[Federal Register Volume 65, Number 216 (Tuesday, November 7, 2000)]
[Rules and Regulations]
[Pages 66637-66643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28473]


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LEGAL SERVICES CORPORATION

45 CFR Part 1628


Recipient Fund Balances

AGENCY: Legal Services Corporation.

ACTION: Final rule.

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SUMMARY: This final rule revises 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 of 
up to 25% of its LSC support for a particular reporting period and to 
specify a limited number of extraordinary and compelling circumstances 
for which LSC has discretion to permit a recipient to maintain a fund 
balance in excess of 25% of its LSC support. The final rule also adds 
additional requirements and limitations applicable to waiver requests 
and the use of excess fund balances. Finally, the rule is restructured 
for clarity and for consistency with other Corporation regulations.

EFFECTIVE DATE: This final rule is effective on December 7, 2000.

FOR FURTHER INFORMATION CONTACT: Victor M. Fortuno, Vice President for 
Legal Affairs, Legal Services Corporation, 750 First Street, NE.--Suite 
1000, Washington, DC 20002-4250; 202-336-8800.

SUPPLEMENTARY INFORMATION: On September 11, 1998, the Operations and 
Regulations Committee (``Committee'') of the Legal Services Corporation 
(``LSC'' or ``the Corporation'') Board of Directors (``Board'') met to 
consider proposed revisions to the Corporation's rule governing 
recipient fund balances, 45 CFR part 1628. The Committee adopted a 
proposed rule that was published in the Federal Register for public 
comment at 63 FR 56591 (October 22, 1998). Nineteen comments were 
received and considered by the Corporation.
    Following the close of the comment period, the Committee met on 
February 21, 1999, to review the public comment on the proposed rule. 
No action was taken on the proposed rule at that time as the Committee 
was advised by the Corporation's staff that additional time was needed 
to consider fully a number of issues raised by the public comment and 
to formulate informed recommendations for the Committee's consideration 
in adopting a final rule.
    The Committee was briefed by staff on two issues raised by one 
commenter which challenged the legal sufficiency of the proposed 
rulemaking and the legal authority for the Corporation to permit any 
carryover of fund balances

[[Page 66638]]

by recipients. The commenter's legal sufficiency claim was mistakenly 
based on the Administrative Procedures Act, a law which does not apply 
to LSC rulemaking, and a similarly erroneous allegation that the public 
record failed to include certain ``factual information'' on which LSC 
relied--or, in the eyes of the commenter, should have relied--in 
developing the proposed rule. As explained to the Committee, the 
preamble to the proposed rule properly incorporated by reference 
information which was already a matter of public record and readily 
made these materials and any other factual information available to the 
public upon request. The commenter further asserted that the 
Corporation's proposed fund balance provisions were contrary to federal 
law, specifically relying on the Office of Management and Budget 
Circular A-110, Uniform Administrative Requirements for Grants and 
Agreements with Institutions of Higher Education, Hospitals and Other 
Non-Profit Organizations (OMB Circular A-110). Contrary to the 
commenter's assertion, OMB Circular A-110 expressly authorizes the 
recipients to carry forward unobligated balances to subsequent funding 
periods. OMB Circular A-110, Sec. _.25(e)(3), 58 FR 62992, 62999 
(November 29, 1993).
    On June 11, 1999, the Committee again met to consider public 
comments on the proposed rule. The Committee adopted a number of 
revisions to the rule, but deferred action on the final rule pending 
additional staff research into the policies and practices of other 
agencies awarding federal grants and contracts with regard to 
extraordinary and compelling circumstances for the carryover of an 
excess fund balance. The Committee took under consideration the need to 
permit a fund balance in excess of its 25% limitation in extraordinary 
cases, where a recipient received a large, lump-sum infusion of funds, 
for example, from the sale of real property, insurance proceeds, or a 
court-awarded judgment. Where such funds are derived from the past 
expenditure of LSC funds, they may, because of the amount or timing of 
their receipt, cause a fund balance in excess of 25% of the recipient's 
total LSC support for that year. In particular, the Committee sought 
additional information from staff on the policies adopted by federal 
agencies with regard to grantee fund balances and whether fund balances 
in excess of 25% of a grantee's annual federal support are ever 
permitted, and, if so, under what circumstances.
    On November 19, 1999, the Committee met to consider the staff's 
report on the outstanding issues raised at its last meeting and to 
again receive public comment. The Committee was advised that in 1993, 
OMB Circular A-110, the governing authority for most federal grants to 
non-profit organizations, was amended to expand the authority of 
discretionary grantees to undertake certain types of administrative 
actions without prior agency approval, including the ability to carry 
forward unobligated fund balances into a subsequent funding period (58 
FR 62992, November 29, 1993). Having reviewed the regulations and 
policies issued by more than twenty federal agencies under the amended 
OMB guidelines, LSC staff advised the Committee that the Corporation's 
proposed fund balance policies were more strict than those adopted by 
most federal agencies. Few federal agencies employ a cap on the amount 
of funds that may be carried over by a grantee, with or without prior 
agency approval. Most agencies require notification of fund balances, 
and some reserve the discretion to disallow the carryover or to offset 
it against future grant funds under particular circumstances, such as 
when it exceeded 25% of the grant award, or the grantee was at high 
risk of failure to comply with statutory requirements. Staff also 
provided the Committee with a breakout of the fund balances reported by 
recipients for fiscal year 1997, the most recent, complete data 
available. After considering the staff report and taking other public 
comment on the rule, the Committee made a number of additional 
revisions to the rule and voted to recommend to the Board that the rule 
as revised be adopted as a final rule. On November 20, 1999, the Board 
did adopt as final the rule as revised and reported by the Committee.
    This final rule is intended to provide the Corporation with more 
discretion to determine whether to permit a recipient to maintain a 
fund balance of up to 25% of its LSC support for a particular period 
and sets forth the requirements and limitations applicable to waiver 
requests and the uses of fund balances. The final rule also authorizes 
the Corporation to exercise its discretion to waive the 25% cap on 
excess fund balances in three specific circumstances when extraordinary 
and compelling reasons exist for such a waiver. Finally, the rule is 
restructured for clarity and consistency with other LSC regulations.
    A section-by-section analysis is provided below.

