[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Rules and Regulations]
[Pages 68219-68228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-34120]
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LEGAL SERVICES CORPORATION
45 CFR Part 1630
Cost Standards and Procedures
AGENCY: Legal Services Corporation.
ACTION: Final rule.
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SUMMARY: This final rule sets forth cost standards and procedures
applicable to Legal Services Corporation (``LSC'' or ``Corporation'')
grants and contracts. This rule contains substantial revisions which
bring the Corporation's cost standards and procedures into conformance
with applicable provisions of the Inspector General Act, the
Corporation's appropriations action, and relevant Office of Management
and Budget (``OMB'') Circulars.
DATES: This rule is effective January 30, 1998.
FOR FURTHER INFORMATION CONTACT: Office of the General Counsel, (202)
336-8817.
SUPPLEMENTARY INFORMATION:
Background
On July 13, 1997, the Corporation's Operations and Regulations
Committee (``Committee'') held public hearings in Los Angeles,
California, on draft revisions to the Corporation's rule on cost
standards and procedures and adopted a proposed rule that was published
for public notice and comment on August 29, 1997 (62 FR 45778). The
Corporation subsequently received five written comments on the proposed
revisions.
On November 14, 1997, during public hearings in Washington, DC, the
Committee considered comments on the proposed revisions. After making
additional revisions to the rule, the Committee recommended that the
Corporation's Board of Directors (``Board'') adopt the rule as final,
which the Board did on November 15, 1997.
Revisions were necessary to bring the rule into conformance with
Sec. 509 of Pub. L. 104-134, 110 Stat. 1321; the Inspector General Act
(``IG Act''), 5 U.S.C. App. 3, as amended; the Audit for LSC Recipients
and Auditors (``Audit Guide''); OMB Circular A-50, Audit Followup
(September 29, 1982); OMB Circular A-110, Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and other Non-Profit Organizations (November 19,
1993); OMB Circular A-122, Cost Principles for Non-Profit Organizations
(May 8, 1997); and OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations (June 24, 1997).
[[Page 68220]]
Because the LSC Act specifies that the Corporation is not a Federal
agency, OMB Circulars are generally not binding on the Corporation,
unless Congress has specified elsewhere in the law that the Corporation
must adhere to a specific Circular, as is the case in Sec. 509(k) of
Pub. L. 104-134, which requires the Corporation to develop audit
follow-up procedures which meet, at a minimum, the requirements of OMB
Circular A-50. As a matter of discretion, however, the Corporation has
adopted relevant provisions from OMB Circulars which are applicable to
Federally funded non-profit organizations. For example, Sec. I-2 of the
Corporation's Audit Guide requires recipients and their auditors to
adhere to OMB Circular A-133. This rule draws on that Circular, as well
as Circulars A-110 and A-122, which contain cost standards and
procedures applicable to non-profit organizations which receive Federal
funds.
Scope and Effective Date
The requirements of this rule apply to all costs charged against
Corporation grants or contracts on or after the rule's effective date.
The requirements of this rule also apply to certain income derived from
Corporation grants and contracts. This rule generally does not apply to
funding obtained from sources other than the Corporation, except as
provided by Sec. 1630.11. The review and appeal process of Sec. 1630.7
applies to questioned cost proceedings initiated by the Corporation on
or after the effective date of this rule.
A section-by-section analysis of the rule follows.
Section-by-Section Analysis
Section 1630.2--Definitions
Paragraph (a) defines an allowed cost as a questioned cost which
the Corporation has determined to be eligible for payment with LSC
funds. This definition applies only to costs which either the
Corporation or an authorized auditor has questioned during the course
of an audit or investigation. Costs are generally allowable provided
that they meet the nine criteria of $1630.3(a).
Paragraph (b) defines corrective action as action taken by a
recipient that: (1) Corrects identified deficiencies; (2) produces
recommended improvements; or (3) demonstrates that audit or other
findings are invalid or do not warrant further action. This definition
comes from Sec. 105 of OMB Circular A-133, which is applicable to LSC
recipients through Sec. I-2 of the LSC Audit Guide.
One comment noted that the third part of the rule's definition was
inconsistent with the customary usage of the term by Corporation
recipients, which have not traditionally thought of corrective action
as encompassing expression of disagreement with an auditor's finding.
The third part of the definition comes from Secs. 105 and 315(c) of OMB
Circular A-133, which specify that a corrective action plan is the
place to express disagreement with an audit finding. Thus, within OMB
parlance, the expression of disagreement is ``corrective action.'' To
maintain consistency with the OMB definition, the Board decided to
retain the third part of the rule's definition of corrective action.
One comment noted a significant difference between the OMB
definition and the definition in this rule: while the rule's definition
refers to ``audit or other'' findings, the OMB definition refers only
to ``audit'' findings. The Corporation included ``other'' findings in
its definition of corrective action in order to extend the scope of the
definition to non-audit findings, such as findings from complaint
investigations by Corporation management. For this reason, the Board
has retained the reference to ``other'' findings in the rule's
definition of corrective action.
Paragraph (c) defines derivative income as income resulting from
certain Corporation-funded activities. This definition is adapted from
the definition of ``program income'' which appears in Sec. 2(x) of OMB
Circular A-110. The term ``derivative income'' does not include income
from publication activities, because these activities are subject to an
exception under Sec. 24(h) of OMB Circular A-110, which provides that
recipients have no obligation to the Federal Government with respect to
income earned from license fees and royalties from copyrighted
materials.
One comment suggested that the Corporation should clarify whether
funding obtained from other sources as a result of fundraising efforts
conducted with LSC funds is LSC derivative income. It is not. The
rule's definition of derivative income does not reach grants,
contracts, or contributions from non-LSC sources.
Paragraph (d) defines disallowed cost as a questioned cost that the
Corporation has determined may not be charged to LSC funds. This
definition comes from Sec. 5(f)(3) of the IG Act.
Paragraph (e) defines final action as the completion of all
corrective actions which the Corporation, in a management decision, has
concluded are necessary to address findings and recommendations in an
audit or other report. This definition comes from Sec. 5(f)(6) of the
IG Act. The second sentence of the definition states that, if the
Corporation determines that no corrective action is necessary, final
action occurs when the Corporation issues its management decision. One
comment recommended deletion of this second sentence because the rule
did not apply that portion of the definition. In order to maintain
consistency with the definition in the IG Act, the Board chose not to
revise the rule's definition of final action. Instead, the Board
revised Sec. 1630.7(d) to add clarification that, in the event that
corrective action is unnecessary, final action occurs with the issuance
of a management decision.
