[Federal Register Volume 63, Number 204 (Thursday, October 22, 1998)]
[Proposed Rules]
[Pages 56591-56594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28230]



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LEGAL SERVICES CORPORATION

45 CFR Part 1628


Recipient Fund Balances

AGENCY: Legal Services Corporation.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would revise the Corporation's rule on 
recipient fund balances to provide the Corporation with more discretion 
to determine whether to permit a recipient to maintain a fund balance 
up to 25% of its LSC support for a particular reporting period. It also 
adds additional requirements and limitations applicable to waiver 
requests and the use of fund balances. Finally, the rule is 
restructured for clarity and for consistency with other LSC 
regulations.

DATES: Comments should be received on or before December 21, 1998.

ADDRESSES: Comments should be submitted to the Office of the General 
Counsel, Legal Services Corporation, 750 First St. NE., 11th Floor, 
Washington, DC 20002-4250.

FOR FURTHER INFORMATION CONTACT: Suzanne Glasow, Office of the General 
Counsel, 202-336-8817.

SUPPLEMENTARY INFORMATION: The Operations and Regulations Committee 
(Committee) of the Legal Services Corporation's (LSC) Board of 
Directors (Board) met on September 11, 1998, in Chicago, Illinois, to 
consider proposed revisions to the Corporation's rule governing 
recipient fund balances, 45 CFR Part 1628. The Committee adopted this 
proposed rule for publication in the Federal Register for public 
comment.
    There is no statutory provision that limits the amount of a fund 
balance an LSC recipient may carry over from one year to another. In 
1980, the General Accounting Office (GAO) released a report finding 
that, because LSC grantees were not required to return funds not 
expended by the end of the year, some grantees had relatively large 
carryovers when compared to their total grants. The GAO report 
recommended that the Corporation ``should closely monitor the 
expenditure of funds by grantees to minimize year end fund carryovers 
and adjust subsequent year funding of grantees with excess fund 
balances.'' In response to the report, the Corporation took various 
actions to regulate recipient fund balances that culminated in the 
promulgation of the current rule. See LSC memoranda (December 18, 1980 
& March 18, 1982), grant conditions, Instructions (Instruction 83-4, 48 
FR 560), and 45 CFR Part 1628 (49 FR 21331, effective on June 20, 1984, 
and corrected at 49 FR 23056, June 4, 1984).
    Generally, this proposed rule is intended to provide the 
Corporation with more discretion to determine whether to permit a 
recipient to maintain a fund balance up to 25% of its LSC support for a 
particular reporting period and sets forth the requirements and 
limitations applicable to waiver requests and the use of fund balances. 
Finally, the rule is restructured for clarity and consistency with 
other LSC regulations. A section-by-section analysis is provided below.

Section 1628.1  Purpose

    This section is substantively revised. Provisions have been deleted 
or moved to other parts of the rule because they do not constitute 
statements of the purpose or function of the rule. The purpose of this 
rule is to delineate the Corporation's policies and procedures 
applicable to recipient fund balances. In addition, the rule's policies 
and requirements are intended to ensure the timely expenditure of LSC 
funds for the effective and economical provision of high quality legal 
assistance to eligible clients.

Section 1628.2  Definitions

    The proposed revisions to this section are intended to clarify or 
update the meaning of the terms or to make them consistent with other 
LSC regulations.
    The term LSC Support is revised to clarify that it means the sum of 
the recipient's LSC carryover funds from the prior fiscal year, the 
amount of the recipient's LSC grant for the year in question, and any 
LSC derivative income earned by the recipient during the year in 
question. The reference to derivative income is revised to be 
consistent with the definition of the term in Part 1630.
    The proposed definition of fund balance amount is intended to 
clarify that the term means the excess of LSC support over expenditures 
as determined by the recipient's annual audit. Additional language in 
the current definition is proposed to be deleted because it does not 
constitute a statement of the meaning of the term.
    No revisions have been proposed for the definition of the term fund 
balance percentage.
    The definition of recipient is proposed to be revised to reflect 
current law which limits grants for financial assistance to those 
authorized by Section 1006(a)(1)(A) of the LSC Act. The definition is 
consistent with the definition of the term in many of the rules 
promulgated by the Corporation since 1996.

