[Federal Register Volume 62, Number 126 (Tuesday, July 1, 1997)]
[Rules and Regulations]
[Pages 35406-35420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17208]


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DEPARTMENT OF EDUCATION

Office of Elementary and Secondary Education

34 CFR Part 222

RIN 1810-AA84


Impact Aid Program

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary issues regulations governing the Impact Aid 
Program under title VIII of the Elementary and Secondary Education Act 
of 1965 (ESEA or Act), as amended by the Improving America's Schools 
Act of 1994 (IASA). The program, in general, provides assistance for 
maintenance and operations costs to local educational agencies (LEAs) 
that are affected by Federal activities. These regulations implement a 
number of changes from the previous Impact Aid laws, Pub. L. 81-874 and 
Pub. L. 81-815, which were repealed when title VIII of the ESEA was 
enacted, and clarify and improve the administration of the program. In 
addition, these regulations make technical amendments to implement 
legislative changes made to title VIII of the ESEA by the Impact Aid 
Technical Amendments of 1996 (Pub. L. 104-195) and the National Defense 
Authorization Act for Fiscal Year 1997 (Pub. L. 104-201).
    These regulations cover the following subjects: Application 
requirements, overpayment forgiveness (section 8012 of the Act), 
payments for Federal property (section 8002 of the Act), payments for 
children with severe disabilities (section 8003(g) of the Act), 
withholding and related procedures for Indian policies and procedures 
(sections 8004(d)(2) and 8004(e) (8) and (9) of the Act), 
determinations under section 8009 of the Act, and administrative 
hearings and judicial review (section 8011 of the Act).

EFFECTIVE DATE: These regulations take effect on July 31, 1997.

FOR FURTHER INFORMATION CONTACT: For further information on this part, 
please contact Catherine Schagh. Telephone: (202) 260-3858. Individuals 
who use a telecommunications device for the deaf (TDD) may call the 
Federal Information Relay Service (FIRS) at 1-800-877-8339 between 8 
a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: On October 20, 1994, the President signed 
into law the IASA (Pub. L. 103-382). The IASA reauthorized the Impact 
Aid Program as title VIII of the ESEA, and made a number of changes to 
the program. Under the Impact Aid Program, assistance is provided for 
maintenance and operations costs to LEAs affected by Federal 
activities, including the presence of tax-exempt Federal property and 
an increased student population due to Federal property ownership or 
activities.
    Generally, in implementing the IASA, the Department is issuing 
regulations only where absolutely necessary, or to provide increased 
flexibility or reduce burden. As a part of that process, the Secretary 
published in the Federal Register on September 29, 1995, a final Impact 
Aid regulation removing regulations that were obsolete due to changes 
made in the statute by the IASA, or that were unnecessary because they 
simply repeated statutory provisions. The Secretary indicated in those 
technical regulations that he intended to publish a notice of proposed 
rulemaking (NRPM) in the future to implement provisions of the new law 
that were not included in those final regulations, and to make any 
substantive changes that were identified as needed under the 
Secretary's reinvention review.
    On October 7, 1996, the Secretary published an NPRM to accomplish 
those objectives (61 FR 52564). These final regulations, which contain 
the following provisions, are substantially similar to that NPRM:
     In subpart A (General), existing Sec. 222.4 is amended to 
conform the proof of mailing requirements to those accepted under other 
Department programs, which do not accept private metered postmarks or 
mail receipts that are not dated by the U.S. Postal Service, and new 
Secs. 222.12-222.18 are added to implement the authority in section 
8012 of the Act for forgiveness of certain Impact Aid overpayments;
     In subpart B (Payments for Federal Property under Section 
8002 of the Act), existing Sec. 222.22 is amended to provide 
clarification about the treatment of revenues from activities conducted 
on Federal property, and a new Sec. 222.23 is added to implement the 
new statutory method for valuing Federal property.
     A new subpart F is added (Payments to Local Educational 
Agencies for Children with Severe Disabilities under Section 8003(g) of 
the Act--Secs. 222.80-222.85) to implement the authority in section 
8003(g) for supplemental payments for children with severe 
disabilities;
     In subpart G (Special Provisions for Local Educational 
Agencies that Claim Children Residing on Indian Lands), new 
Secs. 222.114-222.122 are added to implement the Secretary's expanded 
enforcement authority for Indian policies and procedures in sections 
8004(d)(2) and 8004(e)(8)-(9) of the Act;
     In subpart J (Impact Aid Administrative Hearings and 
Judicial Review under Section 8011 of the Act), changes are made to 
Secs. 222.151, 222.152, 222.157, and 222.158, including, in 
Sec. 222.151, the adoption of a shortened time for filing 
administrative appeals (30 days from the adverse action, rather than 
the current 60 days) to expedite the redistribution of recovered 
overpayments to all applicants;
     In subpart K (Determinations under section 8009 of the 
Act), Sec. 222.161 is revised to implement new terms used in section 
8009 of the Act, Sec. 222.164 is revised regarding notification 
procedures for a party initiating a proceeding, Sec. 222.164(b)(5) is 
revised to explain the Secretary's flexible predetermination 
procedures, and Sec. 222.165 is revised regarding administrative 
appeals of section 8009 determinations to include, in part, a more 
expedited hearing process.
    In addition, the following technical amendments are made. In 
subpart C, Sec. 222.36(b) (1) and (2) is amended to conform to 
legislative changes in section 8003 of the Act made by section 376 of 
the National Defense Authorization Act for Fiscal Year 1997 (Pub. L. 
104-201). Previously, section 8003(a)(3) of the Act provided that, for 
a school district to be eligible to receive a payment for federally 
connected children under section 8003(a)(1) (F) or (G) (formerly 
identified as ``civilian b's''), those children had to number at least 
2000 in average daily attendance (ADA) and 15 percent of the school 
district's total

[[Page 35407]]

ADA. The children described in subparagraph 8003(a)(1) (F) or (G), 
respectively, are those children who reside on Federal property but 
whose parents neither work on Federal property nor are on active duty 
in the military, or children who do not reside on Federal property but 
reside with civilian parents employed on Federal property in the same 
State. Section 222.36(b) (1) and (2) of the existing regulations 
contains parallel requirements. Effective for fiscal year (FY) 1997, 
the National Defense Authorization Act for Fiscal Year 1997 modified 
the threshold eligibility requirement in section 8003(a)(3) to require 
a school district's section 8003(a)(1) (F) and (G) children to number 
at least 1000 in ADA or 10 percent of the school district's total ADA. 
A corresponding amendment is made to Sec. 222.36(b) (1) and (2) of 
these final regulations.
    In subpart K, a technical amendment is made to conform 
Sec. 222.162(a) to legislative changes in section 8009 of the Act made 
by section 10 of the Impact Aid Technical Amendments Act of 1996 (Pub. 
L. 104-195). Previously, section 8009 of the Act specified that, to be 
certified, a State must have a disparity percentage of no more than 25 
percent for FYs 1995, 1996, and 1997, and no more than 20 percent for 
FYs 1998 and 1999. Section 222.162 of the existing regulations contains 
parallel requirements. The Impact Aid Technical Amendments Act of 1996 
modified section 8009 of the Act to continue the 25 percent standard 
for FYs 1998 and 1999, rather than implement a new 20 percent standard. 
These final regulations implement this change by revising 
Sec. 222.162(a) to eliminate the 20 percent requirement for FYs 1998 
and 1999 because that requirement is no longer authorized by section 
8009 of the Act.
    Finally, for consistency purposes, a technical amendment is made to 
remove from the Impact Aid regulations unnecessary citations to the 
Secretary's general rulemaking authority (20 U.S.C. 1221e-3 and 20 
U.S.C. 1221e-3(a)(1)).

Significant Changes

    In addition to minor editorial, clarifying, and technical 
revisions, the following significant changes from the NPRM are made in 
these final regulations.
    1. Sections 222.12-222.18. The regulatory sections that implement 
the Secretary's authority in section 8012 of the Act to forgive certain 
Impact Aid overpayments are reorganized in response to public comment 
to make them shorter and easier to follow. As a consequence of this 
reorganization, three new sections are added. Substantive changes from 
the NPRM concerning the overpayment forgiveness provisions are 
described separately below.
    2. Section 222.16 (Sec. 222.13(c) in the NPRM). The requirements 
for information and documentation to be submitted by LEAs requesting 
overpayment forgiveness are simplified and changed. LEAs will not be 
required to submit maximum local real property tax rate data, or data 
regarding the equalized assessed valuation of real property per pupil 
(EAVPP). Instead, any LEA requesting forgiveness, not just LEAs whose 
boundaries are the same as a Federal military installation, will be 
required to submit its average per pupil expenditure (APPE) data, and 
the APPE figure for its State (in addition to local real property tax 
rate data that most LEAs also will submit).
    3. Section 222.17 (Sec. 222.14 in the NPRM). The criteria that the 
Secretary will use to determine what constitutes undue financial 
hardship and serious harm to an LEA's educational program are 
simplified, by reducing them to three measures: The total amount of the 
LEA's eligible overpayments on the date of its forgiveness request; the 
LEA's local real property tax rate in comparison to the State average 
local real property tax rate; and the LEA's APPE in comparison to the 
State APPE. For LEAs whose boundaries are the same as a Federal 
military installation, and for other LEAs with no or minimal local real 
property tax revenues in comparison to other LEAs in the State, the 
Secretary will use only an APPE measure in addition to the amount of 
the LEA's total eligible overpayments.
    4. Section 222.18 (Sec. 222.15 in the NPRM). The portion of the 
total eligible overpayment that the Secretary may forgive is increased, 
by raising the carryover amount that is allowed before repayment is 
required from five percent to 10 percent of the LEA's preceding year's 
total current expenditures.

Analysis of Comments and Changes

    In response to the Secretary's invitation to comment in the NPRM, 
the Department received eight letters, which were from State and local 
officials and the National Association for Federally Impacted Schools 
(NAFIS). Several commenters indicated their support of a number of 
aspects of the proposed regulations. Most of the letters contained 
multiple comments and addressed the proposed overpayment forgiveness 
provisions. An analysis of the comments, and the Secretary's responses 
to those comments, is presented below.

Clarity of Regulations

    Comment: One commenter indicated that the regulatory requirements 
were not clearly stated because they refer to numeric sections of the 
law with which most people are unfamiliar, so that applicants are 
required to reread sections of the law to understand the effect of the 
regulations. In addition, the commenter stated that the regulations 
would be more understandable if shorter sections were used and that the 
numeric and alphabetical subsection labelling is confusing.
    Discussion: In keeping with the Administration's regulatory reform 
initiatives, the Department is committed to reducing the volume of 
regulations. Thus, for example, the Department often avoids repeating 
in regulations those provisions of law that are clear in their 
statutory form. While acknowledging that this policy may require a 
reader to refer to two documents, rather than one, the Department 
believes that the benefits of this approach outweigh any disadvantage 
with respect to the Impact Aid regulations.
    Applicants for Federal financial assistance under a particular 
program are urged to familiarize themselves with the statute governing 
that program, as well as the regulations. Copies of the current Impact 
Aid statute are available upon request from the Department's Impact Aid 
Program office. In addition, a citation to the portion of the Impact 
Aid law, as published in the United States Code, relating to each 
regulation follows each section of the program regulations. An 
applicant needing clarification of a regulatory or statutory 
requirement is invited to communicate with the departmental 
representative listed in this preamble under the heading ``For Further 
Information Contact.''
    In preparing regulations and other documents for publication in the 
Federal Register, the Department adheres to requirements prescribed by 
the Office of the Federal Register. These requirements--applied 
uniformly to all Federal Departments and Agencies--govern such matters 
as the lettering and numbering of paragraphs, the order of that 
lettering and numbering, and indentation of paragraphs. The Department 
has submitted a copy of this comment to the Office of the Federal 
Register for the information and use of that Office.
    Subject to the Federal Register requirements, the Department's 
policy is to draft regulatory sections that are short, clear, and as 
readable as possible.