Section-by-Section Analysis

Section 1628.1  Purpose

    The final rule adopts the revisions to this section as proposed. 
Those revisions deleted or moved parts of the section because they were 
not statements of the purpose of the rule. As revised, the purpose of 
the rule is stated as setting forth the Corporation's policies and 
procedures for recipient fund balances. The final rule retains the 
underlying intent of the current rule which is 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 rule clarified and updated the meaning of three of the 
current terms to make them consistent with other changes in LSC 
regulations, and retained a fourth term without change.
    In the final rule, ``excess fund balance'' has been added as a 
defined term for clarity. ``Excess fund balance'' is defined to mean 
the amount of a recipient's LSC fund balance that exceeds the amount 
the recipient is authorized to retain under the regulation.
    As proposed, the term ``LSC support'' was defined as the sum of 
three amounts: (1) The recipient's LSC carryover funds from the prior 
fiscal year; (2) the amount of the recipient's LSC grant for the year 
in question; and (3) any LSC derivative income earned by the recipient 
during the year in question. In the final rule, the Corporation has 
deleted a recipient's prior year carryover funds from the definition of 
LSC support. As pointed out during the comment period, including 
carryover funds in LSC support could artificially inflate the amount of 
funds permitted to be carried over under the percentage ceilings used 
in the rule. As this result was not intended by the Corporation, the 
reference to the prior year's carryover funds has been deleted and the 
remaining components of the definition of ``LSC support'' renumbered 
accordingly. The language was further amended to make clear the fiscal 
year being referenced and that one-time and special purpose grants were 
not to be included in the definition of ``LSC support'' as either 
financial assistance or derivative income. The rules governing fund 
balances for one-time and special purpose grants are discussed in more 
detail in Sec. 1628.3(g) below.