Section 1628.3  Policy

    This proposed section sets out the Corporation's policies governing 
recipient fund balances. Several provisions in this section are found 
in other sections of the current rule. They have been moved to this 
section because they are statements of policy and are more 
appropriately included here. In addition, procedural provisions in the 
current rule have been removed from this section and transferred to the 
section on procedures.
    Paragraph (a) states that recipients may automatically retain a 
fund balance up to 10% of their LSC support. Paragraph (b) clarifies 
that recipients may request a waiver from the Corporation to maintain a 
fund balance up to 25% of their LSC support. Paragraph (c) states that 
the Corporation has discretion to grant a waiver under paragraph (b) 
and clarifies that the Corporation's decision to grant a waiver must be 
based on the criteria found in Sec. 1628.4(e).
    Public comments, citing the practice of nonprofit corporations to 
retain higher fund balances, urged raising the 10% and 25% caps or 
eliminating the 25% cap altogther. The LSC Inspector General, on the 
other hand, expressed concern that large fund balances create the risk 
of fraud or defalcation of funds. Another comment cautioned that 
appropriated funds should generally be expended within the 
appropriation period for the badly needed provision of legal assistance 
for eligible clients.
    The Committee decided it needs more information before deciding 
this issue and seeks public comment on what the appropriate level of a 
permissible fund balance should be and what constitutes the normal 
operating practice of nonprofit and government entities with regard to 
fund balances.
    Paragraph (d) requires that any fund balance in excess of what is 
permitted by this rule must be returned to the Corporation. The 
Corporation has discretion to determine, after consultation with the 
recipient, whether the repayment of an excess fund balance should be 
made in a lump sum or in pro rata deductions from the recipient's grant 
checks for a specified number of months.
    Paragraph (e) clarifies that the recovery of an excess fund balance 
does not constitute a termination pursuant to Part 1606.
    Paragraph (f) clarifies that funds from one-time or special purpose 
grants may not be carried over as part of a recipient's fund balance. 
Instead, any expended funds from such grants remaining after the 
termination date of

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the grant must be returned to the Corporation.