[[Page 35408]]

As a part of this policy, on September 29, 1995, the Secretary 
published comprehensive final regulations for the Impact Aid Program 
that reorganized and streamlined the existing regulations to be 
logically organized, clearly stated, and easier to use. These final 
regulations are designed to fit into that streamlined reorganization. 
In addition, changes have been made in the overpayment forgiveness 
provisions of this final regulation (Secs. 222.12-222.18) to shorten 
and simplify those individual regulatory sections.
    Changes: The overpayment forgiveness provisions (originally 
Secs. 222.12-222.15 in the NPRM) have been reorganized to shorten 
individual regulatory sections, resulting in the addition of three new 
sections (now Secs. 222.12-222.18). The regulatory language also has 
been simplified and condensed where possible.

Subpart A--General

Application Filing Requirements (Sec. 222.4)
    Comment: One commenter believed that not being able to use private 
metered postmarks for applications will cause unnecessary hardship to 
districts and discriminate against law-abiding districts for the misuse 
of a few other districts that, in any event, already are regulated by 
the U.S. Postal Service. Another commenter agreed with the Department's 
proposal not to accept private metered postmarks.
    Discussion: Changing to a proof of mailing standard that does not 
accept private metered postmarks or mail receipts that are not dated by 
the U.S. Postal Service is consistent with the standards of other 
Department programs. Although the U.S. Postal Service does regulate in 
this area, the Impact Aid Program has received applications in the past 
with private postmark dates that were manipulated without detection by 
the U.S. Postal Service. This regulation does not prohibit districts 
from using private meter postage for mailing applications. Rather, the 
purpose of the provision is to ensure that districts are aware that 
private meter postage alone will not be sufficient proof of mailing 
should application receipt issues arise after a deadline has passed.
    Changes: None.
    Comment: One commenter suggested that the Department accept 
electronic mail as an alternative means of application receipt.
    Discussion: As a goal, the Department strongly supports electronic 
transmission as an alternative means of submitting an application for 
Federal financial assistance, and has begun investigating appropriate 
methods and necessary technology support systems to accomplish that 
objective on a Department-wide basis. As part of this process, the 
Department is participating in an interagency working group on the 
issue, and currently uses electronic transmission and receipt for 
documents in several areas, including small purchase contracts and data 
transmission for postsecondary education grants. At this time the 
Department is not able to accept Impact Aid applications that have been 
transmitted electronically, but continues to move ahead on this matter 
to prepare for future acceptance of electronic submissions.
    Changes: None.
Overpayment Forgiveness Provisions (Secs. 222.12-222.15 in the NPRM; 
Sec. 222.12-222.18 in these final regulations)
    General.
    Comment: One commenter, an LEA, believed that it was not affected 
by the overpayment forgiveness provisions because the district was in 
an equalized State that reduced State aid by an amount equal to 100 
percent of the district's Impact Aid.
    Discussion: Even if an LEA's State aid were reduced by an amount 
equal to 100 percent of the LEA's Impact Aid payment, it could benefit 
from the overpayment forgiveness provisions. This is because, unless 
its overpayment were forgiven, the LEA would still be responsible for 
repayment to the Federal Government of any Federal funds received by 
the district for which the district was not eligible.
    Moreover, when making reductions in State aid, States that are 
certified as equalized States qualified to make reductions in State aid 
under section 8009(b) of the Act are required to set aside and not 
consider certain of an LEA's Impact Aid receipts, including funds under 
section 8003(f) for heavily impacted districts. See section 
8009(d)(1)(B) of the Act and 34 CFR 222.161(a)(1)(iii) and 222.163. The 
most recent data available to the Department from the commenter's State 
indicate that the State is properly setting aside the appropriate 
categories and amounts of Impact Aid and that a reduction in State aid 
equal to less than 100 percent of the commenter's Impact Aid was in 
fact made. Reductions in excess of the amounts authorized in section 
8009(d)(1)(B) of the Act and 34 CFR 222.161(a)(1)(iii) and 222.163 
would be unlawful.
    Changes: None.
    Comment: One commenter stated that the proposed overpayment 
forgiveness provisions are too strict, and that no repayment should be 
sought if the overpayment was due to the error of the Department or the 
State educational agency, particularly if the error concerned local 
contribution rates (LCRs).
    In addition, the commenter believed that overpayments should be 
forgiven in full if the Department did not discover the error in the 
same fiscal year in which the affected payment was made. In particular, 
the commenter believed that the Department should review claims for 
federally connected children with disabilities promptly to catch any 
errors made by school districts in their claims of those children.
    Discussion: The proposed overpayment forgiveness provisions include 
flexibility for the Secretary to forgive an overpayment in whole if the 
Secretary determines on a case-by-case basis that repayment would be 
manifestly unjust (Secs. 222.13(a)(2)(ii) and 222.15(a)(2) in the NPRM; 
Secs. 222.14(c)(2) and 222.18(a)(2) in the final regulations). As 
indicated in the preamble to the NPRM (61 FR 52566), the Secretary 
anticipates that this special provision will be used only on the rare 
occasion when an overpayment was due to an error on the part of the 
Department that an LEA could not reasonably be expected to identify and 
report. An example of a rare occasion when this paragraph would apply 
is a case in which a calculation of an LEA's payment was made by the 
Department using the wrong LCR and the LEA could not have known that 
the LCR was too high.
    Because payments based upon federally connected children under 
section 8003 of the Act now are based upon preceding year student count 
data, the Impact Aid Program normally would have time to discover any 
errors in those reported student counts before making payments based 
upon those children. However, because the Department cannot verify the 
data in every application each year prior to making payments, it is 
important that applicants carefully read and follow the application 
instructions to ensure that only eligible federally connected children, 
including eligible federally connected children with disabilities, are 
included in their student counts.
    Changes: None.
    Comment: One commenter stated that the overpayment forgiveness 
provisions should not be applied retroactively, and that forgiveness 
requests filed before the effective date of the final regulations 
should be considered only under the

[[Page 35409]]

provisions of the law in effect at the time the request was filed.
    Discussion: In reauthorizing the Impact Aid Program, Congress 
provided authority to the Secretary to forgive overpayments owed by 
LEAs when it enacted section 8012 of the Act. This unique and limited 
authority requires, by its very nature, the careful balancing of 
competing interests of Impact Aid recipients. The competing interests 
involved in deciding overpayment forgiveness requests specifically 
noted by the Secretary in the preamble to the NPRM are the interests of 
the districts applying for forgiveness and the interests of those 
applicants eligible for redistribution of the overpaid Impact Aid 
funds. Rather than undertake the difficult balancing of these competing 
interests solely on the basis of statutory authority that lacks 
specific measures, and in a hasty and relatively uninformed manner, the 
Secretary through this rulemaking proceeding sought to obtain 
information and views from all of the affected parties about how best 
to implement the new legislation.
    The appropriateness of seeking comments on this unprecedented 
authority is reflected in the facts that the proposed overpayment 
forgiveness provisions garnered more public comments than the other 
provisions of the NPRM and that the Secretary has made significant 
changes as a result of those comments. Deciding overpayment forgiveness 
requests solely on the basis of the statute without regard to the 
information and views expressed during the rulemaking proceeding would, 
in the Secretary's view, result in uninformed and inappropriate 
decisions being made without the benefit of the knowledge acquired in 
the rulemaking proceeding.
    The Secretary has received a number of overpayment forgiveness 
requests, both before and after the statutory authority was enacted. 
For reasons of fairness, the Secretary concludes that it would be 
inappropriate to subject some overpayment requests to the statutory 
standard without benefit of implementing regulations, but consider 
other overpayment requests under the more fully developed standards. 
Therefore, all of those requests will be decided using the same 
consistent and uniform measures that are published in these final 
regulations.
    Changes: None.
``Manifestly Unjust'' Provision (Sec. 222.13(a)(2)(ii) in the NPRM; 
Sec. 222.14(c)(2) in the final regulations)
    Comment: One commenter stated that the manifestly unjust provision 
is too vague and needs clarification as to the types of Department 
errors that are covered and how the Department will determine what 
overpayments qualify under that special provision.
    Discussion: The special provision that allows the Secretary to 
forgive an overpayment if it is determined, on a case-by-case basis, 
that the repayment would be ``manifestly unjust,'' is designed to allow 
the Secretary flexibility to forgive overpayments caused by Department 
error in future unanticipated situations. It would defeat the flexible 
nature of this provision to speculate about the possible situations 
that might occur and limit its applicability to those situations. As 
the Secretary indicated in the preamble to the NPRM, however, the 
Secretary anticipates applying this provision only on the rare occasion 
in which an LEA could not reasonably be expected to identify and report 
the overpayment when it is made.
    Changes: None.
Filing Deadlines (Sec. 222.13(b) in the NPRM; Sec. 222.14 (a) and (b) 
in the final regulations)
    Comment: One commenter stated that the time limit for filing a 
forgiveness request should be changed from 30 to 60 days because of the 
slow receipt of mail by rural Indian school districts. The commenter 
believed that 30 days would not give these districts sufficient time to 
prepare a reply and submit the required supporting documentation.
    Discussion: The time limit for filing a forgiveness request is 
determined for all school districts from their date of receipt of the 
overpayment notice, not from the date of mailing of that document. 
Therefore, differences in the length of time that it takes for various 
school districts to receive the overpayment notices should not affect 
the amount of time available to respond with an overpayment forgiveness 
request. The Secretary believes that 30 days is a reasonable amount of 
time to allow for a school district to submit a forgiveness request. If 
that is not sufficient time for the districts also to gather the 
required supporting documentation, the regulations allow a district to 
request an extension of time for the submission of that information 
(Sec. 222.13(b)(3) in the NPRM; Sec. 222.14(b) in the final 
regulations).
    Changes: None.
Required Information and Documentation (Sec. 222.13(c) in the NPRM; 
Sec. 222.16 in the final regulations)
    Comment: One commenter stated that per pupil expenditure (PPE) data 
should be required from all school districts, rather than just from 
school districts with boundaries that are the same as a Federal 
military installation (``coterminous'' districts). Another commenter 
believed that PPE data should be treated similarly for coterminous 
school districts as for other school districts that have real property 
taxing authority. To accomplish this result, the commenter believed 
that PPE data for coterminous districts must exclude certain 
expenditures such as repair, renovation, and building maintenance to 
Federal buildings, expenditures for construction of new buildings, 
school bus purchases, and capital outlay, because a ``taxing LEA'' 
could fund those expenditures through bonded debt that would not be 
included in its PPE figure.
    Discussion: The Secretary agrees that the PPE figure is a good 
measure (in addition to others) to use for all school districts in 
determining whether a district has the fiscal capacity to repay an 
overpayment. Therefore, as discussed below, changes have been made in 
the standards that the Secretary will apply to determine whether 
repayment of an overpayment would cause undue financial hardship and 
serious harm to a district's educational program. A corresponding 
change has been made in the data that an LEA is required to submit, to 
require every LEA requesting forgiveness to submit its average PPE 
(APPE) data and the APPE figure for its State.
    The same definition of APPE for an LEA, which is based upon the 
definition of ``current expenditures'' as defined in section 8013 of 
the Act, applies to all school districts, and excludes capital outlay 
expenditures. Thus, if a coterminous school district has extensive 
repair or renovation costs, those costs likely would be classified as 
capital outlay expenditures and excluded from the district's current 
expenditures (and its APPE), whether or not they are funded through 
debt service. Likewise, the purchase of replacement equipment, such as 
school buses, is treated as a capital outlay and excluded from current 
expenditures and APPE figures if the State treats those purchases as a 
capital outlay.
    Changes: A change is made to require all LEAs requesting 
overpayment forgiveness to submit APPE data for the preceding year, 
rather than requiring only coterminous districts to submit those data.
    Comment: One commenter stated that the Secretary should not require 
LEAs to submit information about a State's maximum local real property 
tax rate or the equalized assessed valuation of real property per pupil 
(EAVPP), because

