is the recipient's
financial managment record.
Paragraph (e) is new and provides tighter controls on the use of
fund balances by recipients. It states that the Corporation's approval
must require the recipient to use the funds within a specified time
period and must use the funds for the purposes set out in the waiver
request as revised by the Corporation's approval.
Paragraph (f) is a reporting requirement for any fund balance
retained by a recipient pursuant to a waiver.
Section 1628.5 Fund Balance Deficits
Only technical changes have been made to this section either to
update the information or to make it consistent with the rest of the
rule. Generally, this section regulates recipient deficits. Deficits
are discouraged and use of LSC funds to liquidate a deficit requires
prior Corporation approval. Any LSC funds used to liquidate a deficit
shall be identified as questioned costs unless prior approval for such
use has been provided by the Corporation.
List of Subjects in 45 CFR Part 1628
Legal services, Fund balances.
For reasons set out in the preamble, LSC proposes to revise 45 CFR
part 1628 to read as follows:
PART 1628--RECIPIENT FUND BALANCES
Sec.
1628.1 Purpose.
1628.2 Definitions.
1628.3 Policy.
1628.4 Procedures.
Sec. 1628.5 Fund balance deficits.
Authority: Secs. 42 USC 2996e(b)(1)(A), 2996f(a)(3).
Sec. 1628.1 Purpose.
The purpose of this part is to set out the Corporation's policies
and procedures applicable to recipient fund balances. The Corporation's
fund balance policies are intended to ensure the timely expenditure of
LSC funds for the effective and economical provision of high quality
legal assistance to eligible clients.
Sec. 1628.2 Definitions.
(a) ``LSC support'' means the sum of:
(1) The carryover LSC fund balance from the prior fiscal year;
(2) The amount of financial assistance awarded by the Corporation
to the recipient for the fiscal year in question; and
(3) Any LSC derivative income, as defined in Sec. 1630.2(c), earned
by the recipient for the grant year in question.
(b) The LSC ``fund balance amount'' is the excess of LSC support
over expenditures as determined by the recipient's annual audit.
(c) The ``fund balance percentage'' shall be determined by
expressing the fund balance amount as a percentage of the recipient's
LSC support for the reporting period.
(d) ``Recipient'' as used in this part, means any grantee or
contractor receiving financial assistance from the Corporation under
section 1006(a)(1)(A) of the LSC Act.
Sec. 1628.3 Policy.
(a) Recipients are permitted to retain from year-to-year fund
balances up to 10% of their LSC support.
(b) Recipients may request a waiver to retain a fund balance up to
a maximum of 25% of their LSC support.
(c) A waiver pursuant to paragraph (b) of this section may be
granted at the discretion of the Corporation pursuant to the criteria
set out in Sec. 1628.4(e).
(d) Any fund balance amount in excess of 10% of LSC support shall
be repaid to the Corporation. If a waiver of the 10% ceiling is
granted, any fund balance amount in excess of the amount permitted to
be retained shall be repaid to the Corporation. Repayment shall be in a
lump sum or by pro rata deductions from the recipient's grant checks
for a specific number of months. The Corporation shall determine which
of the specified methods of repayment is reasonable and appropriate in
each case after consultation with the recipient.
(e) A recovery from LSC support to recover an excess fund balance
pursuant to this part does not constitute a termination under 45 CFR
part 1606. See Sec. 1606.2(c)(2)(ii).
(f) All one-time or special purpose grants awarded by the
Corporation shall have an effective date and a termination date. Such
grants are not subject to this part's fund balance policy. Revenue and
expenses relating to such grants must be reflected separately in the
audit report submitted to the Corporation. This may be done by
establishing a separate fund or by providing a separate supplemental
schedule of revenue and expenses related to such grants as a part of
the audit report. No funds provided under a one-time or special purpose
grant may be expended subsequent to the termination date of the grant
without the prior written approval of the Corporation. All unexpended
funds under such grants shall be returned to the Corporation.
Sec. 1628.4 Procedures.