Paragraph (f) defines management decision as the evaluation by
Corporation management of the findings and recommendations in an audit
or other report, and the issuance of a final, written decision by
Corporation management, including a description of the corrective
action which Corporation management considers necessary to respond to
the findings and recommendations. This definition comes from Sec.
5(f)(5) of the IG Act. A similar definition appears in Sec. 105 of OMB
Circular A-133.
Two comments sought clarification about the scope of the rule's
definitions of final action and management decision. While the IG Act's
definitions of management decision and final action refer only to
``audit'' reports, the definitions in the rule refer to ``audit and
other'' reports. As explained above in the discussion of the definition
of corrective action, the Corporation has included ``other'' findings
in the rule's definitions in order to extend the scope of the
definitions to non-audit findings, such as those resulting from
complaint investigations by Corporation management.
Paragraph (g) defines questioned cost as a cost charged to
Corporation funds which the Corporation or an authorized auditor has
questioned because of: (1) A violation of applicable law; (2) a lack of
adequate supporting documentation; or (3) an appearance that the cost
is unnecessary or unreasonable. This definition comes from Sec. 5(f)(1)
of the IG Act. A similar definition appears in Sec. 105 of OMB Circular
A-133.
The definition of questioned cost recognizes that other persons and
entities, in addition to Corporation management, such as the Office of
Inspector General (``OIG''), the General Accounting Office (``GAO''),
independent public accountants, and other duly authorized auditors and
audit organizations have authority to question costs incurred by
Corporation recipients. However, this definition does not extend such
authority to
[[Page 68221]]
persons or entities which are not duly authorized by applicable law to
audit or investigate Corporation recipients.
Paragraph (h) defines recipient for the purposes of this part only.
This definition reaches grantees receiving Corporation funds pursuant
to either Sec. 1006(a)(1) or Sec. 1006(a)(3) of the LSC Act, in
contrast to the definition of recipient appearing at 45 CFR
Sec. 1600.1, which defines recipients only as those entities receiving
Corporation funds pursuant to Sec. 1006(a)(1)(A) of the Act.
Section 1630.3--Standards Governing Allowability of Costs Under
Corporation Grants or Contracts
Paragraph (a)--Criteria for Allowability
Paragraph (a) of this section sets out nine criteria which
determine whether costs are allowable under Corporation grants or
contracts. These criteria generally conform to section A, paragraph 2,
of Attachment A to OMB Circular A-122. Section 1630.5(b) contains a
tenth, prior approval criterion which applies to a small number of
specific costs. These two sections apply only to Corporation funds and
income derived from Corporation-funded activities.
Subparagraph (a)(1) requires that costs be actually incurred in the
performance of the grant or contract. This requirement is consistent
with the accrual method of accounting, which is required by generally
accepted accounting principles. Costs incurred just prior to the onset
of a Corporation grant or contract, or just after the cessation of
Corporation funding, are allowable with the prior approval of the
Corporation as required by Sec. 1630.5(b)(1). This is a change from the
prior rule, which did not allow costs incurred prior to, or after the
cessation of, Corporation funding.
Subparagraph (a)(2) requires that costs be reasonable and necessary
to the performance of a Corporation grant or contract. The concept of
reasonableness applies both to the amount of the cost and to the nature
of the activity that the cost represents. Paragraph (b) of the rule
describes in greater detail four considerations which enter into a
determination of whether a cost is reasonable and necessary.
Subparagraph (a)(3) requires that costs be allocable to a
Corporation grant or contract. Paragraph (c) describes in detail the
considerations which govern the allocability of costs.
Subparagraph (a)(4) requires that costs be in compliance with the
LSC Act, applicable appropriations law, Corporation rules, regulations,
guidelines, and instructions, the Accounting Guide for LSC Recipients,
the terms and conditions of the grant or contract, and other applicable
law. The cost of an activity prohibited or restricted by such law is
not allowable under this rule and may result in a questioned or
disallowed cost.
Subparagraph (a)(5) requires that recipients account for costs
through the consistent application of established accounting policies
and procedures. The Accounting Guide for LSC Recipients sets forth
applicable principles, guidelines, and criteria for recipients'
accounting systems.
Subparagraph (a)(6) requires that recipients account for costs
consistently over time. This provision does not prevent recipients from
modifying their cost allocation methods. However, recipients doing so
should document the reasons for modification, especially if such
modification results in the shifting of a particular type of cost from
one funding source to another.
Subparagraph (a)(7) requires that recipients allocate costs in
accordance with generally accepted accounting principles. The
Accounting Guide for LSC Recipients contains guidance on accounting
principles applicable to Corporation recipients.
Subparagraph (a)(8) requires that recipients not use Corporation
funds to meet the cost matching requirements of other Federal funding
sources, unless another Federal funding source has indicated in writing
that recipients may do so. In at least one instance, another Federal
funding source has done so. In 1980, the Department of Health and Human
Services issued a Policy Announcement stating that recipients could use
Corporation funds to meet the matching requirement of Title III funding
for legal services.
Subparagraph (a)(9) requires that recipients document costs charged
to Corporation funds in business records which are available during
normal business hours to the Corporation and other persons or entities,
such as the GAO, which are duly authorized by applicable law to conduct
audits or investigations of Corporation recipients.
Paragraph (b)--Reasonableness
Paragraph (b) applies a four-part prudent person test to the
determination of whether a cost is reasonable. The language of this
provision comes from section A, paragraph 3, of Attachment A to OMB
Circular A-122.
One comment noted that, because the language of subparagraph (b)(3)
of the proposed rule referred to ``persons concerned,'' the prudent
person test could be read to hold recipients liable for the actions of
employees acting outside of their agency, even where recipients may
have taken all reasonable steps to prevent the actions from occurring.
Because this is not the Corporation's intent, the Board modified
subparagraph (b)(3) to refer to ``the recipient'' instead of ``persons
concerned.''