[[Page 35410]]

that information should not be used to determine whether repayment of 
an overpayment would cause undue financial hardship and serious harm to 
an LEA's educational program.
    Discussion: The Secretary has decided to use standards other than a 
State's maximum local real property tax rate and a district's EAVPP in 
determining whether the district has the fiscal capacity to repay an 
overpayment, and, as discussed below, will not apply these measures to 
determine whether repayment of an overpayment would cause undue 
financial hardship and serious harm to a district's educational 
program. Accordingly, LEAs will not be required to submit data on these 
measures.
    Changes: A change has been made by removing the requirement that an 
LEA requesting overpayment forgiveness must submit State maximum local 
real property tax rate and EAVPP data (Sec. 222.13(c)(1) (iii) and (v) 
in the NPRM; Sec. 222.16(a) in the final regulations).
Determination of Undue Financial Hardship and Serious Harm to an LEA's 
Educational Program (Sec. 222.14 in the NPRM; Sec. 222.17 in the final 
regulations)
    Comment: Two commenters believed that the Secretary should change 
the measures used to determine undue financial hardship and serious 
harm to an LEA's educational program by removing the State maximum 
local real property tax rate and EAVPP measures, and using instead a 
State average local real property tax rate measure and a PPE measure. 
One of those commenters stated that a State maximum tax rate measure 
was not a good indicator of local effort because an LEA might be 
levying a tax rate significantly above the State average, but still 
fail to be at 90 percent of the State maximum. In addition, that 
commenter indicated that the State maximum measure should not be used 
because annual changes by the State to that measure could result in 
arbitrary results, and State limitations on tax increases could 
prohibit LEAs from being able to raise their tax levies sufficiently to 
meet the standard. The second commenter also believed that the State 
maximum measure would unfairly affect Indian districts that did not 
have a sufficient tax base or number of taxpayers to absorb a large tax 
increase.
    As an alternative, both of these commenters suggested using a State 
average tax rate measure for all LEAs, instead of for coterminous 
districts only, because it would be a more consistent standard 
nationwide and a better measure of local effort. One of these 
commenters believed that it would be reasonable to consider that an LEA 
had met the standard if the LEA were levying a local real property tax 
that was at least 90 percent of the State average local real property 
tax rate. A third commenter stated, however, that the State average 
local real property tax rate, although it can be calculated, is not a 
good measure for ``unequalized'' States such as New York, and that a 
``local contribution rate'' measure should be used instead.
    Finally, two commenters believed that the EAVPP standard should be 
eliminated because it is too subject to manipulation, and is not a good 
measure of an LEA's financial capacity because it ignores other 
available revenues. If the EAVPP standard were retained, one of the 
commenters believed that some consideration also should be given to 
other financial resources of an LEA because some States make 
adjustments in State aid for LEAs with a low EAVPP.
    The commenters suggested as a substitute for EAVPP that, in 
addition to the tax rate standard, a lower-than-average PPE standard 
generally should be applied, and that the Secretary also should 
consider an LEA's ability to raise additional revenues by increasing 
its local real property tax levy.
    For coterminous districts, one commenter agreed with the NPRM 
provision that the PPE standard would be met if the LEA's APPE was no 
more than 125 percent of the State APPE. That commenter indicated that 
the same standard should be extended as well to heavily impacted Indian 
lands LEAs with little local real property tax revenue capacity. In 
addition, that commenter suggested that, for those special districts, 
the Secretary should retain the flexibility to adjust the tax rate 
percentage, or waive it altogether, if the Secretary believed that the 
educational program of the district otherwise would suffer.
    Discussion: The Secretary agrees with the importance of using 
uniform and consistent measures that can be applied nationwide, and 
therefore eliminates the State maximum tax rate measure in these final 
regulations because only some States have maximum tax rates. The 
Secretary also agrees with the importance of considering all sources of 
revenue, and therefore eliminates the EAVPP measure. In addition, the 
Secretary agrees that good measures of an LEA's fiscal capacity are the 
LEA's local effort as measured by its local real property tax rate in 
comparison to the State average, and its per pupil expenditures in 
comparison to the State average, and therefore generally adopts those 
measures, combined with a minimum eligible overpayment balance, to 
determine whether repayment would result in undue financial hardship 
and serious harm to an LEA's educational program.
    The Secretary also agrees, however, that it would be unfair to 
impose a local effort measure on districts that have no or little 
ability to raise local real property tax revenues in comparison with 
other LEAs in their State. Therefore, for all of those districts, the 
Secretary eliminates in these final regulations the use of a local 
effort measure, and will use instead the PPE measure that was proposed 
in the NPRM for coterminous districts (in addition to a minimum 
eligible overpayment balance). That PPE measure is that the LEA's APPE 
for the preceding year is no more than 125 percent of the State APPE.
    The Secretary does not believe that a local contribution rate 
measure is an appropriate substitute for a local real property tax rate 
measure. For States in which tax rates are ``unequalized'' among school 
districts, the Secretary expects the State to equalize those rates 
before calculating a State average local real property tax rate in 
order to remove any distortion of the resulting average.
    Finally, the Secretary agrees that it also would be a good measure 
of an LEA's fiscal capacity to consider the amount of additional 
revenues that could be raised by the LEA through an increase in taxes. 
However, that measure is not being adopted in these final regulations 
because it may not be possible to apply it consistently across States. 
The Department also believes that its application would impose a 
significant administrative burden on some LEAs and States, and on the 
Federal Government.
    Changes: The State maximum local real property tax rate and EAVPP 
measures of fiscal burden are eliminated, and the following three 
measures adopted for all LEAs except those with no or little local real 
property tax revenues: (1) The LEA's eligible overpayments on the date 
of its request must total at least $10,000; (2) the LEA's local real 
property tax rate for current expenditures for the preceding year must 
be equal to or above the State average; and (3) the LEA's APPE for the 
preceding year must be less than the State APPE. The measure for 
coterminous LEAs is extended to apply as well to other LEAs with no or 
minimal local real property tax revenues. That standard (in addition to 
the total overpayment amount equalling or exceeding $10,000) is that 
the LEA's APPE for the preceding fiscal year does

[[Page 35411]]

not exceed 125 percent of the State APPE.
Amount Forgiven (Sec. 222.15 in the NPRM; Sec. 222.18 in the final 
regulations)
    Comment: The NPRM proposed to determine the amount of the 
overpayment to be forgiven depending on the amount of an LEA's closing 
balance the previous year in comparison with its previous year's total 
current expenditures (TCE). In cases where an LEA's carryover was more 
than five percent of its previous year's TCE, the NPRM provided that 
the LEA would repay all or a portion of the overpayment. One commenter 
stated that, for LEAs with strict State budget limits that are required 
to use closing balances to fund override expenditures because they have 
very few taxpayers, the Secretary in determining the overpayment amount 
to be forgiven should remove from the carryover balance the portion of 
that balance needed to fund the override expenditures.
    Two commenters believed that a five percent carryover was too 
small, and that the allowed carryover should be increased to 25 percent 
to allow LEAs a cash reserve to cover three months operating expenses. 
In addition, one of those commenters indicated that, in determining the 
amount to be forgiven, the Secretary should adopt a method that takes 
into consideration an LEA's ability to raise taxes to repay the debt. 
Under the proposed method suggested by that comment, all eligible LEAs 
would repay the amount by which their closing balance exceeded 25 
percent of the previous year's total current expenditures, and, in 
addition, all LEAs would repay the lesser of the amount of local 
revenue that could be raised with (1) a five percent tax increase, or 
(2) the maximum tax rate increase that legally could have been adopted.
    Discussion: As noted in the preamble to the NPRM, the basis for 
using an LEA's closing balance, as expressed as a percentage of TCE, to 
demarcate the extent of forgiveness for eligible overpayments was 
intended to provide LEAs with reasonable minimal amounts to allow for 
the transition from one fiscal year to the next. In light of this 
limited purpose, the Secretary proposed the level of five percent of 
TCE. In response to comments that a sufficient cash reserve should be 
provided for a longer transitional period, however, the Secretary is 
increasing the size of the permitted reserve to 10 percent. While the 
Secretary considers this substantial enlargement of the permitted 
reserve to be consistent with the stated purpose, a further increase in 
the allowable carryover reserve to one that might be sufficient for a 
period of up to three months--one full quarter--would be inappropriate 
for the limited transitional purpose of this provision.
    No special provision has been made in these final regulations for 
LEAs that use ending balances to fund override expenditures in States 
with budget limits. As noted, the purpose of this provision is to 
provide for a transition from one fiscal year to another. Creating an 
exception allowing larger reserves solely for LEAs that fund subsequent 
year operations through overrides funded with ending balances would not 
be consistent with the purpose of the provision, and would be unfair to 
other LEAs that are not subject to budget limits but nonetheless use 
their ending balances to fund operations in the ensuing year. In 
addition, the Secretary believes that the doubling in size of the 
allowable carryover reserve should help address the concerns of any 
district that uses ending balances to fund override spending.
    Finally, the allowable carryover reserve is considered only in 
determining the amount of the overpayment that will be forgiven. The 
Secretary would not expect every district to use all of its closing 
balance in excess of the allowable cash reserve to satisfy immediately 
the unforgiven portion of its overpayments. As has been the practice in 
the past, in appropriate cases, repayment may be made through 
administrative offset, or a repayment schedule can be negotiated to 
provide for repayment over time so as not to disrupt the educational 
services provided by the LEA.
    Changes: The allowed carryover amount, in determining how much of 
the eligible overpayments are forgiven, is increased from five percent 
to 10 percent of the previous year's total current expenditures.