Section 1628.4  Procedures

    This section sets out the procedures applicable to recipient fund 
balances. It has been revised to provide the basis on which the 
Corporation will exercise its discretion to grant a waiver of an excess 
fund balance and sets forth requirements that are intended to ensure 
careful oversight by the Corporation of a recipient's fund balance. All 
procedural requirements in the current rule have been moved to this 
section.
    Paragraph (a) sets out the obligation of a recipient whose fund 
balance is in excess of the 10% ceiling to request a waiver from the 
Corporation within 30 days of the issuance of the recipient's final 
audit. The current rule requires that the statement be provided to the 
Corporation within 120 days of the close of the recipient's fiscal 
year. This is changed to link the deadline for the waiver request to 
the audit submission date rather than the end of the recipient's fiscal 
year. This will allow for periodic changes in the required submission 
dates for audits without a need to revise this rule. This paragraph 
also clarifies that, unless the recipient seeks and is granted a waiver 
to maintain a fund balance over the 10%, the funds will be recovered by 
the Corporation.
    Paragraph (b) clarifies that the Corporation will review 
recipients' final audits, fund balance statements and any requests for 
waivers and will provide written notice to any recipient whose fund 
balance amount is due and payable to the Corporation. The written 
notice will include the method of repayment of any funds to be 
recovered.
    Paragraph (c) sets out the procedures for requesting a waiver of 
the 10% ceiling. Generally, a recipient must specify its fund balance 
amount, the reasons the fund balance has accrued, the recipient's plan 
for the use or reserve of the fund balance within the current grant 
year and the circumstances justifying the retention of the fund 
balance.
    A new provision is proposed for this paragraph that would require a 
recipient who seeks a waiver to retain a cash reserve to replace or 
update the recipient's information technology systems pursuant to 
paragraph (e)(4) of this section to submit a Technology Investment Plan 
(TIP) that outlines how and when the funds would be used to improve the 
recipient's Information Technology resources. See discussion of 
paragraph (e)(4) below.
    Paragraph (d) prohibits a recipient from expending an excess fund 
balance prior to receiving approval of its waiver request.
    Paragraph (e) sets out the standards governing the Corporation's 
decision to grant a waiver. A proposed substantive revision to this 
paragraph establishes a different standard for determining whether to 
grant a recipient a waiver to retain a 25% fund balance. The new 
standard is intended to provide the Corporation with more flexibility 
and discretion to decide whether recipients may maintain a fund 
balance. Experience has shown that ``extraordinary circumstances'' is 
too high a standard. The underlying rationale for regulating fund 
balances is to ensure that recipients provide effective and economical 
legal assistance. While prohibiting recipients from carrying over too 
large a fund balance promotes this purpose, regulated use of carryover 
funds under certain circumstances also promotes the same purpose. Based 
on changing needs and the Corporation's experience with fund balances 
since 1984, this proposed paragraph is intended to reflect both 
generally and specifically the circumstances under which the 
Corporation may grant a fund balance waiver.
    The overriding standard to be considered by the Corporation is 
whether the waiver would promote the statutory mandate that recipients 
provide high quality legal services in an effective and economical 
manner. In addition, the Corporation must consider 5 other factors. The 
first factor is consideration of any emergencies or unusual or 
unexpected occurrences or circumstances giving rise to the existence of 
the excess fund balance. The reference to ``extraordinary 
circumstances'' has been changed to ``circumstances'' to be consistent 
with the rule's other changes to the standards proposed for determining 
whether to grant a waiver. In addition, language providing examples of 
extraordinary circumstances has been deleted.
    No revisions are proposed for factor two which requires 
consideration of any special needs of clients.
    Factor three has been revised. The revision merges provisions in 
the current rule which deal with compensated private bar programs. See 
Sec. 1628.3(d) and Sec. 1628.4(d)(2). The current language is unclear 
and somewhat inconsistent. It appears to require the Corporation to 
grant a waiver for a cash reserve for compensated bar programs, while 
at the same time, it gives discretion to grant the waiver because it is 
granted only if there is a need for the cash reserve and after the 
recipient makes a timely request. This proposed rule gives the 
Corporation discretion to grant the waiver after consideration of 
whether there is a need for the cash reserve.
    Factor four is new and would give the Corporation discretion to 
grant a waiver so that a recipient could retain a cash reserve to 
replace or update the recipient's information technology systems. To 
carry out its statutory responsibility to encourage the most efficient 
and productive delivery of legal services possible, the Corporation 
encourages programs to invest in technology such as computers, 
networking equipment and advanced telephone systems. Investments in 
such technology can significantly increase the capability of programs 
to serve their clients effectively and efficiently. Computer based 
systems can help recipients manage legal work more efficiently. 
Improved technology can increase the efficiency and effectiveness of 
intake and pro se and community legal education efforts to make legal 
services more accessible. Access to the Internet can increase the 
quality of legal work by facilitating coordination among advocates and 
increasing access to available legal information and other pertinent 
databases.
    For programs to take advantage of such opportunities generally 
requires significant purchases of hardware and software. The 
Corporation believes that the best practice for management of 
information technology is to replace computer and information 
management technology on a regular, ongoing basis. Currently, however, 
significant new technological capacities are developing at an extremely 
rapid rate that suggest that radically transformative technology may 
emerge periodically during the coming years. The unexpected development 
and universal adoption of the world wide web as a principal instrument 
of business and government is an example of such a development. Most 
planners agree that for programs to keep up with these expanding 
possibilities, they should be prepared to replace computer equipment 
completely on a regular cycle, which may be as often as every three 
years. There may be occasions, therefore, when normal incremental 
upgrading of technological resources is not enough and a 
disproportionately significant investment is required because of the 
need to replace all the program's equipment and software.
    Programs that plan to purchase large amounts of computer equipment 
are often faced with the barrier that they can only maintain a fund 
balance of 10% or less and cannot create a property replacement 
reserve, if the

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resulting fund balance should exceed 10%. The Corporation proposes to 
amend Part 1628 to allow it to waive the 10% ceiling so that, with 
proper safeguards, recipients can maintain such a property reserve 
fund. The Corporation believes that such a waiver for recipients to 
update their equipment in an orderly and efficient manner will promote 
more effective planning and will encourage more effective and efficient 
delivery of services to clients.
    The final factor considered by the Corporation is the recipient's 
financial managment record.
    Paragraph (e) is new and provides tighter controls on the use of 
fund balances by recipients. It states that the Corporation's approval 
must require the recipient to use the funds within a specified time 
period and must use the funds for the purposes set out in the waiver 
request as revised by the Corporation's approval.
    Paragraph (f) is a reporting requirement for any fund balance 
retained by a recipient pursuant to a waiver.