In general, when applying the prudent person test to determine
whether a cost is reasonable, the Corporation will look at both the
cost itself and the process by which the recipient decided to incur the
cost. Generally, a cost is reasonable in nature and amount if it is
comparable to similar costs incurred by other legal services programs
in similar circumstances. Indicia of a prudent process include, but are
not limited to, the solicitation of quotes from prospective vendors,
documentation of the acquisition process, and board approval of
unusually large costs.
If, for any reason, uncertainty exists as to the reasonableness of
a cost, recipients may seek an advance understanding from the
Corporation pursuant to Sec. 1630.5(a). A request for an advance
understanding should describe in reasonable detail the nature and
amount of the cost. Provided that the actual costs does not vary
significantly in nature or amount for the description in the request,
an advance understanding ensures that the Corporation will not disallow
the cost later on the grounds that it was unreasonable.
Paragraph (c)--Allocability
Paragraph (c) sets forth considerations which govern the
allocability of costs charged to Corporation grants and contracts. In
short, a cost is allocable to a grant or contract to the extent that it
``benefits'' the grant or contract. The language of this section comes
from section A, paragraph 4, of Attachment A to OMB Circular A-122.
Some costs benefit a single grant, such as the salary cost of a
Title III attorney who exclusively represents elder clients. Other
costs benefit several different grants, such as the rental cost of an
office which serves clients under LSC, IOLTA, and Title III grants. In
the former instance, a recipient should allocate all of the Title III
attorney's salary cost to the Title III grant. In the latter instance,
a recipient should allocate a share of the office's rental costs to the
LSC, IOLTA, and Title III grants, provided that each of those funding
sources permit this type of cost.
This paragraph no longer contains a provision from the prior rule
which prohibited the shifting of costs to avoid funding deficiencies or
restrictions on
[[Page 68222]]
the uses of funds. The Board specifically sought comment on the
deletion of this provision in the preamble to the proposed rule. The
Corporation received no comments opposing the deletion.
The Board approved deletion of this provision, because
Sec. 1630.3(a)(4) already prevents recipients from charging the costs
of restricted activities to LSC funds. Although the result of deleting
this provision is to permit the shifting of otherwise allowable costs
to Corporation funds, the Corporation encourages recipients to budget
and allocate costs carefully so as to avoid accumulating deficits in
their non-LSC funds which would necessitate year-end transfers of LSC
funds to eliminate the deficits.
Paragraphs (d) and (e)--Direct and Indirect Costs
The salary of a Title III attorney who exclusively serves elder
clients is a typical example of a direct cost as described by paragraph
(d). Generally, recipients should treat the salaries and wages of
attorneys and paralegals as direct costs. The rental cost of office
space which is used to serve clients under two or more different grants
is a typical example of an indirect cost as described by paragraph (e).
The language of these two sections comes from sections B and C of
Attachment A to OMB Circular A-122.
Paragraph (d)--Keeping of Personnel Activity Reports
Several comments observed that a reference to ``time records'' in
paragraph (d) of the proposed rule could be read to require recipients
to base their allocations of staff salaries and wages on timekeeping
records kept pursuant to 45 CFR part 1635, the Corporation's
timekeeping rule. This would require a significant number of recipients
to modify their timekeeping systems, because many recipients do not
include funding source information in the timekeeping records which
they keep pursuant to 45 CFR part 1635.
The Corporation does not intend to impose such a requirement. The
preamble to 45 CFR part 1635 clearly states that, while timekeeping
records are one possible basis for cost allocations, the Corporation
did not intend to require recipients to calculate cost allocations
directly from timekeeping records kept pursuant to 45 CFR part 1635.
(61 FR 14263, Apr. 1, 1996.) For this reason, the Board revised
paragraph (d) to refer to ``personnel activity reports'' instead of
``time records.''
Accordingly, paragraph (d) requires that recipients keep personnel
activity reports to support salaries and wages which are allocated as
direct costs. Paragraph 6(1)(2) of Attachment B to OMB Circular A-122
provides detailed guidance about the keeping of such reports. These
reports should: (1) Be prepared at least monthly; (2) contain a
reasonable, after-the-fact estimate of the distribution of activity of
each compensated employee whose time is charged directly to a grant;
and (3) be signed by either the employee or a supervisor having first-
hand knowledge of the employee activity. The keeping of these records
also satisfies the ``labor-distribution'' recordkeeping requirement of
Sec. 3-5.5(a) of the Accounting Guide for LSG Recipients.
Paragraph (f)--Allocation of Indirect Costs
Pursuant to paragraph (f) of this section, the allocation of
indirect costs should be accomplished through an established cost
allocation method. Because nearly all current recipients perform the
single function of delivering legal services to low-income clients,
paragraph (f) sets forth a simplified allocation method for allocating
indirect costs among funding sources. The language of this paragraph
comes from section D of Attachment A to OMB Circular A-122.
Generally, recipients should use an indirect cost allocation method
which distributes costs equitably among all funding sources. Possible
bases for allocating indirect costs include, but are not limited to,
total direct costs, direct salaries and wages, attorney hours, numbers
of cases, and numbers of employees.
Paragraph (g)--Exception for Certain Indirect Costs
Two comments noted that some funding sources do not permit the
charging of certain indirect costs. Paragraph (g) creates an exception
to accommodate this situation. If a recipient cannot allocate an
indirect cost to one or more funding sources, the recipient should
distribute the cost equitably among the funding sources which do permit
the charging of the cost.
In the case of audit costs under Sec. 509(c) of Public Law 104-134,
for example, recipients should distribute their audit costs on a pro
rata basis among funding sources which do permit the charging of such
costs. This allocation method satisfies the requirements of Sec.
509(c).
Paragraph (h)--Applicable Credits
Paragraph (h) defines and explains how to allocate applicable
credits. Applicable credits are receipts or reductions of expenditures
which operate to offset or reduce expenses.
Paragraph (i)--Guidance
Because the LSC Act specifies that the Corporation is not a Federal
agency, OMB Circulars are generally not binding on the Corporation or
on recipients of its funds. However, the Corporation has relied on
three relevant OMB Circulars in the development of these cost standards
and procedures.