Subpart F--Payments to Local Educational Agencies for Children With 
Severe Disabilities Under Section 8003(g) of the Act

Definitions (Sec. 222.80)
    Comment: Two commenters indicated that the regulations should 
include a definition of the statutory term ``compassionate post 
assignment,'' and that the definition of the term should be obtained 
from the Department of Defense. One of those commenters suggested that, 
absent a definition from the Department of Defense, the Department 
should consider defining the term based upon the enrollment of military 
students with disabilities. Specifically, the commenter suggested that 
the term could be defined as meaning an assignment to any LEA with an 
enrollment of children with disabilities that exceeds the State 
average, and where at least 25 percent of those children are military 
dependents.
    Discussion: As stated in the NPRM, the Department has been unable 
to obtain a standard definition of the term ``compassionate post 
assignment.'' In the absence of a standard or official definition of 
the term in Department of Defense statutes, regulations, or other 
official policy guidance, the Department has determined that it would 
be inappropriate to develop its own definition of the term. The 
commenter's suggested definition of the term as any LEA with an above-
State average enrollment of children with disabilities, 25 percent of 
whom are military dependents, may in practical effect exclude some LEAs 
that do not meet the commenter's standard, but that do meet the section 
8003(g) statutory standard of serving two or more severely disabled 
students who each have a parent in the uniformed services. For this 
reason, the Department believes that it would be inappropriate to adopt 
the commenter's suggestion.
    Changes: None.

Subpart G--Special Provisions for Local Educational Agencies That Claim 
Children Residing on Indian Lands

Withholding and Related Procedures for Indian Policies and Procedures  
(Secs. 222.114-222.122)
    Comment: One commenter approved of the clarity of the proposed 
enforcement regulations in this section but asked whether a school 
district claiming children residing on Indian lands under section 
8003(a)(1)(C) of the Act could choose to count the children in another 
category, thereby waiving the 1.25 payment weight and avoiding the 
Indian policies and procedures (IPP) requirements under section 8004 of 
the Act, which are associated with children residing on Indian lands.
    Discussion: A school district with a pending IPP enforcement issue 
that has claimed children residing on Indian lands under section 
8003(a)(1)(C) but refused to comply with the IPP requirements cannot 
avoid the IPP enforcement provisions, including having its funds 
withheld, by deciding not to claim the children on an amended or future 
application. However, there is no provision in the Impact Aid statute 
that requires a school district to claim children residing on Indian 
lands under section 8003(a)(1)(C), even if the children

[[Page 35412]]

would meet the eligibility requirements for the increased payment 
weight associated with that section.
    While a school district may choose to claim the children in another 
payment category, such as under section 8003(a)(1)(F) of the Act, in 
order to circumvent or avoid the special provisions relating to school 
districts claiming children residing on Indian lands, the Secretary 
does not support or endorse such an action. Reclassifying the children 
in this way clearly would result in the school district receiving a 
lesser Impact Aid payment than it otherwise would receive. Most 
importantly, however, the Secretary believes that the requirements of 
section 8004 may be beneficial in ensuring the equal participation of 
children living on Indian lands in a school district's programs and 
activities and affording parents and Indian tribes an opportunity to 
present their views on those programs and activities. Therefore, the 
Secretary encourages school districts to meet the spirit and the 
purpose of the requirements associated with section 8004, which would 
also enable them to receive the higher payments for children residing 
on Indian lands.
    Changes: None.
Secretary's Authority To Withhold Payments  (Sec. 222.115)
    Comment: Another commenter asked for clarification of the 
relationship between the proposed language in Sec. 222.115(b) and 
Sec. 222.113(c).
    Discussion: Section 222.115(b) provides that the Assistant 
Secretary withholds payments to an LEA after an IPP hearing where the 
LEA rejects the final determination of the Assistant Secretary or the 
LEA fails to implement the required remedy within the time established 
and the Assistant Secretary determines that the required remedy will 
not be undertaken by the LEA even if the LEA is granted a reasonable 
extension of time. Section 222.113(c) provides that the Assistant 
Secretary's final determination under Sec. 222.113(a) is the final 
action for the Department concerning the complaint and is subject to 
judicial review. When read together, these sections mean that if a 
school district appeals a final determination, the Assistant Secretary 
is not precluded from withholding the funds in accordance with the 
regulations while the appeal is pending.
    Changes: None.

Subpart K--Determinations Under Section 8009 of the Act

Treatment of State Aid Under Section 8009 of the Act  (Sec. 222.161)
    Comment: One commenter stated that the definition of ``total local 
tax revenues'' should be clarified by adding the word ``tax'' after the 
word ``including.''
    Discussion: ``Local tax revenues'' as defined in Sec. 222.161(c) 
clearly includes the proceeds from various types of taxes, and does not 
include other types of revenues.
    Changes: In the definition of ``total local tax revenues,'' the 
word ``tax'' is added after the word ``including.''

Paperwork Reduction Act of 1995

    Under the Paperwork Reduction Act of 1995, no persons are required 
to respond to a collection of information unless it displays a valid 
OMB control number. The valid OMB control number assigned to the 
collections of information in these final regulations is displayed at 
the end of the affected sections of the regulations.

List of Subjects in 34 CFR Part 222

    Education, Education of children with disabilities, Elementary and 
secondary education, Federally affected areas, Grant programs--
education, Indians--education, Public housing, Reports and 
recordkeeping requirements, School construction.

    Dated: June 26, 1997.
Richard W. Riley,
Secretary of Education.

(Catalog of Federal Domestic Assistance Number 84.041, Impact Aid)
    The Secretary amends part 222 of Title 34 of the Code of Federal 
Regulations as follows:

PART 222--IMPACT AID PROGRAM

    1. The authority citation for Part 222 continues to read as 
follows:

    Authority: 20 U.S.C. 7701-7714, unless otherwise noted.


Secs. 222.7, 222.9, 222.10 and 222.11  [Amended]

    2. In the authority citation for the following sections, remove 
``1221e-3,'':
    Sec. 222.7.
    Sec. 222.9.
    Sec. 222.10.
    Sec. 222.11.


Secs. 222.50, 222.94, 222.95, 222.103, 222.104, 222.108-
222.113  [Amended]

    3. In the authority citation for the following sections, remove 
``1221e-3(a)(1),'':
    Sec. 222.50.
    Sec. 222.94.
    Sec. 222.95.
    Sec. 222.103.
    Sec. 222.104.
    Sec. 222.108.
    Sec. 222.109.
    Sec. 222.110.
    Sec. 222.111.
    Sec. 222.112.
    Sec. 222.113.
    4. Section 222.4 is revised to read as follows:


Sec. 222.4  How does the Secretary determine when an application is 
timely filed?

    (a) To be timely filed under Sec. 222.3, an application must be 
received by the Secretary, or mailed, on or before the applicable 
filing date.
    (b) An applicant must show one of the following as proof of 
mailing:
    (1) A legibly dated U.S. Postal Service postmark.
    (2) A legible mail receipt with the date of mailing stamped by the 
U.S. Postal Service.
    (3) A dated shipping label, invoice, or receipt from a commercial 
carrier.
    (4) Any other proof of mailing acceptable to the Secretary.
    (c) If an application is mailed through the U.S. Postal Service, 
the Secretary does not accept either of the following as proof of 
mailing:
    (1) A private metered postmark.
    (2) A mail receipt that is not dated by the U.S. Postal Service.

(Authority: 20 U.S.C. 7705)

    Note to Paragraph (b)(1): The U.S. Postal Service does not 
uniformly provide a dated postmark. Before relying on this method, 
an applicant should check with its local post office.


Sec. 222.11  [Amended]

    5. In Sec. 222.11, the introductory text is amended by removing 
``Except as otherwise provided in section 8012'', and by adding in its 
place ``Except as otherwise provided in Secs. 222.12-222.18,''.


Sec. 222.13  [Redesignated as Sec. 222.19]

    6. Section 222.13 is redesignated as Sec. 222.19, and new 
Secs. 222.12-222.18 are added to read as follows:


Sec. 222.12  What overpayments are eligible for forgiveness under 
section 8012 of the Act?

    (a) The Secretary considers as eligible for forgiveness under 
section 8012 of the Act (``eligible overpayment'') any overpayment 
amount that is more than an LEA was eligible to receive for a 
particular fiscal year under Public Law 81-874, Public Law 81-815, or 
the Act (except for the types of overpayments listed in Sec. 222.13), 
and that--
    (1) Remains owing on or after July 31, 1997;

[[Page 35413]]

    (2) Is the subject of a written request for forgiveness filed by 
the LEA before July 31, 1997; or
    (3) Is the subject of a pending, timely written request for an 
administrative hearing or reconsideration, and has not previously been 
reviewed under Secs. 222.12-222.18.
    (b) The Secretary applies Secs. 222.14-222.18 in forgiving, in 
whole or part, an LEA's obligation to repay an eligible overpayment 
that resulted from error either by the LEA or the Secretary.

(Authority: 20 U.S.C. 7712)


Sec. 222.13  What overpayments are not eligible for forgiveness under 
section 8012 of the Act?

    The Secretary does not consider the following overpayments to be 
eligible for forgiveness under section 8012 of the Act:
    (a) Any overpayment under section 7 of Public Law 81-874 or section 
16 of Public Law 81-815.
    (b) An amount received by an LEA, as determined under section 
8003(g) of the Act (payments to LEAs for certain federally connected 
children with severe disabilities, implemented in subpart F of this 
part), that exceeds the LEA's maximum basic support payment under 
section 8003(b) of the Act.
    (c) Any overpayment caused by an LEA's failure to expend or account 
for funds properly in accordance with the following laws and 
regulations:
    (1) Section 8003(d) of the Act (implemented in subpart D of this 
part) or section 3(d)(2)(C) of Public Law 81-874 for certain federally 
connected children with disabilities.
    (2) Section 8003(g) of the Act.

(Authority: 20 U.S.C. 7712)


Sec. 222.14  What requirements must a local educational agency meet for 
an eligible overpayment to be forgiven in whole or part?

    The Secretary forgives an eligible overpayment, in whole or part as 
described in Sec. 222.18, if--
    (a) An LEA submits to the Department's Impact Aid Program office a 
written request for forgiveness by the later of--
    (1) Thirty days from the LEA's initial receipt of a written notice 
of the overpayment; or
    (2) September 2, 1997;
    (b) The LEA submits to the Department's Impact Aid Program office 
the information and documentation described in Sec. 222.16 by the 
deadlines described in paragraph (a) of this section, or other time 
limit established in writing by the Secretary due to lack of 
availability of the information and documentation; and
    (c) The Secretary determines under Sec. 222.17 that--
    (1) In the case either of an LEA's or the Department's error, 
repayment of the LEA's total eligible overpayments will result in an 
undue financial hardship on the LEA and seriously harm the LEA's 
educational program; or
    (2) In the case of the Department's error, determined on a case-by-
case basis, repayment would be manifestly unjust (``manifestly unjust 
repayment exception'').


Sec. 222.15  How are the filing deadlines affected by requests for 
other forms of relief?

    Unless the Secretary (or the Secretary's delegatee) extends the 
applicable time limit in writing--
    (a) A request for forgiveness of an overpayment under Sec. 222.14 
does not extend the time within which an applicant must file a request 
for an administrative hearing under Sec. 222.151; and
    (b) A request for an administrative hearing under Sec. 222.151, or 
for reconsideration under Sec. 222.152, does not extend the time within 
which an applicant must file a request for forgiveness under 
Sec. 222.14.