[[Page 66639]]

    The final rule replaces the defined term ``fund balance amount'' 
with ``fund balance'' for ease of use and clarity. Other minor language 
changes were also incorporated for clarity. The final definition makes 
clear that a ``fund balance'' is the amount by which LSC support, 
together with the prior year's carryover amount of LSC Funds, exceeds 
the recipient's expenditures of LSC Funds, including capital 
acquisitions, as these amounts are reported in the recipient's annual 
audit. Some commenters recommended doing away with the term ``fund 
balance'' altogether as that term is inconsistent with generally 
accepted accounting principles set forth in the Statement of Financial 
Accounting Standards (FASB) No. 117, Financial Statements for Not-for-
Profit Organizations. The current FASB Statement No. 117 speaks in 
terms of three categories of ``net assets'' rather than fund 
accounting. This issue was addressed by the Corporation in 1997 when it 
republished its Accounting Guide for LSC Recipients (August, 1997) 
following the FASB Statement No. 117 change. To permit the separate 
reporting of LSC revenue and expenditures, while at the same time 
adhering to Statement No. 117, Section 2-4 of LSC's Accounting Guide 
requires separate reporting, preferably through a supplemental schedule 
to be attached to audited financial statements prepared in accordance 
with FASB Statement No. 117. The supplemental schedule details the 
receipt and expenditure of LSC funds and permits the calculation of the 
LSC ``fund balance.'' Therefore, the final rule retains the term ``fund 
balance.''
    The final rule retains the meaning of the term ``fund balance 
percentage'' but has revised the language to be consistent with its use 
as a defined term. The fund balance percentage is the percentage ratio 
of the LSC fund balance to the recipient's LSC support.
    The final rule adopts without change the proposed definition of 
``recipient,'' which was updated to reflect the current law limiting 
grants for financial assistance to those authorized by 
Sec. 1006(a)(1)(A) of the LSC Act and to be consistent with the meaning 
of the term as defined elsewhere in the regulations.

Section 1628.3  Policy

    The proposed rule restructured this section to consolidate 
statements of general policy on recipient fund balances in this section 
and to move provisions that dealt more with procedure to other sections 
of the rule.
    Paragraph (a) states the Corporation's long-standing policy that 
recipients may, without any prior LSC approval, retain a fund balance 
of up to 10% of their LSC support. While this policy has not changed 
from the current rule, the Corporation received significant comment 
urging that the ceiling on fund balances be raised. A number of 
commenters argued that their own accountants or auditors recommended 
higher fund balance retention in the interests of sound financial 
management for nonprofit corporations. The commenters, however, 
differed on the appropriate level for such fund balances, with 
recommendations ranging as low as one month's operating expenses to 
three or six months of expenses, or even higher. The majority of the 
recipients that commented suggested increasing the fund balance which 
could be retained without specific LSC approval to between 15% and 25% 
of LSC support. Several commenters noted that their other funders 
generally did not permit their funds to be included in fund balances, 
making the inclusion of LSC funds for this purpose more critical for 
the recipient's stability as an ongoing enterprise and to ease the 
transition for the recipient should it lose some or all of its LSC 
funding.
    The Corporation has retained the 10% ceiling on the level of fund 
balances that recipients may carryover without specific LSC approval. 
The Corporation was not convinced by the comments that a higher level 
was either necessary or appropriate at this time. The primary purpose 
of LSC funding is to enable the recipient to provide a maximum of high 
quality legal assistance to eligible clients, rather than to underwrite 
the long term fiscal stability of the recipient. There is an inherent 
tension between the purpose of the grant funds and the non-expenditure 
of these funds solely to underwrite the entity's viability as an 
ongoing enterprise. Nothing in the comments persuades the Corporation 
that an amount in excess of the current 10% ceiling is necessary.
    In 1980, the GAO was critical of fund balances between 20% and 31% 
of a recipient's annual grant. While OMB introduced more flexibility 
into grantee administration of its federal funding through its 
amendments to Circular A-110, there is no empirical evidence that the 
GAO criticisms of fund balances for LSC recipients are any less valid 
today. Nor have the commenters demonstrated any compelling need for 
higher fund balances. Additionally, large fund balances could create 
the potential for misuse of such funds. In 1997, the last year for 
which complete records were available, recipients carried over $17.9 
million in LSC funding, compared to $49.6 million in non-LSC funding. 
The data further reflect that most recipients report carry over of 
funds and that, of those that do, the majority carried over 
significantly more non-LSC funds than LSC funds. These data tend to 
refute the argument of the commenters that LSC funds are necessary for 
an adequate fund balance because of the general lack of non-LSC funds 
available for this purpose. Nor does the Corporation adhere to the 
principle underlying these claims, that LSC funds should be used to 
underwrite a recipient's financial stability when other funders will 
not do so. Especially with the advent of competitive grants, LSC would 
prefer to have its grants go to client service rather than to reserve 
funds for grant transition activities and needs. Where such needs 
exist, LSC can provide the necessary funding.
    Paragraph (b) permits recipients to request a waiver from LSC to 
retain a fund balance of up to 25% of their LSC support. Such waivers 
are granted at the discretion of LSC and require a showing of special 
circumstances to justify the waiver. As discussed above, several 
commenters sought a fund balance ceiling of 25% or higher to be 
automatic, rather than by waiver. However, the Corporation disagreed 
with these comments and has retained the ceiling of 10% for fund 
balances which can be retained without prior LSC approval, and up to 
25% only upon a waiver request to LSC, supported by a showing of 
special circumstance. Consistent with the proposed rulemaking, however, 
LSC has relaxed somewhat the showing required to obtain a waiver for a 
fund balance of up to 25% of a recipient's LSC support. The particular 
standards are discussed below in Sec. 1628.4.
    In the final rule, the Corporation has added a new paragraph (c) 
which permits a recipient to request a waiver to retain a fund balance 
in excess of 25% of their LSC support in extraordinary and compelling 
circumstances. The rule further limits ``extraordinary and compelling 
circumstances'' by specifying only three possible sources for such 
funds: (1) An insurance reimbursement; (2) the sale of real property; 
and (3) the receipt of monies from a lawsuit in which the recipient was 
a party.
    Although the Corporation did not find it necessary or appropriate 
to raise the ceilings in effect for routine fund balance carryovers or 
waivers, it was swayed by the comments concerning unusual and 
compelling circumstances which could arise that may justify retention 
of a fund balance in excess of 25% of a recipient's LSC support. In 
general these circumstances arise when