In particular, OMB Circulars A-110, A-122, and A-133 contain
publicly noticed and commented standards which are applied throughout
the Federal government to nonprofit organizations which receive Federal
funds. In the event that questions arise about the allowability of
costs under this part, the Corporation will look to these Circulars for
guidance, to the extent that they are not inconsistent with law
applicable to the Corporation and its recipients, including the
Corporation's rules, regulations, and guidelines.
Section 1630.4--Burden of Proof
This section provides that the recipient has the burden of proving
that costs charged to Corporation funds meet the requirements of
Secs. 1630.3 and 1630.5 of this part. When a recipient engages in an
activity which is permissible only with non-LSC funds, the recipient
also has the burden of showing that such costs are properly charged to
non-LSC funds.
To meet this requirement, recipients must maintain accounting
systems which are sufficient to demonstrate the allocation of costs to
various funding sources, as required by this part and Secs. 2-4.1 and
3-5 of the Accounting Guide for LSC Recipients. However, neither this
rule nor the Accounting Guide requires recipients to maintain separate
bank accounts for the purposes of segregating funds received from
different funding sources.
Section 1630.5--Costs Requiring Corporation Prior Approval
Paragraph (a) of this section permits recipients to obtain an
advance understanding from the Corporation prior to incurring costs
that are exceptional in nature or amount. The language of this
paragraph comes from section A, paragraph 6, of Attachment A to OMB
Circular A-122.
An advance understanding as to the reasonableness or allocability
of an exceptional cost guards against the possibility that the cost
might come into question during a subsequent audit. The Corporation
encourages recipients to
[[Page 68223]]
seek advance understandings prior to incurring costs which might be
perceived later by an auditor as being other than ordinary and
necessary to the operation of a legal services program.
Paragraph (b) of this section lists specific costs which recipients
may not charge to Corporation funds without the Corporation's written
prior approval. Because this paragraph applies to costs charged to LSC
funds only, recipients charging the entire amount of such costs to non-
LSC funds do not need to seek the Corporation's prior approval. Where
recipients charge part of the cost to LSC funds and part of the cost to
non-LSC funds, Corporation prior approval is necessary when the amount
charged to LSC funds exceeds one of the threshold amounts in this
paragraph. In the case of purchases of real property, Corporation prior
approval is necessary when a recipient expends any amount of LSC funds
to acquire real property.
Subparagraph (b)(1) requires recipients to obtain prior approval
before charging certain pre-award and post-cessation-of-funding costs
to Corporation funds. Two comments noted that the wording of this
subparagraph, as it appeared in the proposed rule, could be read to
apply to expenditures of LSC fund balances carried over by continuing
recipients pursuant to 45 CFR part 1628. Because this was not the
Corporation's intent, the Board approved a revision to this
subparagraph, so that it now refers to ``pre-award costs and costs
incurred after the cessation of funding.''
Pursuant to paragraph 34 of Attachment B to OMB Circular A-122, and
with the Corporation's prior approval, pre-award costs may be charged
to a Corporation grant if they are: (1) Incurred pursuant to the
negotiation of and in anticipation of, the grant; (2) necessary to the
performance of the grant; and (3) otherwise allowable during the actual
term of the grant. Such costs include, but are not limited to, the
hiring of staff and the acquisition of office space and equipment
necessary to the performance of the grant.
With the prior approval of the Corporation, recipients may use some
or all of their LSC funds remaining at the time of cessation of funding
to fulfill their professional responsibilities to clients by closing
out cases or by transferring them to other providers. In the rare event
that termination of funding occurs during the term of a grant,
paragraph 48 of Attachment B to OMB Circular A-122 provides detailed
guidance on the allowability of costs incurred during the termination
process.
The $10,000 threshold of subparagraph (b)(2) applies to individual
items of personal property only. Corporation prior approval is no
longer necessary for purchases and leases of individual items costing
less than this amount, even if a purchase or lease of several related
items with individual costs below $10,000 has a combined cost which
exceeds the threshold amount. However, the costs of acquiring such
items must still meet the criteria of Sec. 1630.3 of this part,
including the requirement that such costs be reasonable and necessary
to the performance of the grant or contract.
The use of Corporation funds to purchase real property, whether to
pay part or all of an initial down payment or to pay part or all of the
principal or interest payments on debt secured to finance the purchase,
requires Corporation prior approval. Capital expenditures to improve
real property also require Corporation prior approval, if the amount of
LSC funds going toward such an expenditure exceeds $10,000. Leases of
real property do not require Corporation prior approval.
Paragraph (b) no longer requires prior approval of consultant
contracts. However, recipients should be prepared to justify the costs
of such contracts should they come into question during a subsequent
audit or investigation. Subparagraph 35(b) of Attachment B to OMB
Circular A-122 list several factors which govern the allowability of
the costs of retaining consultants. These include: (1) The nature and
scope of the service; (2) the necessity of contracting for the service;
(3) the recipient's ability to perform the service itself; (4) the
qualifications of the consultants; (5) and the adequacy of the contract
agreement. In the event that there is likely to be any question about
the reasonableness or allocability of a consultant contract, recipients
may seek an advance understanding from the Corporation as provided by
Sec. 1630.5(a).
The elimination of the prior approval requirement for consultant
contracts does not affect or supersedes 45 CFR part 1627, which governs
subgrants of LSC funds. As provided by part 1627, contracts using LSC
funds to perform programmatic activities are subgrants which require
Corporation prior approval, except that contracts for private attorney
involvement in amounts not greater than $25,000 do not require prior
approval.
Section 1630.6--Timetable and Basis for Granting Prior Approval
Paragraph (a) requires the Corporation to grant prior approval of a
cost when a recipient provides sufficient written information to
demonstrate that the cost would be allowable under the provisions of
this part. When denying a request for prior approval, the Corporation
must explain in writing why the cost would not be allowable.
Paragraph (b) provides a timetable for obtaining prior approval. If
the Corporation fails to act within the timetable in this paragraph, it
may not assert the absence of prior approval as a basis for disallowing
a cost. However, to be allowable, the cost must nonetheless meet the
nine criteria of Sec. 1630.3(a).