(Authority: 20 U.S.C. 7712)


Sec. 222.16  What information and documentation must an LEA submit for 
an eligible overpayment to be considered for forgiveness?

    (a) Every LEA requesting forgiveness must submit, within the time 
limits established under Sec. 222.14(b), the following information and 
documentation for the fiscal year immediately preceding the date of the 
forgiveness request (``preceding fiscal year''):
    (1) A copy of the LEA's annual financial report to the State.
    (2) The LEA's local real property tax rate for current expenditure 
purposes, as described in Sec. 222.17(b).
    (3) The average local real property tax rate of all LEAs in the 
State.
    (4) The average per pupil expenditure (APPE) of the LEA, calculated 
by dividing the LEA's aggregate current expenditures by the total 
number of children in average daily attendance for whom the LEA 
provided a free public education.
    (5) The APPE of the State, as defined in section 8013 of the ESEA.
    (b) An LEA requesting forgiveness under Sec. 222.14(c)(2) 
(manifestly unjust repayment exception), or Sec. 222.17(a)(3) (no 
present or prospective ability to repay), also must submit written 
information and documentation in specific support of its forgiveness 
request under those provisions within the time limits established under 
Sec. 222.14(b).

(Authority: 20 U.S.C. 7712)


Sec. 222.17  How does the Secretary determine undue financial hardship 
and serious harm to a local educational agency's educational program?

    (a) The Secretary determines that repayment of an eligible 
overpayment will result in undue financial hardship on an LEA and 
seriously harm its educational program if the LEA meets the 
requirements in paragraph (a)(1), (2), or (3) of this section.
    (1) An LEA other than an LEA described in paragraphs (a)(2) and (3) 
of this section meets the requirements of paragraph (a) of this section 
if--
    (i) The LEA's eligible overpayments on the date of its request 
total at least $10,000;
    (ii) The LEA's local real property tax rate for current expenditure 
purposes, for the preceding fiscal year, is equal to or higher than the 
State average local real property tax rate for that preceding fiscal 
year; and
    (iii) The LEA's average per pupil expenditure (APPE) (as described 
in Sec. 222.16(a)(4)) for the preceding fiscal year is lower than the 
State APPE (as described in Sec. 222.16(a)(5)) for that preceding 
fiscal year.
    (2) The following LEAs qualify under paragraph (a) of this section 
if they meet the requirements in paragraph (a)(1)(i) of this section 
and their APPE (as described in Sec. 222.16(a)(4)) for the preceding 
fiscal year does not exceed 125 percent of the State APPE (as described 
in Sec. 222.16(a)(5)) for that preceding fiscal year:
    (i) An LEA with boundaries that are the same as a Federal military 
installation.
    (ii) Other LEAs with no local real property tax revenues, or with 
minimal local real property tax revenues per pupil due to substantial 
amounts of Federal property in the LEA as compared with the average 
amount of those revenues per pupil for all LEAs in the State.
    (3) An LEA qualifies under paragraph (a) of this section if neither 
the successor nor the predecessor LEA has the present or prospective 
ability to repay the eligible overpayment.
    (b) The Secretary uses the following methods to determine a tax 
rate for the purposes of paragraph (a)(1)(ii) of this section:
    (1) If an LEA is fiscally independent, the Secretary uses actual 
tax rates if all the real property in the taxing jurisdiction of the 
LEA is assessed at the same percentage of true value. In the

[[Page 35414]]

alternative, the Secretary computes a tax rate for fiscally independent 
LEAs by using the methods described in Secs. 222.67-222.69.
    (2) If an LEA is fiscally dependent, the Secretary imputes a tax 
rate using the method described in Sec. 222.70(b).

(Authority: 20 U.S.C. 7712)


Sec. 222.18  What amount does the Secretary forgive?

    For an LEA that meets the requirements of Sec. 222.14(a) (timely 
filed forgiveness request) and Sec. 222.14(b) (timely filed information 
and documentation), the Secretary forgives an eligible overpayment as 
follows:
    (a) Forgiveness in whole. The Secretary forgives the eligible 
overpayment in whole if the Secretary determines that the LEA meets--
    (1) The requirements of Sec. 222.17 (undue financial hardship), and 
the LEA's current expenditure closing balance for the LEA's fiscal year 
immediately preceding the date of its forgiveness request (``preceding 
fiscal year'') is ten percent or less of its total current expenditures 
(TCE) for that year; or
    (2) The manifestly unjust repayment exception in Sec. 222.14(c)(2).
    (b) Forgiveness in part. (1) The Secretary forgives the eligible 
overpayment in part if the Secretary determines that the LEA meets the 
requirements of Sec. 222.17 (undue financial hardship), and the LEA's 
preceding fiscal year's current expenditure closing balance is more 
than ten percent of its TCE for that year.
    (2) For an eligible overpayment that is forgiven in part, the 
Secretary--
    (i) Requires the LEA to repay the amount by which the LEA's 
preceding fiscal year's current expenditure closing balance exceeded 
ten percent of its preceding fiscal year's TCE (``calculated repayment 
amount''); and
    (ii) Forgives the difference between the calculated repayment 
amount and the LEA's total overpayments.
    (3) For the purposes of this section, ``current expenditure closing 
balance'' means an LEA's closing balance before any revocable transfers 
to non-current expenditure accounts, such as capital outlay or debt 
service accounts.

    EXAMPLE: An LEA that timely requests forgiveness has two 
overpayments of which portions remain owing on the date of its 
request--one of $200,000 and one of $300,000. Its preceding fiscal 
year's closing balance is $250,000 (before a revocable transfer to a 
capital outlay or debt service account); and 10 percent of its TCE 
for the preceding fiscal year is $150,000.
    The Secretary calculates the amount that the LEA must repay by 
determining the amount by which the preceding fiscal year's closing 
balance exceeds 10 percent of the preceding year's TCE. This 
calculation is made by subtracting 10 percent of the LEA's TCE 
($150,000) from the closing balance ($250,000), resulting in a 
difference of $100,000 that the LEA must repay. The Secretary then 
totals the eligible overpayment amounts ($200,000 + $300,000), 
resulting in a total amount of $500,000. The Secretary subtracts the 
calculated repayment amount ($100,000) from the total of the two 
overpayment balances ($500,000), resulting in $400,000 that the 
Secretary forgives.

(Authority: 20 U.S.C. 7712)

    7. Section 222.22 is amended by revising paragraphs (c) and (d) to 
read as follows:


Sec. 222.22  How does the Secretary treat compensation from Federal 
activities for purposes of determining eligibility and payments?

* * * * *
    (c) If an LEA described in paragraph (a) of this section received 
revenue described in paragraph (b)(1) of this section during the 
preceding fiscal year that is less than the maximum payment amount 
calculated under section 8002(b)(2) for the fiscal year for which the 
LEA seeks assistance, the Secretary reduces that maximum payment amount 
by the amount of that revenue received by the LEA.
    (d) For purposes of this section, the amount of revenue that an LEA 
receives during the previous fiscal year from activities conducted on 
Federal property does not include the following:
    (1) Payments received by the agency from the Secretary of Defense 
to support--
    (i) The operation of a domestic dependent elementary or secondary 
school; or
    (ii) The provision of a free public education to dependents of 
members of the Armed Forces residing on or near a military 
installation.
    (2) Federal payments-in-lieu-of-taxes (PILOTs or PILTs), including 
PILTs for Federal entitlement lands authorized by Public Law 97-258, 31 
U.S.C. 6901-6906.
* * * * *
    8. A new Sec. 222.23 is added to read as follows:


Sec. 222.23  How does a local official determine the aggregate assessed 
value of eligible Federal property for the purpose of a local 
educational agency's section 8002 payment?

    (a) The aggregate assessed value of eligible Federal property for 
the purpose of an LEA's section 8002 payment must be determined, by a 
local official responsible for assessing the value of real property 
located in the jurisdiction of the LEA for the purpose of levying a 
property tax, as follows:
    (1) The local official first determines a fair market value (FMV) 
for the eligible Federal property in each Federal installation or other 
federally owned property (e.g., Federal forest), based on the highest 
and best use of taxable properties adjacent to the eligible Federal 
property.
    (2) The local official then determines a section 8002 assessed 
value for each Federal installation or federally owned property by 
adjusting the FMV established in paragraph (a)(1) of this section by 
any percentage, ratio, index, or other factor that the official would 
use, if the eligible Federal property were taxable, to determine its 
assessed value for the purpose of generating local real property tax 
revenues for current expenditures. In making this adjustment, the 
official may assume that there was a transfer of ownership of the 
eligible Federal property for the year for which the section 8002 
assessed value is being determined.
    (3) The local official then calculates the aggregate section 8002 
assessed value for all eligible Federal property in the LEA by adding 
the section 8002 assessed values for each different Federal 
installation or federally owned property determined in paragraph (a)(2) 
of this section.

    EXAMPLE: Two different Federal properties are located within an 
LEA--a Federal forest, and a naval facility. Based upon the highest 
and best use of taxable properties adjacent to the eligible Federal 
property, the local assessor establishes a FMV for the Federal 
forest of $1 million (woodland), and a FMV for the naval facility of 
$3 million (50 percent residential and 50 percent commercial/
industrial). Assessed values in that taxing jurisdiction are 
determined by multiplying the FMV of property by an assessment 
ratio--the assessment ratio for woodland property is 30 percent of 
FMV, for residential 60 percent of FMV, and for commercial 75 
percent of FMV.
    To determine the section 8002 assessed value of the Federal 
forest, the assessor multiplies the FMV for that property 
($1,000,000) by 30 percent (the assessment ratio for woodland 
property), resulting in a section 8002 assessed value of $300,000.
    To determine the section 8002 assessed value for the naval 
facility, the assessor first must determine the portion of the total 
FMV attributable to each property type if that portion has not 
already been established. To make this determination for the 
residential portion, the assessor could multiply the total FMV 
($3,000,000) for the naval facility by 50 percent (the portion of 
residential property), resulting in a $1.5 million FMV for the 
residential property. To determine a section 8002 assessed value for 
this residential portion, the assessor then would multiply the $1.5 
million by 60 percent (assessment ratio

[[Page 35415]]

for residential property), resulting in $900,000.
    Similarly, to determine the portion of the FMV for the naval 
facility attributable to the commercial/industrial property, the 
assessor could multiply the total FMV ($3,000,000) by 50 percent 
(the portion of commercial/industrial property), resulting in $1.5 
million. To determine the section 8002 assessed value for this 
commercial/industrial portion, the official then would multiply the 
$1.5 million by 75 percent (the assessment ratio for commercial/
industrial property), resulting in $1,025,000. The assessor then 
must add the section 8002 assessed value figures for the residential 
portion ($900,000) and for the commercial/industrial portion 
($1,025,000), resulting in a total section 8002 assessed value for 
the entire naval facility of $1,925,000.
    Finally, the assessor determines the aggregate section 8002 
assessed value for the LEA by adding the section 8002 assessed value 
for the Federal forest ($300,000), and the section 8002 assessed 
value for the naval facility ($1,925,000), resulting in an aggregate 
assessed value of $2,325,000.