(a) Any recipient whose audited fund balance exceeds the 10%
ceiling set forth in Sec. 1628.3 shall submit to the Corporation,
within 30 days of the issuance of the recipient's final audit, a
statement of the fund balance which occurred according to the required
annual audit. The funds will be recovered as set forth in
Sec. 1628.3(d) unless the recipient requests and is granted a waiver by
the Corporation.
(b) After the Corporation's receipt and review of the recipient's
annual audit, the recipient's fund balance statement pursuant to
paragraph (a) of this section and any requests for a waiver, the
Corporation shall provide written notice to the recipient of any fund
balance amount due and payable to the Corporation as well as the method
for repayment 30 days prior to the effective date for repayment either
to occur or to commence in accordance with Sec. 1628.3(d).
(c) The recipient may, within 30 days of the issuance of the
recipient's annual audit, request a waiver of the 10% ceiling. Such
request must specify:
(1) The fund balance amount according to the recipient's annual
audit;
(2) The reason such fund balance has been attained;
(3) The recipient's plan for the disposition or reserve of such
fund balance amount within the current grant period. If a waiver is
requested under Sec. 1628.4(e)(4), for updating or replacing
information technology systems, a Technology Investment Plan that
outlines how and when the funds will be used to improve the recipient's
Information Technology resources should be provided with the waiver
request;
(4) The amount of fund balance projected to be carried forward at
the close of the recipient's then current fiscal year; and
(5) The circumstances justifying the retention of the fund balance.
(d) Excess fund balance amounts shall not be expended by the
recipient prior to approval of the waiver request by the Corporation.
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(e) The decision of the Corporation regarding the granting of a
waiver shall be guided by the statutory mandate requiring the recipient
to provide high quality legal services in an effective and economical
manner. In addition, the Corporation shall consider the following
factors.
(1) Emergencies or unusual or unexpected occurrences, or
circumstances giving rise to the existence of a fund balance in excess
of 10%;
(2) The special needs of clients;
(3) The need for a recipient that operates a compensated private
bar program or component to retain a cash reserve up to 25% of the
amount of direct payment to attorneys indicated in the recipient's last
audit for direct payment to attorneys in the bar program;
(4) The need for the recipient to retain a cash reserve to replace
or update the recipient's information technology systems; and
(5) The recipient's financial management record.
(f) The Corporation's written approval of a request for a waiver
shall require that the recipient use the funds it is permitted to
retain within the time period set out in the approval and for the
purposes set out in the waiver request, as revised by the Corporation's
approval.
(g) Excess fund balance amounts approved by the Corporation for
expenditure by a recipient must be separately reported in the current
fiscal year audit. This may be done by establishing a separate fund or
by providing a separate supplemental schedule as part of the audit
report.
Sec. 1628.5 Fund balance deficits.
(a) Sound financial management practices such as those set out in
Chapter 3 of the Corporation's Accounting Guide for LSC Recipients
should preclude deficit spending. Use of current year LSC grant funds
to liquidate deficit balances in the LSC fund from a preceding period
requires the prior written approval of the Corporation.
(b) The recipient may, within 30 days of the issuance of the
recipient's annual audit, apply to the Corporation for approval of the
costs associated with the liquidation of the deficit balances in the
LSC fund.
(c) In the absence of approval by the Corporation, expenditures of
current year LSC grant funds to liquidate a deficit from a prior year
shall be identified as questioned costs.
(d) The recipient's request must specify the same information
relative to the deficit LSC fund balance as that set forth in
Sec. 1628.4(c) (1) and (2). Additionally, the recipient must develop
and submit a plan approved by its governing body describing the
measures which will be implemented to prevent a recurrence of a deficit
balance in the LSC fund. The Corporation reserves the right to require
changes in the submitted plan.
(e) The decision of the Corporation regarding acceptance of these
deficit-related costs shall be guided by the statutory mandate
requiring the recipient to provide high quality legal services
performed in an effective and economical manner. Special consideration
will be given for emergencies, unusual occurrences, or other
circumstances giving rise to this situation.
Dated: October 16, 1998.
Victor M. Fortuno,
General Counsel.
[FR Doc. 98-28230 Filed 10-21-98; 8:45 am]
BILLING CODE 7050-01-P