Section 1630.7--Review of Questioned Costs and Appeal of Disallowed
Costs
Paragraph (a) recognizes the statutory authority of the
Corporation's OIG, the GAO, and authorizes independent auditors to
question costs incurred by recipients. Section 509(k) of Public Law
104-134 requires Corporation management to develop procedures for, and
to follow up on, significant audit findings reported to the
Corporation. This section of the rule addresses that requirement, as it
applies to findings of questioned costs.
If, after reviewing a questioned cost, the Corporation determines
that there is a reasonable basis for disallowing the cost, paragraph
(b) requires the Corporation to provide the recipient with written
notice of its intent to disallow the cost. Paragraph (b) also
establishes a five-year time limitation on the Corporation's ability to
disallow costs.
When approving the proposed rule for public notice and comment, the
Board adopted a three-year limitation on the Corporation's ability to
disallow costs. One comment supported this shorter time period, on the
grounds that it was long enough to permit the Corporation to review
costs questioned during routine annual audits of recipients.
Both Corporation management and the OIG recommended that the Board
adopt a five-year time period, on the grounds that a three-year time
period might be too short to enable the Corporation to fulfill its
statutory responsibility to follow up on questioned costs which might
arise during the course of a GAO or OIG audit, or during a complaint
investigation by Corporation management. Such an audit or investigation
might occur at the end of the three-year period, and the time
limitation in the proposed rule would prevent the Corporation from
following up on a questioned cost finding. The Board agreed and revised
paragraph (b) to provide for a five-year time limitation.
Paragraph (c) provides a 30-day time period during which recipients
may
[[Page 68224]]
provide a written response to the Corporation with evidence and
argument as to why the Corporation should not disallow part or all of a
questioned cost. This paragraph guarantees that recipients will have at
least one full opportunity to respond to a finding of a questioned cost
which the Corporation has sought to disallow.
Paragraph (d) requires the Corporation to issue a management
decision, as defined by Sec. 1630.2(f), within 60 days of receiving a
recipient's response to a notice of intent to disallow a questioned
cost. If the Corporation's management decision disallows the cost, the
recipient may appeal the disallowance as provided by paragraph (e),
provided that the amount of the disallowed cost exceeds $2,500.
One comment urged the Board to eliminate the $2,500 appeal
threshold, so that recipients could appeal all disallowed costs, no
matter what the amount. In contrast, the Corporation's OIG recommended
that the Board institute a higher threshold. Among other reasons, the
OIG cited as a basis for this recommendation the likelihood that the
cost of an appeal, in many instances, would exceed the amount of the
disallowed cost itself.
After considering the Corporation's recent experience, which has
involved an average of one appeal per year, the Board decided to retain
the $2,500 threshold as an appropriate balancing of the Corporation's
and recipients' interests in the equitable and efficient resolution of
disagreements about disallowed costs.
Section 1630.8--Recovery of Disallowed Costs and Other Corrective
Action
Paragraphs (a) and (b) require the Corporation to recover
disallowed costs and ensure that recipients take necessary corrective
action to prevent the recurrence of circumstances giving rise to
questioned costs. Final action with respect to a disallowed costs
occurs when the Corporation has recovered the disallowed cost and the
recipient has concluded all necessary corrective action specified in
the Corporation's management decision.
The proposed rule included a provision which allowed the
Corporation to recover, in connection with a disallowed cost, income
which a recipient may have derived from the activity which resulted in
the disallowed cost. One comment urged the deletion of this provision
on the grounds that it was unnecessary and without legal basis.
Because the Corporation's experience shows that disallowed costs
rarely result in derivative income, and because relevant OMB Circulars
and other applicable law do not provide for its recovery, the Board
agreed to delete language providing for the recovery of derivative
income from this section. The Board also deleted corresponding
references to derivative income from Secs. 1630.7(b) and 1630.11(b).
Section 1630.9--Other Remedies; Effect on Other Parts
Paragraph (a) requires Corporation management to refer instances of
serious financial mismanagement, fraud, and defalcation of funds to the
Corporation's OIG. In such instances, the Corporation may also initiate
proceedings to suspend or terminate a recipient's funding. Paragraph
(b) clarifies that the disallowance of a cost does not constitute a
permanent reduction in a recipient's funding level.
Section 1630.10--Applicability to Subgrants
This section provides that recipients and subrecipients shall each
be responsible for questioned costs incurred by subrecipients. In the
event that a cost incurred by a subrecipient comes into question, both
the recipient and the subrecipient will have access to the review and
appeal procedures of Sec. 1630.7.
Section 16530.11--Applicability to Non-LSC Funds
Paragraphs (a) and (b) provide that, in the event that a recipient
expends non-LSC funds to pay for an activity for which non-LSC funds
may not be expended pursuant to either Sec. 1010(c) of the LSC Act or
Sec. 504 of Public Law 104-134, the Corporation may recover from the
recipient's LSC funds an amount not to exceed the amount of non-LSC
funds which the recipient expended on the prohibited activity. The
activities for which recipients may not expend non-LSC funds are
defined at 45 CFR Secs. 1610.2 (a) and (b).
The provisions of this section do not apply to non-LSC funds spent
on activities which are not subject to LSC restrictions on non-LSC
funds. Thus, this section does not enable the Corporation to recover
the costs of activities which are prohibited by or inconsistent with
restrictions imposed by other funding sources. For example, if a
recipient uses Title III funds to represent a client who does not meet
Title III eligibility requirements, this section does not enable the
Corporation to seek to recover the costs of representing that client.
Section 1630.12--Applicability to Derivative Income
Paragraph (a) requires proportional allocation of income derived
from LSC-funded activities. Thus, for example, if a recipient has
charged one-half of the cost of purchasing a photocopier to LSC funds
and one-half of the cost to non-LSC funds, and the recipient uses the
photocopier to provide photocopying services to another non-profit
organization for a fee, then one-half of the income from the fee is LSC
derivative income which should be allocated to the LSC fund. The
remainder of the income is non-LSC derivative income which should be
allocated to non-LSC funds. This allocation method is similar to that
required by 45 CFR Sec. 1642.5(a), which provides for the allocation of
attorney fee awards.
Paragraph (b) specifies that LSC derivative income is subject to
the requirements of this part, including the requirement that
expenditures of such funds be in compliance with the restrictions of
the LSC Act, regulations, and other applicable law. One comment sought
a revision to this section clarifying that only that proportion of
derivative income which is allocable to the LSC fund is subject to this
subparagraph. The Board adopted the suggested revision, and the final
rule reflects this clarification.