    (b) For the purpose of this section, the terms listed below have 
the following meanings:
    (1) Adjacent means next to or close to the eligible Federal 
property. In most cases, this will be the closest taxable parcels.
    (2)(i) Highest and best use of a parcel of adjacent property means 
the FMV of that parcel determined based upon a ``highest and best use'' 
standard in accordance with State or local law or guidelines if 
available. To the extent that State or local law or guidelines are not 
available, ``highest and best use'' generally will be a reasonable fair 
market value based upon the current use of those properties. However, 
the local official may also consider the most developed and profitable 
use for which the adjacent taxable property is physically adaptable and 
for which there is a need or demand for that use in the near future.
    (ii) A local official may not base the ``highest and best use'' 
value of adjacent taxable property upon potential uses that are 
speculative or remote.
    (iii) If the taxable properties adjacent to the eligible Federal 
property have different highest and best uses, these different uses 
must enter into the local official's determination of the FMV of the 
eligible Federal property under paragraph (a)(1) of this section.

    EXAMPLE: If a portion of a Federal installation to be valued has 
road or highway frontage with adjacent properties that are used for 
residential and commercial purposes, but the rest of the Federal 
installation is rural and vacant with adjacent properties that are 
agricultural, the local official must take into consideration the 
various uses of the adjacent properties (residential, commercial, 
and agricultural) in determining the FMV of the Federal property 
under paragraph (a)(1) of this section.

(Authority: 20 U.S.C. 7702)

    9. Section 222.36 is amended by revising paragraph (b) (1) and (2) 
to read as follows:


Sec. 222.36  What minimum number of federally connected children must a 
local educational agency have to receive a payment on behalf of those 
children under section 8003 (b) and (e)?

* * * * *
    (b) * * *
    (1) 1,000 in ADA; or
    (2) 10 percent of the total number of children in ADA.
* * * * *
    10. Subpart F (Payments to Local Educational Agencies for Children 
with Severe Disabilities under Section 8003(g) of the Act), consisting 
of Secs. 222.80 through 222.85, is added to read as follows:
Subpart F--Payments to Local Educational Agencies for Children With 
Severe Disabilities Under Section 8003(g) of the Act
Sec.
222.80  What definitions apply to this subpart?
222.81  What requirements must a local educational agency meet to be 
eligible for a payment under section 8003(g) of the Act?
222.82  How does the Secretary calculate the total amount of funds 
available for payments under section 8003(g)?
222.83  How does an eligible local educational agency apply for a 
payment under section 8003(g)?
222.84  How does the Secretary calculate payments under section 
8003(g) for eligible local educational agencies?
222.85  How may a local educational agency use funds that it 
receives under section 8003(g)?

Subpart F--Payments to Local Educational Agencies for Children With 
Severe Disabilities Under Section 8003(g) of the Act


Sec. 222.80  What definitions apply to this subpart?

    (a) The definitions in Secs. 222.2 and 222.50 apply to this 
subpart.
    (b) In addition, the following term applies to this subpart:
    Children with severe disabilities means children with disabilities 
who because of the intensity of their physical, mental, or emotional 
problems need highly specialized education, social, psychological, and 
medical services in order to maximize their full potential for useful 
and meaningful participation in society and for self-fulfillment. The 
term includes those children with disabilities with severe emotional 
disturbance (including schizophrenia), autism, severe and profound 
mental retardation, and those who have two or more serious disabilities 
such as deaf-blindness, mental retardation and blindness, and cerebral-
palsy and deafness.

(Authority: 20 U.S.C. 1400 et seq., 7703(g))


Sec. 222.81  What requirements must a local educational agency meet to 
be eligible for a payment under section 8003(g) of the Act?

    An LEA is eligible for a payment under section 8003(g) of the Act 
if it--
    (a) Is eligible for and receives a payment under section 8003(d) of 
the Act for children identified in paragraph (b) of this section and 
meets the requirements of Secs. 222.52 and 222.83(b) and (c); and
    (b) Incurs costs of providing a free appropriate public education 
to at least two children with severe disabilities whose educational 
program is being provided by an entity outside the schools of the LEA, 
and who each have a parent on active duty in the uniformed services.

(Authority: 20 U.S.C. 1400 et seq., 7703(a), (d), (g))


Sec. 222.82  How does the Secretary calculate the total amount of funds 
available for payments under section 8003(g)?

    (a) In any fiscal year in which Federal funds other than funds 
available under the Act are provided to an LEA to meet the purposes of 
the Act, the Secretary--
    (1) Calculates the sum of the amount of other Federal funds 
provided to an LEA to meet the purposes of the Act and the amount of 
the payment that the LEA received for that fiscal year under section 
8003(b) of the Act; and
    (2) Determines whether the sum calculated under paragraph (a)(1) of 
this section exceeds the maximum basic support payment for which the 
LEA is eligible under section 8003(b), and, if so, subtracts from the 
amount of any payment received under section 8003(b), any amount in 
excess of the maximum basic support payment for which the LEA is 
eligible.
    (b) The sum of all excess amounts determined in paragraph (a)(2) of 
this section is available for payments under section 8003(g) to 
eligible LEAs.

(Authority: 20 U.S.C. 7703(b), (g))


Sec. 222.83  How does an eligible local educational agency apply for a 
payment under section 8003(g)?

    (a) In fiscal years in which funds are available for payments under 
section 8003(g) of the Act, the Secretary provides notice to all 
potentially eligible LEAs that funds will be available.
    (b) An LEA applies for a payment under section 8003(g) by 
submitting to

[[Page 35416]]

the Secretary documentation detailing the total costs to the LEA of 
providing a free appropriate public education to the children 
identified in Sec. 222.81, during the LEA's preceding fiscal year, 
including the following:
    (1) For the costs of the outside entity providing the educational 
program for those children, copies of all invoices, vouchers, tuition 
contracts, and other similar documents showing the signature of an 
official or authorized employee of the outside entity; and
    (2) For any additional costs (such as transportation) of the LEA 
related to providing an educational program for those children in an 
outside entity, copies of invoices, check receipts, contracts, and 
other similar documents showing the signature of an official or 
authorized employee of the LEA.
    (c) An LEA applying for a payment must submit to the Secretary the 
information required under paragraph (b) of this section within 60 days 
of the date of the notice that funds will be available.

(Approved by the Office of Management and Budget under control 
number 1810-0036)
(Authority: 20 U.S.C. 7703(g)(2))


Sec. 222.84  How does the Secretary calculate payments under section 
8003(g) for eligible local educational agencies?

    For any fiscal year in which the Secretary has determined, under 
Sec. 222.82, that funds are available for payments under section 
8003(g) of the Act, the Secretary calculates payments to eligible LEAs 
under section 8003(g) as follows:
    (a) For each eligible LEA, the Secretary subtracts an amount equal 
to that portion of the payment the LEA received under section 8003(d) 
of the Act for that fiscal year, attributable to children described in 
Sec. 222.81, from the LEA's total costs of providing a free appropriate 
public education to those children, as submitted to the Secretary 
pursuant to Sec. 222.83(b). The remainder is the amount that the LEA is 
eligible to receive under section 8003(g).
    (b) If the total of the amounts for all eligible LEAs determined in 
paragraph (a) of this section is equal to or less than the amount of 
funds available for payment as determined in Sec. 222.82, the Secretary 
provides each eligible LEA with the entire amount that it is eligible 
to receive, as determined in paragraph (a) of this section.
    (c) If the total of the amounts for all eligible LEAs determined in 
paragraph (a) of this section exceeds the amount of funds available for 
payment as determined in Sec. 222.82, the Secretary ratably reduces 
payments under section 8003(g) to eligible LEAs.
    (d) If the total of the amounts for all eligible LEAs determined in 
paragraph (a) of this section is less than the amount of funds 
available for payment as determined in Sec. 222.82, the Secretary pays 
the remaining amount to LEAs under section 8003(d). An LEA that 
receives such a payment shall use the funds for expenditures in 
accordance with the requirements of section 8003(d) and subpart D of 
this part.

(Authority: 20 U.S.C. 7703 (d) and (g))


Sec. 222.85  How may a local educational agency use funds that it 
receives under section 8003(g)?

    An LEA that receives a payment under section 8003(g) of the Act 
shall use the funds for reimbursement of costs reported in the 
application that it submitted to the Secretary under Sec. 222.83(b).

(Authority: 20 U.S.C. 7703(g)(2))

    9. Section 222.95 is amended by revising the paragraph (g) 
introductory text, and adding an OMB control number before the 
authority citation, to read as follows:


Sec. 222.95  How are Indian policies and procedures reviewed to ensure 
compliance with the requirements in section 8004(a) of the Act?

* * * * *
    (g) An LEA that amends its IPPs shall, within 30 days, send a copy 
of the amended IPPs to--
* * * * *
(Approved by the Office of Management and Budget under control 
number 1810-0036)

    12. New Secs. 222.114 through 222.122 are added to subpart G of 
this part, with a heading preceding them, to read as follows:

Withholding and Related Procedures for Indian Policies and Procedures

  222.114 How does the Assistant Secretary implement the provisions 
of this subpart?
Sec. 222.115  When does the Assistant Secretary withhold payments 
from a local educational agency under this subpart?
222.116  How are withholding procedures initiated under this 
subpart?
222.117  What procedures are followed after the Assistant Secretary 
issues a notice of intent to withhold payments?
222.118  How are withholding hearings conducted in this subpart?
222.119  What is the effect of withholding under this subpart?
222.120  When is a local educational agency exempt from withholding 
of payments?
222.121  How does the affected Indian tribe or tribes request that 
payments to a local educational agency not be withheld?
222.122  What procedures are followed if it is determined that the 
local educational agency's funds will not be withheld under this 
subpart?
222.123-222.129  [Reserved]

Withholding and Related Procedures for Indian Policies and 
Procedures


Sec. 222.114  How does the Assistant Secretary implement the provisions 
of this subpart?

    The Assistant Secretary implements section 8004 of the Act and this 
subpart through such actions as the Assistant Secretary determines to 
be appropriate, including the withholding of funds in accordance with 
Secs. 222.115-222.122, after affording the affected LEA, parents, and 
Indian tribe or tribes an opportunity to present their views.

(Authority: 20 U.S.C. 7704 (d)(2), (e) (8)-(9))


Sec. 222.115  When does the Assistant Secretary withhold payments from 
a local educational agency under this subpart?

    Except as provided in Sec. 222.120, the Assistant Secretary 
withholds payments to an LEA if--
    (a) The Assistant Secretary determines it is necessary to enforce 
the requirements of section 8004 of the Act or this subpart; or
    (b) After a hearing has been conducted under section 8004(e) of the 
Act and Secs. 222.102-222.113 (IPP hearing)--
    (1) The LEA rejects the final determination of the Assistant 
Secretary; or
    (2) The LEA fails to implement the required remedy within the time 
established and the Assistant Secretary determines that the required 
remedy will not be undertaken by the LEA even if the LEA is granted a 
reasonable extension of time.

(Authority: 20 U.S.C. 7704 (a), (b), (d)(2), (e)(8)-(9))


Sec. 222.116  How are withholding procedures initiated under this 
subpart?