[[Page 66640]]

there is a sudden and unexpected infusion of funds which are derived 
from prior LSC grant funds but are not part of the current year's 
funding. By their nature, these funds may be substantial in amount. 
Instances discussed included the settlement of an insurance claim 
resulting in the payment to the recipient of a large insurance 
reimbursement; the receipt of a substantial amount as proceeds from the 
sale of real property; or, the receipt of an award based on a judgment 
or settlement in a lawsuit to which the recipient was a party. In these 
cases, because of the timing of the receipt of the funds or the amount 
of such funds or both, it may be more prudent to permit the recipient 
to carryover the funding into the next fiscal year, even if the amount 
of the carryover will exceed 25%, than to require the recipient to 
spend the funds in the fiscal year received. The recipient can better 
plan and find the best use for the funds, rather than being forced into 
a hasty expenditure simply to avoid the limitation on the carryover of 
fund balances and the resultant surrender of the excess fund balances 
to the Corporation.
    The Committee considered using a standard of ``extraordinary and 
compelling'' for these waivers with the three specific circumstances 
discussed as examples. However, it was felt that more guidance was 
required to avoid erosion of the standard. Therefore, the Board 
ultimately decided to limit the permissible circumstances for these 
extraordinary waivers to the three conditions which have in the past 
been known to give rise to the sudden infusion of large sums, and hence 
may precipitate the need for a waiver. By limiting the circumstances 
justifying such waivers, the Corporation intends to provide notice to 
recipients of the limited types of circumstance in which extraordinary 
excess fund balances will be tolerated, thereby avoiding any 
misunderstanding, abuse, or erosion of the standard.
    In the final rule, proposed paragraph (c) is relettered as (d) and 
otherwise retains the policy that the granting of any waiver request is 
at the discretion of the Corporation. The final rule makes explicit 
that the discretion to grant a waiver applies to both requests for 
waivers of up to 25% of a recipient's LSC support and for waivers in 
excess of 25%. In addition, the final rule refers to the criteria in 
Sec. 1628.4(d) which governs the Corporation's exercise of its waiver 
discretion.
    In the final rule, proposed paragraph (d) is relettered as (e) and 
continues to state that, absent a waiver, a fund balance in excess of 
10% of LSC support is to be repaid to the Corporation. In addition, the 
final rule continues the policy requiring repayment to LSC of any 
amount in excess of the amount permitted under a waiver granted by the 
Corporation. As suggested during the comment period, the two sentences 
describing the alternative means of repayment have been moved to the 
section on procedures (see Sec. 1628.4(c)).
    In the final rule, proposed paragraph (e) is relettered as (f), but 
is otherwise unchanged. It continues to clarify LSC policy that the 
recovery of excess fund balances does not constitute a termination of 
funds under Part 1606 of the Corporation's regulations.
    Finally, the final rule reletters paragraph (f) as (g) and retains 
the substance of the proposed rule to make clear that one-time and 
special purpose grants awarded by the Corporation are not subject to 
the fund balance rules in this part, are not part of the calculation of 
fund balances pursuant to this rule, but are to be separately accounted 
for and reported. The rule also continues LSC's policy that unexpended 
funds from one-time and special purpose grants must be returned to the 
Corporation at the end of the grant term unless the Corporation has 
approved the expenditure of those funds in writing. The Corporation 
Office of Compliance and Enforcement is planning to update the LSC 
Accounting Guide to reflect the revisions to the rule, including 
treatment of one-time and special purpose grants as provided for in 
this provision.