Section 1628.5 Fund Balance Deficits

    Only technical changes have been made to this section either to 
update the information or to make it consistent with the rest of the 
rule. Generally, this section regulates recipient deficits. Deficits 
are discouraged and use of LSC funds to liquidate a deficit requires 
prior Corporation approval. Any LSC funds used to liquidate a deficit 
shall be identified as questioned costs unless prior approval for such 
use has been provided by the Corporation.

List of Subjects in 45 CFR Part 1628

    Legal services, Fund balances.
    For reasons set out in the preamble, LSC proposes to revise 45 CFR 
part 1628 to read as follows:

PART 1628--RECIPIENT FUND BALANCES

Sec.
1628.1  Purpose.
1628.2  Definitions.
1628.3  Policy.
1628.4  Procedures.


Sec. 1628.5  Fund balance deficits.

    Authority: Secs. 42 USC 2996e(b)(1)(A), 2996f(a)(3).


Sec. 1628.1  Purpose.

    The purpose of this part is to set out the Corporation's policies 
and procedures applicable to recipient fund balances. The Corporation's 
fund balance policies are intended to ensure the timely expenditure of 
LSC funds for the effective and economical provision of high quality 
legal assistance to eligible clients.




Sec. 1628.2  Definitions.

    (a) ``LSC support'' means the sum of:
    (1) The carryover LSC fund balance from the prior fiscal year;
    (2) The amount of financial assistance awarded by the Corporation 
to the recipient for the fiscal year in question; and
    (3) Any LSC derivative income, as defined in Sec. 1630.2(c), earned 
by the recipient for the grant year in question.
    (b) The LSC ``fund balance amount'' is the excess of LSC support 
over expenditures as determined by the recipient's annual audit.
    (c) The ``fund balance percentage'' shall be determined by 
expressing the fund balance amount as a percentage of the recipient's 
LSC support for the reporting period.
    (d) ``Recipient'' as used in this part, means any grantee or 
contractor receiving financial assistance from the Corporation under 
section 1006(a)(1)(A) of the LSC Act.


Sec. 1628.3  Policy.

    (a) Recipients are permitted to retain from year-to-year fund 
balances up to 10% of their LSC support.
    (b) Recipients may request a waiver to retain a fund balance up to 
a maximum of 25% of their LSC support.
    (c) A waiver pursuant to paragraph (b) of this section may be 
granted at the discretion of the Corporation pursuant to the criteria 
set out in Sec. 1628.4(e).
    (d) Any fund balance amount in excess of 10% of LSC support shall 
be repaid to the Corporation. If a waiver of the 10% ceiling is 
granted, any fund balance amount in excess of the amount permitted to 
be retained shall be repaid to the Corporation. Repayment shall be in a 
lump sum or by pro rata deductions from the recipient's grant checks 
for a specific number of months. The Corporation shall determine which 
of the specified methods of repayment is reasonable and appropriate in 
each case after consultation with the recipient.
    (e) A recovery from LSC support to recover an excess fund balance 
pursuant to this part does not constitute a termination under 45 CFR 
part 1606. See Sec. 1606.2(c)(2)(ii).
    (f) All one-time or special purpose grants awarded by the 
Corporation shall have an effective date and a termination date. Such 
grants are not subject to this part's fund balance policy. Revenue and 
expenses relating to such grants must be reflected separately in the 
audit report submitted to the Corporation. This may be done by 
establishing a separate fund or by providing a separate supplemental 
schedule of revenue and expenses related to such grants as a part of 
the audit report. No funds provided under a one-time or special purpose 
grant may be expended subsequent to the termination date of the grant 
without the prior written approval of the Corporation. All unexpended 
funds under such grants shall be returned to the Corporation.


Sec. 1628.4  Procedures.