    (a) If the Assistant Secretary decides to withhold an LEA's funds, 
the Assistant Secretary issues a written notice of intent to withhold 
the LEA's payments.
    (b) In the written notice, the Assistant Secretary--
    (1) Describes how the LEA failed to comply with the requirements at 
issue; and
    (2)(i) Advises an LEA that has participated in an IPP hearing that 
it may request, in accordance with Sec. 222.117(c), that its payments 
not be withheld; or
    (ii) Advises an LEA that has not participated in an IPP hearing 
that it may request a withholding hearing in accordance with 
Sec. 222.117(d).

[[Page 35417]]

    (c) The Assistant Secretary sends a copy of the written notice of 
intent to withhold payments to the LEA and the affected Indian tribe or 
tribes by certified mail with return receipt requested.

(Authority: 20 U.S.C. 7704 (a), (b), (d)(2), and (e) (8)-(9))


Sec. 222.117  What procedures are followed after the Assistant 
Secretary issues a notice of intent to withhold payments?

    (a) The withholding of payments authorized by section 8004 of the 
Act is conducted in accordance with section 8004 (d)(2) or (e) (8)-(9) 
of the Act and the regulations in this subpart.
    (b) An LEA that receives a notice of intent to withhold payments 
from the Assistant Secretary is not entitled to an Impact Aid hearing 
under the provisions of section 8011 of the Act and subpart J of this 
part.
    (c) After an IPP hearing. (1) An LEA that rejects or fails to 
implement the final determination of the Assistant Secretary after an 
IPP hearing has 10 days from the date of the LEA's receipt of the 
written notice of intent to withhold funds to provide the Assistant 
Secretary with a written explanation and documentation in support of 
the reasons why its payments should not be withheld. The Assistant 
Secretary provides the affected Indian tribe or tribes with an 
opportunity to respond to the LEA's submission.
    (2) If after reviewing an LEA's written explanation and supporting 
documentation, and any response from the Indian tribe or tribes, the 
Assistant Secretary determines to withhold an LEA's payments, the 
Assistant Secretary notifies the LEA and the affected Indian tribe or 
tribes of the withholding determination in writing by certified mail 
with return receipt requested prior to withholding the payments.
    (3) In the withholding determination, the Assistant Secretary 
states the facts supporting the determination that the LEA failed to 
comply with the legal requirements at issue, and why the provisions of 
Sec. 222.120 (provisions governing circumstances when an LEA is exempt 
from the withholding of payments) are inapplicable. This determination 
is the final decision of the Department.
    (d) An LEA that has not participated in an IPP hearing.
    (1) An LEA that has not participated in an IPP hearing has 30 days 
from the date of its receipt of the Assistant Secretary's notice of 
intent to withhold funds to file a written request for a withholding 
hearing with the Assistant Secretary. The written request for a 
withholding hearing must--
    (i) Identify the issues of law and facts in dispute; and
    (ii) State the LEA's position, together with the pertinent facts 
and reasons supporting that position.
    (2) If the LEA's request for a withholding hearing is accepted, the 
Assistant Secretary sends written notification of acceptance to the LEA 
and the affected Indian tribe or tribes and forwards to the hearing 
examiner a copy of the Assistant Secretary's written notice, the LEA's 
request for a withholding hearing, and any other relevant documents.
    (3) If the LEA's request for a withholding hearing is rejected, the 
Assistant Secretary notifies the LEA in writing that its request for a 
hearing has been rejected and provides the LEA with the reasons for the 
rejection.
    (4) The Assistant Secretary rejects requests for withholding 
hearings that are not filed in accordance with the time for filing 
requirements described in paragraph (d)(1) of this section. An LEA that 
files a timely request for a withholding hearing, but fails to meet the 
other filing requirements set forth in paragraph (d)(1) of this 
section, has 30 days from the date of receipt of the Assistant 
Secretary's notification of rejection to submit an acceptable amended 
request for a withholding hearing.
    (e) If an LEA fails to file a written explanation in accordance 
with paragraph (c) of this section, or a request for a withholding 
hearing or an amended request for a withholding hearing in accordance 
with paragraph (d) of this section, the Secretary proceeds to take 
appropriate administrative action to withhold funds without further 
notification to the LEA.

(Authority: 20 U.S.C. 7704 (a), (b), (d)(2), and (e) (8)-(9))


Sec. 222.118  How are withholding hearings conducted in this subpart?

    (a) Appointment of hearing examiner. Upon receipt of a request for 
a withholding hearing that meets the requirements of Sec. 222.117(d), 
the Assistant Secretary requests the appointment of a hearing examiner.
    (b) Time and place of the hearing. Withholding hearings under this 
subpart are held at the offices of the Department in Washington, DC, at 
a time fixed by the hearing examiner, unless the hearing examiner 
selects another place based upon the convenience of the parties.
    (c) Proceeding. (1) The parties to the withholding hearing are the 
Assistant Secretary and the affected LEA. An affected Indian tribe is 
not a party, but, at the discretion of the hearing examiner, may 
participate in the hearing and present its views on the issues relevant 
to the withholding determination.
    (2) The parties may introduce all relevant evidence on the issues 
stated in the LEA's request for withholding hearing or other issues 
determined by the hearing examiner during the proceeding. The Assistant 
Secretary's notice of intent to withhold, the LEA's request for a 
withholding hearing, and all amendments and exhibits to those 
documents, must be made part of the hearing record.
    (3) Technical rules of evidence, including the Federal Rules of 
Evidence, do not apply to hearings conducted under this subpart, but 
the hearing examiner may apply rules designed to assure production of 
the most credible evidence available, including allowing the cross-
examination of witnesses.
    (4) Each party may examine all documents and other evidence offered 
or accepted for the record, and may have the opportunity to refute 
facts and arguments advanced on either side of the issues.
    (5) A transcript must be made of the oral evidence unless the 
parties agree otherwise.
    (6) Each party may be represented by counsel.
    (7) The hearing examiner is bound by all applicable statutes and 
regulations and may neither waive them nor rule them invalid.
    (d) Filing requirements. (1) All written submissions must be filed 
with the hearing examiner by hand-delivery, mail, or facsimile 
transmission. The Secretary discourages the use of facsimile 
transmission for documents longer than five pages.
    (2) If agreed upon by the parties, a party may serve a document 
upon the other party by facsimile transmission.
    (3) The filing date for a written submission under this subpart is 
the date the document is--
    (i) Hand-delivered;
    (ii) Mailed; or
    (iii) Sent by facsimile transmission.
    (4) A party filing by facsimile transmission is responsible for 
confirming that a complete and legible copy of the document was timely 
received by the hearing examiner.
    (5) Any party filing a document by facsimile transmission must file 
a follow-up hard copy by hand-delivery or mail within a reasonable 
period of time.
    (e) Procedural rules. (1) If the hearing examiner determines that 
no dispute exists as to a material fact or that the resolution of any 
disputes as to material facts would not be materially assisted by

[[Page 35418]]

oral testimony, the hearing examiner shall afford each party an 
opportunity to present its case--
    (i) In whole or in part in writing; or
    (ii) In an informal conference after affording each party 
sufficient notice of the issues to be considered.
    (2) With respect to withholding hearings involving a dispute as to 
a material fact the resolution of which would be materially assisted by 
oral testimony, the hearing examiner shall afford to each party--
    (i) Sufficient notice of the issues to be considered at the 
hearing;
    (ii) An opportunity to present witnesses on the party's behalf; and
    (iii) An opportunity to cross-examine other witnesses either orally 
or through written interrogatories.
    (f) Decision of the hearing examiner. (1) The hearing examiner--
    (i) Makes written findings and an initial withholding decision 
based upon the hearing record; and
    (ii) Forwards to the Secretary, and mails to each party and to the 
affected Indian tribe or tribes, a copy of the written findings and 
initial withholding decision.
    (2) A hearing examiner's initial withholding decision constitutes 
the Secretary's final withholding decision without any further 
proceedings unless--
    (i) Either party to the withholding hearing, within 30 days of the 
date of its receipt of the initial withholding decision, requests the 
Secretary to review the decision and that request is granted; or
    (ii) The Secretary otherwise determines, within the time limits 
stated in paragraph (g)(2)(ii) of this section, to review the initial 
withholding decision.
    (3) When an initial withholding decision becomes the Secretary's 
final decision without any further proceedings, the Department notifies 
the parties and the affected Indian tribe or tribes of the finality of 
the decision.
    (g) Administrative appeal of an initial decision. (1)(i) Any party 
may request the Secretary to review an initial withholding decision.
    (ii) A party must file this request for review within 30 days of 
the party's receipt of the initial withholding decision.
    (2) The Secretary may--
    (i) Grant or deny a timely request for review of an initial 
withholding decision; or
    (ii) Otherwise determine to review the decision, so long as that 
determination is made within 45 days of the date of receipt of the 
initial decision by the Secretary.
    (3) The Secretary mails to each party and the affected Indian tribe 
or tribes, by certified mail with return receipt requested, written 
notice of--
    (i) The Secretary's action granting or denying a request for review 
of an initial decision; or
    (ii) The Secretary's determination to review an initial decision.
    (h) Secretary's review of an initial withholding decision. (1) When 
the Secretary reviews an initial withholding decision, the Secretary 
notifies each party and the affected Indian tribe or tribes in writing, 
by certified mail with return receipt requested, that it may file a 
written statement or comments; and
    (2) Mails to each party and to the affected Indian tribe or tribes, 
by certified mail with return receipt requested, written notice of the 
Secretary's final withholding decision.

(Authority: 20 U.S.C. 7704)


Sec. 222.119  What is the effect of withholding under this subpart?

    (a) The withholding provisions in this subpart apply to all 
payments that an LEA is otherwise eligible to receive under section 
8003 of the Act for any fiscal year.
    (b) The Assistant Secretary withholds funds after completion of any 
administrative proceedings under Secs. 222.116-222.118 until the LEA 
documents either compliance or exemption from compliance with the 
requirements in section 8004 of the Act and this subpart.

(Authority: 20 U.S.C. 7704 (a), (b), (d)(2), (e) (8)-(9))


Sec. 222.120  When is a local educational agency exempt from 
withholding of payments?

    Except as provided in paragraph (d)(2) of this section, the 
Assistant Secretary does not withhold payments to an LEA under the 
following circumstances:
    (a) The LEA documents that it has received a written statement from 
the affected Indian tribe or tribes that the LEA need not comply with 
section 8004 (a) and (b) of the Act, because the affected Indian tribe 
or tribes is satisfied with the provision of educational services by 
the LEA to the children claimed on the LEA's application for assistance 
under section 8003 of the Act.
    (b) The Assistant Secretary receives from the affected Indian tribe 
or tribes a written request that meets the requirements of Sec. 222.121 
not to withhold payments from an LEA.
    (c) The Assistant Secretary, on the basis of documentation provided 
by the LEA, determines that withholding payments during the course of 
the school year would substantially disrupt the educational programs of 
the LEA.
    (d)(1) The affected Indian tribe or tribes elects to have 
educational services provided by the Bureau of Indian Affairs under 
section 1101(d) of the Education Amendments of 1978.
    (2) For an LEA described in paragraph (d)(1) of this section, the 
Secretary recalculates the section 8003 payment that the LEA is 
otherwise eligible to receive to reflect the number of students who 
remain in attendance at the LEA.

(Authority: 20 U.S.C. 7703(a), 7704(c), (d)(2) and (e)(8))


Sec. 222.121  How does the affected Indian tribe or tribes request that 
payments to a local educational agency not be withheld?