List of Subjects in 45 CFR Part 1630
Accounting, Government contracts, Grant programs-law, Hearing and
appeal procedures, Legal services, Questioned costs.
For the reasons set forth in the preamble, the Corporation revises
45 CFR part 1630 to read as follows:
PART 1630--COST STANDARDS AND PROCEDURES
Sec.
1630.1 Purpose.
1630.2 Definitions.
1630.3 Standards governing allowability of costs under Corporation
grants or contracts.
1630.4 Burden of proof.
1630.5 Costs requiring Corporation prior approval.
1530.6 Timetable and basis for granting prior approval.
1630.7 Review of questioned costs and appeal of disallowed costs.
1630.8 Recovery of disallowed costs and other corrective action.
1630.9 Other remedies; effect on other parts.
1630.10 Applicability to subgrants.
1630.11 Applicability to non-LSC funds.
1630.12 Applicability to derivative income.
1630.13 Time.
[[Page 68225]]
Authority: 5 U.S.C. App. 3, 42 U.S.C. 2996e, 2996f, 2996g,
2996h(c)(1), and 2996i(c); Pub. L. 105-11, 111 Stat. 2440; Pub. L.
104-134, 110 Stat. 3009.
Sec. 1630.1 Purpose.
This part is intended to provide uniform standards for allowability
of costs and to provide a comprehensive, fair, timely, and flexible
process for the resolution of questioned costs.
Sec. 1630.2 Definitions.
(a) Allowed costs means a questioned cost that the Corporation, in
a management decision, has determined to be eligible for payment from a
recipient's Corporation funds.
(b) Corrective action means action taken by a recipient that:
(1) Corrects identified deficiencies;
(2) Produces recommended improvements; or
(3) Demonstrates that audit or other findings are either invalid or
do not warrant recipient action.
(c) Derivative income means income earned by a recipient from
Corporation-supported activities during the term of a Corporation grant
or contract, and includes, but is not limited to, income from fees for
services (including attorney fee awards and reimbursed costs), sales
and rentals of real or personal property, and interest earned on
Corporation grant or contract advances.
(d) Disallowed cost means a questioned cost that the Corporation,
in a management decision, has determined should not be charged to a
recipient's Corporation funds.
(e) Final action means the completion of all actions that
Corporation management, in a management decision, has concluded are
necessary with respect to the findings and recommendations in a an
audit or other report. In the event that Corporation management
concludes no corrective action is necessary, final action occurs when a
management decision has been made.
(f) Management decisions means the evaluation by Corporation
management of findings and recommendations in an audit or other report
and the recipient's response to the report, and the issuance of a
final, written decision by management concerning its response to such
findings and recommendations, including any corrective actions which
Corporation management has concluded are necessary to address the
findings and recommendations.
(g) Questioned cost means a cost that a recipient has charged to
Corporation funds which Corporation management, the Office of Inspector
General, the General Accounting Office, or an independent auditor or
other audit organization authorized to conduct an audit of a recipient
has questioned because of an audit or other finding that:
(1) There may have been a violation of a provision of a law,
regulation, contract, grant, or other agreement or document governing
the use of Corporation funds;
(2) The cost is not supported by adequate documentation; or
(3) The cost incurred appears unnecessary or unreasonable and does
not reflect the actions a prudent person would take in the
circumstances.
(h) Recipient as used in this part means any grantee or contractor
receiving funds from the Corporation under sections 1006(a)(1) or
1006(a)(3) of the Act.
Sec. 1630.3 Standards governing allowability of costs under
Corporation grants or contracts.
(a) General criteria. Expenditures by a recipient are allowable
under the recipient's grant or contract only if the recipient can
demonstrate that the cost was:
(1) Actually incurred in the performance of the grant or contract
and the recipient was liable for payment;
(2) Reasonable and necessary for the performance of the grant or
contract as approved by the Corporation;
(3) Allocable to the grant or contract;
(4) In compliance with the Act, applicable appropriations law,
Corporation rules, regulations, guidelines, and instructions, the
Accounting Guide for LSC Recipients, the terms and conditions of the
grant or contract, and other applicable law;
(5) Consistent with accounting policies and procedures that apply
uniformly to both Corporation-financed and other activities of the
recipient;
(6) Accorded consistent treatment over time;
(7) Determined in accordance with generally accepted accounting
principles;
(8) Not included as a cost or used to meet cost sharing or matching
requirements of any other federally financed program, unless the agency
whose funds are being matched determines in writing that Corporation
funds may be used for federal matching purposes; and
(9) Adequately and contemporaneously documented in business records
accessible during normal business hours to Corporation management, the
Office of Inspector General, the General Accounting Office, and
independent auditors or other audit organizations authorized to conduct
audits of recipients.
(b) Reasonable costs. A cost is reasonable if, in its nature or
amount, it does not exceed that which would be incurred by a prudent
person under the same or similar circumstances prevailing at the time
the decision was made to incur the cost. If a questioned cost is
disallowed solely on the ground that it is excessive, only the amount
that is larger than reasonable shall be disallowed. In determining the
reasonableness of a given cost, consideration shall be given to:
(1) Whether the cost is of a type generally recognized as ordinary
and necessary for the operation of the recipient or the performance of
the grant or contract;
(2) The restraints or requirements imposed by such factors as
generally accepted sound business practices, arms-length bargaining,
Federal and State laws and regulations, and the terms and conditions of
the grant or contract;
(3) Whether the recipient acted with prudence under the
circumstances, considering its responsibilities to its clients and
employees, the public at large, the Corporation, and the Federal
government; and
(4) Significant deviations from the established practices of the
recipient which may unjustifiably increase the grant or contract costs.
(c) Allocable costs. A cost is allocable to a particular cost
objective, such as a grant, project, service, or other activity, in
accordance with the relative benefits received. Costs may be allocated
to Corporation funds either as direct or indirect costs according to
the provisions of this section. A cost is allocable to a Corporation
grant or contract if it is treated consistently with other costs
incurred for the same purpose in like circumstance and if it:
(1) Is incurred specifically for the grant or contract;
(2) Benefits both the grant or contract and other work and can be
distributed in reasonable proportion to the benefits received; or
(3) Is necessary to the overall operation of the recipient,
although a direct relationship to any particular cost objective cannot
be shown.