Section 1628.4  Procedure

    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 the requirements which are intended to ensure careful 
oversight by the Corporation of a recipient's fund balances. The 
procedures apply to both waivers of the 10% ceiling for a fund balance 
of up to 25% of a recipient's LSC support and waivers of the 25% 
ceiling in extraordinary and compelling circumstances. The final rule 
consolidates the procedural requirements in the current rule in this 
section and updates those requirements as necessary.
    Paragraph (a) of the final rule sets out the timeframe for 
recipients whose fund balance exceeds the 10% ceiling to request a 
waiver from the Corporation and the required content of such waiver 
requests. The final rule provides a recipient with 30 days from the 
submission of the recipient's annual financial audit in which to 
request a waiver. By tying the waiver request to the submission date 
for the recipient's annual financial audit, the Corporation intends to 
place recipients on notice of a fixed date for such requests. As used 
in this paragraph, the submission date for the recipient's annual 
financial audit is the date on which such audit is due to be submitted 
to the Corporation, which is currently specified in the LSC Audit Guide 
as 120 days from the close of the grantee's fiscal year.
    Several comments urged that the rule provide for advance or 
preliminary approvals. According to the comments, advance approval 
would permit better fiscal planning and would allow the expenditure of 
fund balances earlier in the following fiscal year. Although these 
concerns have merit, approval is by definition based on the amount of 
fund balance indicated in the recipient's audit, and that audit is not 
available until after the end of the fiscal year. This rule does not 
preclude the recipient's request for a Corporation action on a waiver 
prior to the close of the fiscal year, it simply does not require the 
Corporation to provide for advance approval. The Corporation already 
has a practice of providing informal guidance to recipients who inquire 
early about their anticipated fund balances. This practice will 
continue to be available to recipients, but need not be required by 
regulation.
    Paragraph (a) of the final rule incorporates the content of waiver 
requests which was specified in paragraph (c) of the proposed rule. The 
final rule continues to require that waiver requests specify: (1) The 
fund balance as reported in the recipient's annual audit; (2) the 
reason for the excess fund balance; (3) the recipient's plans for use 
of the excess fund balance; (4) the fund balance, if any, that the 
recipient projects for the current fiscal year; and (5) the 
circumstances justifying retention of the excess fund balance. The 
Corporation revised item (3) to delete the proposed reference to a 
Technology Investment Plan and other specific requirements related to 
information technology systems. The Corporation decided there was 
insufficient support for singling out information technology systems 
for special treatment under its fund balance rules. The need to acquire 
or update the hardware or software related to a recipient's information 
technology systems is simply one example of equipment or property 
acquisition for which an excess fund balance may be used. Other 
stylistic and clarifying language changes have been made,

[[Page 66641]]