    (a) Any recipient whose audited fund balance exceeds the 10% 
ceiling set forth in Sec. 1628.3 shall submit to the Corporation, 
within 30 days of the issuance of the recipient's final audit, a 
statement of the fund balance which occurred according to the required 
annual audit. The funds will be recovered as set forth in 
Sec. 1628.3(d) unless the recipient requests and is granted a waiver by 
the Corporation.
    (b) After the Corporation's receipt and review of the recipient's 
annual audit, the recipient's fund balance statement pursuant to 
paragraph (a) of this section and any requests for a waiver, the 
Corporation shall provide written notice to the recipient of any fund 
balance amount due and payable to the Corporation as well as the method 
for repayment 30 days prior to the effective date for repayment either 
to occur or to commence in accordance with Sec. 1628.3(d).
    (c) The recipient may, within 30 days of the issuance of the 
recipient's annual audit, request a waiver of the 10% ceiling. Such 
request must specify:
    (1) The fund balance amount according to the recipient's annual 
audit;
    (2) The reason such fund balance has been attained;
    (3) The recipient's plan for the disposition or reserve of such 
fund balance amount within the current grant period. If a waiver is 
requested under Sec. 1628.4(e)(4), for updating or replacing 
information technology systems, a Technology Investment Plan that 
outlines how and when the funds will be used to improve the recipient's 
Information Technology resources should be provided with the waiver 
request;
    (4) The amount of fund balance projected to be carried forward at 
the close of the recipient's then current fiscal year; and
    (5) The circumstances justifying the retention of the fund balance.
    (d) Excess fund balance amounts shall not be expended by the 
recipient prior to approval of the waiver request by the Corporation.

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    (e) The decision of the Corporation regarding the granting of a 
waiver shall be guided by the statutory mandate requiring the recipient 
to provide high quality legal services in an effective and economical 
manner. In addition, the Corporation shall consider the following 
factors.
    (1) Emergencies or unusual or unexpected occurrences, or 
circumstances giving rise to the existence of a fund balance in excess 
of 10%;
    (2) The special needs of clients;
    (3) The need for a recipient that operates a compensated private 
bar program or component to retain a cash reserve up to 25% of the 
amount of direct payment to attorneys indicated in the recipient's last 
audit for direct payment to attorneys in the bar program;
    (4) The need for the recipient to retain a cash reserve to replace 
or update the recipient's information technology systems; and
    (5) The recipient's financial management record.
    (f) The Corporation's written approval of a request for a waiver 
shall require that the recipient use the funds it is permitted to 
retain within the time period set out in the approval and for the 
purposes set out in the waiver request, as revised by the Corporation's 
approval.
    (g) Excess fund balance amounts approved by the Corporation for 
expenditure by a recipient must be separately reported in the current 
fiscal year audit. This may be done by establishing a separate fund or 
by providing a separate supplemental schedule as part of the audit 
report.


Sec. 1628.5  Fund balance deficits.

    (a) Sound financial management practices such as those set out in 
Chapter 3 of the Corporation's Accounting Guide for LSC Recipients 
should preclude deficit spending. Use of current year LSC grant funds 
to liquidate deficit balances in the LSC fund from a preceding period 
requires the prior written approval of the Corporation.
    (b) The recipient may, within 30 days of the issuance of the 
recipient's annual audit, apply to the Corporation for approval of the 
costs associated with the liquidation of the deficit balances in the 
LSC fund.
    (c) In the absence of approval by the Corporation, expenditures of 
current year LSC grant funds to liquidate a deficit from a prior year 
shall be identified as questioned costs.
    (d) The recipient's request must specify the same information 
relative to the deficit LSC fund balance as that set forth in 
Sec. 1628.4(c) (1) and (2). Additionally, the recipient must develop 
and submit a plan approved by its governing body describing the 
measures which will be implemented to prevent a recurrence of a deficit 
balance in the LSC fund. The Corporation reserves the right to require 
changes in the submitted plan.
    (e) The decision of the Corporation regarding acceptance of these 
deficit-related costs shall be guided by the statutory mandate 
requiring the recipient to provide high quality legal services 
performed in an effective and economical manner. Special consideration 
will be given for emergencies, unusual occurrences, or other 
circumstances giving rise to this situation.

    Dated: October 16, 1998.
Victor M. Fortuno,
General Counsel.
[FR Doc. 98-28230 Filed 10-21-98; 8:45 am]
BILLING CODE 7050-01-P