(d) Direct costs. Direct costs are those that can be identified
specifically with a particular final cost objective, i.e., a particular
grant award, project, service, or other direct activity of an
organization. Costs identified specifically with grant awards are
direct costs of the awards and are to be assigned directly thereto.
Direct costs include, but are not limited to, the salaries and wages of
recipient staff who are working on cases or matters that are
[[Page 68226]]
identified with specific grants or contracts. Salary and wages charged
directly to Corporation grants and contracts must be supported by
personnel activity reports.
(e) Indirect costs. Indirect costs are those that have been
incurred for common or joint objectives and cannot be readily
identified with a particular final cost objective. Any direct cost of a
minor amount may be treated as an indirect cost for reasons of
practicality where the accounting treatment for such cost is
consistently applied to all final cost objectives. Indirect costs
include, but are not limited to, the costs of operating and maintaining
facilities, and the costs of general program administration, such as
the salaries and wages of program staff whose time is not directly
attributable to a particular grant or contract. Such staff may include,
but are not limited to, executive officers and personnel, accounting,
secretarial and clerical staff.
(f) Allocation of indirect costs. Where a recipient has only one
major function, i.e., the delivery of legal services to low-income
clients, allocation of indirect costs may be by a simplified allocation
method, whereby total allowable indirect costs (net of applicable
credits) are divided by an equitable distribution base and distributed
to individual grant awards accordingly. The distribution base may be
total direct costs, direct salaries and wages, attorney hours, numbers
of cases, numbers of employees, or another base which results in an
equitable distribution of indirect costs among funding sources.
(g) Exception for certain indirect costs. Some funding sources may
refuse to allow the allocation of certain indirect costs to an award.
In such instances, a recipient may allocate a proportional share of
another funding source's share of an indirect cost to Corporation
funds, provided that the activity associated with the indirect cost is
permissible under the LSC Act and regulations.
(h) Applicable credits. Applicable credits are those receipts or
reductions of expenditures which operate to offset or reduce expense
items that are allocable to grant awards as direct or indirect costs.
Applicable credits include, but are not limited to, purchase discounts,
rebates or allowances, recoveries or indemnities on losses, insurance
refunds, and adjustments of overpayments or erroneous charges. To the
extent that such credits relate to allowable costs, they shall be
credited as a cost reduction or cash refund in the same fund to which
the related costs are charged.
(i) Guidance. The Circulars of the Office of Management and Budget
shall provide guidance for all allowable cost questions arising under
this part when relevant policies or criteria therein are not
inconsistent with the provisions of the Act, applicable appropriations
law, this part, the Accounting Guide for LSC Recipients, Corporation
rules, regulations, guidelines, instructions, and other applicable law.
Sec. 1630.4 Burden of proof.
The recipient shall have the burden of proof under this part.
Sec. 1630.5 Costs requiring Corporation prior approval.
(a) Advance understandings. Under any given grant award, the
reasonableness and allocability of certain cost items may be difficult
to determine. In order to avoid subsequent disallowance or dispute
based on unreasonableness or nonallocability, recipients may seek a
written understanding from the Corporation in advance of incurring
special or unusual costs. If a recipient elects not to seek an advance
understanding from the Corporation, the absence of an advance
understanding on any element of a cost does not affect the
reasonableness or allocability of the cost.
(b) Prior approvals. Without prior written approval of the
Corporation, no cost attributable to any of the following may be
charged to Corporation funds:
(1) Pre-award costs and costs incurred after the cessation of
funding;
(2) Purchases and leases of equipment, furniture, or other
personal, non-expendable property, if the current purchase price of any
individual item of property exceeds $10,000;
(3) Purchases of real property; and
(4) Capital expenditures exceeding $10,000 to improve real
property.
(c) Duration. The Corporation's approval or advance understanding
shall be valid for one year, or for a greater period of time which the
Corporation may specify in its approval or understanding.
Sec. 1630.6 Timetable and basis for granting prior approval.
(a) The Corporation shall grant prior approval of a cost if the
recipient has provided sufficient written information to demonstrate
that the cost would be consistent with the standards and policies of
this part. If the Corporation denies a request for approval, it shall
provide to the recipient a written explanation of the grounds for
denying the request.
(b) Except as provided in paragraphs (c) and (d) of this section,
the Corporation may not assert the absence of prior approval as a basis
for disallowing a questioned cost, if the Corporation has not responded
to a written request for approval within sixty (60) days of receiving
the request.
(c) If additional information is necessary to enable the
Corporation to respond to a request for prior approval, the Corporation
may make a written request for additional information within forty-five
(45) days of receiving the request for approval.
(d) If the Corporation has made a written request for additional
information about a cost as provided by paragraph (c) of this section,
and if the Corporation has not responded within thirty (30) days of
receiving in writing all additional, requested information, the
Corporation may not assert the absence of prior approval as a basis for
disallowing the cost.
Sec. 1630.7 Review of questioned costs and appeal of disallowed
costs.
(a) When the Office of Inspector General, the General Accounting
Office, or an independent auditor or other audit organization
authorized to conduct an audit of a recipient has identified and
referred a questioned cost to the Corporation, Corporation management
shall review the findings of the Office of Inspector General, General
Accounting Office, or independent auditor or other authorized audit
organization, as well as the recipient's written response to the
findings, in order to determine accurately the amount of the questioned
cost, the factual circumstances giving rise to the cost, and the legal
basis for disallowing the cost. Corporation management may also
identify questioned costs in the course of its oversight of recipients.
(b) If Corporation management determines that there is a basis for
disallowing a questioned cost, and if not more than five years have
elapsed since the recipient incurred the cost, Corporation management
shall provide to the recipient written notice of its intent to disallow
the cost. The written notice shall state the amount of the cost and the
factual and legal basis for disallowing it.
(c) Within thirty (30) days of receiving written notice of the
Corporation's intent to disallow the questioned cost, the recipient may
respond with written evidence and argument to show that the cost was
allowable, or that the Corporation, for equitable, practical, or other
reasons, should not recover all or part of the amount, or that the
recovery should be made in installments. If the recipient does not
respond to the Corporation's written notice,
[[Page 68227]]
Corporation management shall issue a management decision on the basis
of information available to it.