    (a) The affected Indian tribe or tribes may submit to the Assistant 
Secretary a formal request not to withhold payments from an LEA.
    (b) The formal request must be in writing and signed by the tribal 
chairman or authorized designee.

(Authority: 20 U.S.C. 7704 (d)(2) and (e)(8))


Sec. 222.122  What procedures are followed if it is determined that the 
local educational agency's funds will not be withheld under this 
subpart?

    If the Secretary determines that an LEA's payments will not be 
withheld under this subpart, the Assistant Secretary notifies the LEA 
and the affected Indian tribe or tribes, in writing, by certified mail 
with return receipt requested, of the reasons why the payments will not 
be withheld.

(Authority: 20 U.S.C. 7704 (d)-(e))


Sec. 222.150  [Amended]

    13. In Sec. 222.150, paragraph (b)(1) is amended by removing 
``Secs. 222.90-222.114'', and adding in its place ``Secs. 222.90-
222.122''.
    14. Section 222.151 is amended by revising the title and paragraph 
(b)(1) to read as follows:


Sec. 222.151  When is an administrative hearing provided to a local 
educational agency?

* * * * *
    (b) * * *
    (1) The applicant files a written request for an administrative 
hearing within 30 days of its receipt of written notice of the adverse 
action; and
* * * * *
    15. Section 222.152 is amended by revising paragraphs (b) and (c) 
to read as follows:


Sec. 222.152  When may a local educational agency request 
reconsideration of a determination?

* * * * *

[[Page 35419]]

    (b) The Secretary's (or the Secretary's delegatee's) consideration 
of a request for reconsideration is not prejudiced by a pending request 
for an administrative hearing on the same matter, or the fact that a 
matter has been scheduled for a hearing. The Secretary (or the 
Secretary's delegatee) may, but is not required to, postpone the 
administrative hearing due to a request for reconsideration.
    (c) The Secretary (or the Secretary's delegatee) may reconsider any 
determination under the Act or Pub. L. 81-874 concerning a particular 
party unless the determination has been the subject of an 
administrative hearing under this part with respect to that party.

(Authority: 20 U.S.C. 7711(a))

    16. Section 222.154 is amended by revising paragraph (e) to read as 
follows:


Sec. 222.154  How must written submissions under this subpart be filed?

* * * * *
    (e) Any party filing a document by facsimile transmission must file 
a follow-up hard copy by hand-delivery or mail within a reasonable 
period of time.

(Authority: 20 U.S.C. 7711(a))


Sec. 222.156  [Amended]

    17. In Sec. 222.156, paragraph (g) is amended by removing ``hearing 
examiner'', and adding in its place ``ALJ''.
    18. Section 222.157 is amended by revising the heading and 
paragraphs (a) and (b)(1) to read as follows:


Sec. 222.157  What procedures apply for issuing or appealing an 
administrative law judge's decision?

    (a) Decision. (1) The ALJ--
    (i) Makes written findings and an initial decision based upon the 
hearing record; and
    (ii) Forwards to the Secretary, and mails to each party, a copy of 
the written findings and initial decision.
    (2) An ALJ's initial decision constitutes the Secretary's final 
decision without any further proceedings unless--
    (i) A party, within the time limits stated in paragraph (b)(1)(ii) 
of this section, requests the Secretary to review the decision and that 
request is granted; or
    (ii) The Secretary otherwise determines, within the time limits 
stated in paragraph (b)(2)(ii) of this section, to review the initial 
decision.
    (3) When an initial decision becomes the Secretary's final decision 
without any further proceedings, the Department's Office of Hearings 
and Appeals notifies the parties of the finality of the decision.
    (b) Administrative appeal of an initial decision. (1)(i) Any party 
may request the Secretary to review an initial decision.
    (ii) A party must file such a request for review within 30 days of 
the party's receipt of the initial decision.
* * * * *
    19. In Sec. 222.158, the heading, introductory text, and paragraph 
(b), are revised to read as follows:


Sec. 222.158  What procedures apply to the Secretary's review of an 
initial decision?

    When the Secretary reviews an initial decision, the Secretary--
    (a) * * *
    (b) Mails to each party written notice of the Secretary's final 
decision.

(Authority: 20 U.S.C. 7711(a))

    20. In Sec. 222.161, paragraph (c) is amended by removing the 
paragraph designations before each definition, reordering the 
definitions in alphabetical order, and adding in alphabetical order the 
following new definitions of ``Local tax revenues,'' ``Local tax 
revenues covered under a State equalization program,'' and ``Total 
local tax revenues'':


Sec. 222.161  How is State aid treated under section 8009 of the Act?

* * * * *
    (c) Definitions. The following definitions apply to this subpart:
* * * * *
    Local tax revenues means compulsory charges levied by an LEA or by 
an intermediate school district or other local governmental entity on 
behalf of an LEA for current expenditures for educational services. 
``Local tax revenues'' include the proceeds of ad valorem taxes, sales 
and use taxes, income taxes and other taxes. Where a State funding 
formula requires a local contribution equivalent to a specified mill 
tax levy on taxable real or personal property or both, ``local tax 
revenues'' include any revenues recognized by the State as satisfying 
that local contribution requirement.
    Local tax revenues covered under a State equalization program means 
``local tax revenues'' as defined in paragraph (c) of this section 
contributed to or taken into consideration in a State aid program 
subject to a determination under this subpart, but excluding all 
revenues from State and Federal sources.
* * * * *
    Total local tax revenues means all ``local tax revenues'' as 
defined in paragraph (c) of this section, including tax revenues for 
education programs for children needing special services, vocational 
education, transportation, and the like during the period in question 
but excluding all revenues from State and Federal sources.
* * * * *
    21. In Sec. 222.162, paragraph (a) is revised to read as follows:


Sec. 222.162  What disparity standard must a State meet in order to be 
certified and how are disparities in current expenditures or revenues 
per pupil measured?

    (a) Percentage disparity limitation. The Secretary considers that a 
State aid program equalizes expenditures if the disparity in the amount 
of current expenditures or revenues per pupil for free public education 
among LEAs in the State is no more than 25 percent. In determining the 
disparity percentage, the Secretary disregards LEAs with per pupil 
expenditures or revenues above the 95th or below the 5th percentile of 
those expenditures or revenues in the State. The method for calculating 
the percentage of disparity in a State is in the appendix to this 
subpart.
* * * * *
    21. In Sec. 222.164, paragraphs (a)(2) and (b) are revised, and an 
OMB control number is added before the authority citation, to read as 
follows:


Sec. 222.164  What procedures does the Secretary follow in making a 
determination under section 8009?

    (a) * * *
    (2) Whenever a proceeding under this subpart is initiated, the 
party initiating the proceeding shall give adequate notice to the State 
and all LEAs in the State and provide them with a complete copy of the 
submission initiating the proceeding. In addition, the party initiating 
the proceeding shall notify the State and all LEAs in the State of 
their right to request from the Secretary, within 30 days of the 
initiation of a proceeding, the opportunity to present their views to 
the Secretary before the Secretary makes a determination.
    (b) Submission. (1) A submission by a State or LEA under this 
section must be made in the manner requested by the Secretary and must 
contain the information and assurances as may be required by the 
Secretary in order to reach a determination under section 8009 and this 
subpart.
    (2)(i) A State in a submission shall--
    (A) Demonstrate how its State aid program comports with 
Sec. 222.162; and
    (B) Demonstrate for each LEA receiving funds under the Act that the 
proportion of those funds that will be taken into consideration 
comports with Sec. 222.163.

[[Page 35420]]

    (ii) The submission must be received by the Secretary no later than 
120 calendar days before the beginning of the State's fiscal year for 
the year of the determination, and must include (except as provided in 
Sec. 222.161(c)(2)) final second preceding fiscal year disparity data 
enabling the Secretary to determine whether the standard in 
Sec. 222.162 has been met. The submission is considered timely if 
received by the Secretary on or before the filing deadline or if it 
bears a U.S. Postal Service postmark dated on or before the filing 
deadline.
    (3) An LEA in a submission must demonstrate whether the State aid 
program comports with section 8009.
    (4) Whenever a proceeding is initiated under this subpart, the 
Secretary may request from a State the data deemed necessary to make a 
determination. A failure on the part of a State to comply with that 
request within a reasonable period of time results in a summary 
determination by the Secretary that the State aid program of that State 
does not comport with the regulations in this subpart.
    (5) Before making a determination under section 8009, the Secretary 
affords the State, and all LEAs in the State, an opportunity to present 
their views as follows:
    (i) Upon receipt of a timely request for a predetermination 
hearing, the Secretary notifies all LEAs and the State of the time and 
place of the predetermination hearing.
    (ii) Predetermination hearings are informal and any LEA and the 
State may participate whether or not they requested the 
predetermination hearing.
    (iii) At the conclusion of the predetermination hearing, the 
Secretary holds the record open for 15 days for the submission of post-
hearing comments. The Secretary may extend the period for post-hearing 
comments for good cause for up to an additional 15 days.
    (iv) Instead of a predetermination hearing, if the party or parties 
requesting the predetermination hearing agree, they may present their 
views to the Secretary exclusively in writing. In such a case, the 
Secretary notifies all LEAs and the State that this alternative 
procedure is being followed and that they have up to 30 days from the 
date of the notice in which to submit their views in writing. Any LEA 
or the State may submit its views in writing within the specified time, 
regardless of whether it requested the opportunity to present its 
views.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1810-0036)

(Authority: 20 U.S.C. 7709)

    22. In Sec. 222.165, paragraphs (e), (f), and (h) are revised to 
read as follows:


Sec. 222.165  What procedures does the Secretary follow after making a 
determination under section 8009?

* * * * *
    (e) Proceedings. (1) The Secretary refers the matter in controversy 
to an administrative law judge (ALJ) appointed under 5 U.S.C. 3105.
    (2) The ALJ is bound by all applicable statutes and regulations and 
may neither waive them nor rule them invalid.
    (f) Filing requirements. (1) Any written submission under this 
section must be filed by hand-delivery, mail, or facsimile 
transmission. The Secretary discourages the use of facsimile 
transmission for documents longer than five pages.
    (2) If agreed upon by the parties, service of a document may be 
made upon the other party by facsimile transmission.
    (3) The filing date for a written submission under this section is 
the date the document is--
    (i) Hand-delivered;
    (ii) Mailed; or
    (iii) Sent by facsimile transmission.
    (4) A party filing by facsimile transmission is responsible for 
confirming that a complete and legible copy of the document was 
received by the Department.
    (5) Any party filing a document by facsimile transmission must file 
a follow-up hard copy by hand-delivery or mail within a reasonable 
period of time.
    (g) * * *
    (h) Decisions. (1) The ALJ--
    (i) Makes written findings and an initial decision based upon the 
hearing record; and
    (ii) Forwards to the Secretary, and mails to each party, a copy of 
the written findings and initial decision.
    (2) Appeals to the Secretary and the finality of initial decisions 
under section 8009 are governed by Secs. 222.157(b), 222.158, and 
222.159 of subpart J of this part.

(Authority: 20 U.S.C. 7709)

[FR Doc. 97-17208 Filed 6-30-97; 8:45 am]
BILLING CODE 4000-01-P