(d) Within sixty (60) days of receiving the recipient's written
response to the notice of intent to disallow the questioned cost,
Corporation management shall issue a management decision stating
whether or not the cost has been disallowed, the reasons for the
decision, and the method of appeal as provided in this section.
(1) If Corporation management has determined that the questioned
cost should be allowed, and that no corrective action by the recipient
is necessary, final action with respect to the questioned cost occurs
at the time when the Corporation issues the management decision.
(2) If Corporation management has determined that the questioned
cost should be disallowed, the management decision shall also describe
the expected recipient action to repay the cost, including the method
and schedule for collection of the amount of the cost. The management
decision may also require the recipient to make financial adjustments
or take other corrective action to prevent a recurrence of the
circumstances giving rise to the disallowed cost.
(e) If the amount of a disallowed cost exceeds $2,500, the
recipient may appeal in writing to the Corporation President within
thirty (30) days of receiving the Corporation's management decision to
disallow the cost. The written appeal should state in detail the
reasons why the Corporation should not disallow part or all of the
questioned cost. If the amount of a disallowed cost does not exceed
$2,500, or if the recipient elects not to appeal the disallowance of a
cost in excess of $2,500, the Corporation's management decision shall
be final.
(f) Within thirty (30) days of receipt of the recipient's appeal of
a disallowed cost in excess of $2,500, the President shall either
adopt, modify, or reverse the Corporation's management decision to
disallow the cost. If the President has had prior involvement in the
consideration of the disallowed cost, the President shall designate
another senior Corporation employee who has not had prior involvement
to review the recipient's appeal. The President shall also have
discretion, in circumstances where the President has not had prior
involvement in the disallowed cost, to designate another senior
Corporation employee to review the recipient's appeal, provided that
the senior Corporation employee has not had prior involvement in the
disallowed cost.
(g) The decision of the President or designee shall be final and
shall be based on the written record, consisting of the Corporation's
notice of intent to disallow the questioned cost, the recipient's
response, the management decision, the recipient's written appeal, any
additional response or analysis provided to the President or designee
by Corporation staff, and the relevant findings, if any, of the Office
of Inspector General, General Accounting Office, or other authorized
auditor or audit organization. Upon request, the Corporation shall
provide a copy of the written record to the recipient.
Sec. 1630.8 Recovery of disallowed costs and other corrective action.
(a) The Corporation shall recover any disallowed costs from the
recipient within the time limits and conditions set forth in the
Corporation's management decision. Recovery of the disallowed costs may
be in the form of a reduction in the amount of future grant checks or
in the form of direct payment from the recipient to the Corporation.
(b) The Corporation shall ensure that a recipient which has
incurred a disallowed cost takes any additional, necessary corrective
action within the time limits and conditions set forth in the
Corporation's management decision. The recipient shall have taken final
action when the recipient has repaid all disallowed costs and has taken
all corrective action which the Corporation has stated in its
management decision is necessary to prevent the recurrence of
circumstances giving rise to a questioned cost.
(c) In the event of an appeal of the Corporation's management
decision, the decision of the President or designee shall supersede the
Corporation's management decision, and the recipient shall repay any
disallowed costs and take necessary corrective action according to the
terms and conditions of the decision of the President or designee.
Sec. 1630.9 Other remedies; effect on other parts.
(a) In cases of serious financial mismanagement, fraud, or
defalcation of funds, the Corporation shall refer the matter to the
Office of Inspector General, and may take appropriate action pursuant
to parts 1606, 1623, 1625, and 1640 of this chapter.
(b) The recovery of a disallowed cost according to the procedures
of this part does not constitute a permanent reduction in the
annualized funding level of the recipient, nor does it constitute a
termination of financial assistance under part 1606, a suspension of
funding under part 1623, or a denial of refunding under part 1625.
Sec. 1630.10 Applicability to subgrants.
When disallowed costs arise from expenditures incurred under a
subgrant of Corporation funds, the recipient and the subrecipient will
be jointly and severally responsible for the actions of the
subrecipient, as provided by 45 CFR part 1627, and will be subject to
all remedies available under this part. Both the recipient and the
subrecipient shall have access to the review and appeal procedures of
this part.
Sec. 1630.11 Applicability to non-LSC funds.
(a) No costs attributable to a purpose prohibited by the LSC Act,
as defined by 45 CFR 1610.2(a), may be charged to private funds, except
for tribal funds used for the specific purposes for which they were
provided. No cost attributable to an activity prohibited by or
inconsistent with section 504, as defined by 45 CFR 1610.2(b), may be
charged to non-LSC funds, except for tribal funds used for the specific
purposes for which they were provided.
(b) According to the review and appeal procedures of 45 CFR 1630.7,
the Corporation may recover from a recipient's Corporation funds an
amount not to exceed the amount improperly charged to non-LSC funds.
Sec. 1630.12 Applicability to derivative income.
(a) Derivative income resulting from an activity supported in whole
or in part with funds provided by the Corporation shall be allocated to
the fund in which the recipient's LSC grant is recorded in the same
proportion that the amount of Corporation funds expended bears to the
total amount expended by the recipient to support the activity.
(b) Derivative income which is allocated to the LSC fund an
accordance with paragraph (a) of this section is subject to the
requirements of this part, including the requirement of 45 CFR
1630.3(a)(4) that expenditures of such funds be in compliance with the
Act, applicable appropriations law, Corporation rules, regulations,
guidelines, and instructions, the Accounting Guide for LSC recipients,
the terms and conditions of the grant or contract, and other applicable
law.
Sec. 1630.13 Time.
(a) Computation. Time limits specified in this part shall be
computed in accordance with Rules 6(a) and 6(e) of the Federal Rules of
Civil Procedure.
(b) Extensions. The Corporation may, on a recipient's written
request for good
[[Page 68228]]
cause, grant an extension of time and shall so notify the recipient in
writing.
Dated: December 24, 1997.
Victor M. Fortuno,
General Counsel.
[FR Doc. 97-34120 Filed 12-30-97; 8:45 am]
BILLING CODE 7050-01-M