including expanding the reference to circumstances in item (5) to 
include both the special circumstances required to justify the 
retention of an excess fund balance of up to 25% of the recipient's LSC 
support and the extraordinary and compelling circumstances specified in 
Sec. 1628.3(c) necessary to justify retention of a fund balance in 
excess of 25% of the recipient's LSC support.
    The Corporation proposed in paragraph (b) of this section to 
identify its obligations to consider the recipient's final audit, fund 
balance statements, and waiver requests, if any, and to provide timely 
written notice to the recipient of any fund balance amount to be 
recovered and the method of recovery. In the final rule, the scope of 
paragraph (b) was narrowed to focus on the Corporation's obligation to 
respond in a timely fashion to a recipient's request for a waiver or to 
notify the recipient that the excess fund balance must be repaid to the 
Corporation. In addition, the final rule requires that the Corporation 
respond within 45 days of its receipt of a waiver request. The 45 day 
period for the Corporation's decision and response to a waiver request 
was deemed reasonable and necessary because of the likelihood that 
multiple requests would be submitted at about the same time each year. 
In this regard, the written response to a waiver request or notice of 
demand for repayment of the excess fund balance may be provided by the 
Corporation by physical delivery, such as regular mail, or 
electronically, such as e-mail, when feasible. Either method is 
likewise acceptable for the submission of waiver requests.
    The final rule contains a new paragraph (c) which consolidates the 
information previously located in paragraph (b) (discussed above) 
concerning the timeliness of repayment notices and in the policy 
section (see Sec. 1628.3(e), supra) concerning the methods of 
repayment. The final rule continues to require written notice of 
repayment of an excess fund balance at least 30 days prior to the date 
when repayment is due. Furthermore, the final rule continues to 
authorize the Corporation to decide, after consultation with the 
recipient, on the method of repayment. Two repayment methods are 
contemplated: a lump sum payment or a pro rated deduction from the 
recipient's monthly grant payments spread over a specified number of 
months. Irrespective of the recovery method used, however, the 
recipient should generally expect the recovery to be complete within 
the term of the current grant.
    Paragraph (d) of the proposed rule stated that excess fund balances 
could not be expended by the recipient prior to approval by the 
Corporation of a waiver request. This paragraph has been deleted from 
the final rule as unnecessary and redundant. It remains the policy of 
the Corporation that a recipient needs to obtain LSC's approval of a 
waiver request before it may expend any excess fund balances.
    In the final rule, proposed paragraph (e) is relettered as 
paragraph (d) and continues to identify the standards governing the 
Corporation's decision to grant a waiver request. The overarching 
standard continues to be that recipients provide high quality legal 
assistance to clients in an effective and economical manner. While 
prohibiting excess fund balances promotes this purpose, regulated use 
of carryover funds under certain circumstances is also consistent with 
this purpose. Based on changing needs and the Corporation's experience 
with fund balances since 1984, the standards enumerated in paragraph 
(d) are intended to reflect both generally and specifically the 
circumstances under which the Corporation may grant a fund balance 
waiver.
    The first standard under paragraph (d) garnered the most comment. 
The Corporation had proposed relaxing the standard from ``emergencies, 
or unusual or unexpected occurrences, or extraordinary circumstances'' 
to ``emergencies, unusual or unexpected occurrences, or circumstances'' 
which give rise to an excess fund balance. Commenters generally 
approved the broader discretion available to the Corporation under the 
proposed standard. According to the commenters, justifiable reasons for 
waiving the 10% ceiling on fund balance retention exist which do not 
rise to the current standard of ``extraordinary circumstances.'' One 
commenter, however, critiqued the proposed standard as too lax and 
feared it may result in a de facto increase in the ceiling on fund 
balances from 10% to 25%.
    In the final rule, the standard has been changed to refer to the 
``circumstances giving rise to the existence of a fund balance in 
excess of 10% of LSC support set out in Sec. 1628.3(b) or (c).'' Thus, 
the final standard incorporates by reference the need for ``special 
circumstances'' to justify a waiver to retain an excess fund balance of 
up to 25% of a recipient's LSC support and ``extraordinary and 
compelling circumstances'' as specified in Sec. 1628.3(c) to justify a 
waiver for a fund balance in excess of 25% of a recipient's LSC 
support. For waivers of up to 25% of LSC support, the Corporation has 
more flexibility and discretion than under the current standard to 
grant a waiver, while at the same time requiring a showing of a special 
circumstance to avoid such waivers from becoming the norm. Moreover, to 
obtain a waiver in excess of 25% of LSC support, the recipient must 
demonstrate that one of the three circumstances specified in 
Sec. 1628.3(c) gave rise to the excess fund balance in order to show 
extraordinary and compelling circumstances to justify a waiver. Thus, 
the ability of a recipient to obtain a waiver to retain a fund balance 
in excess of 25% of its LSC support is narrowly circumscribed.
    Moreover, the circumstances giving rise to the excess fund balance 
remain but one of four factors to be considered by the Corporation in 
granting or denying a waiver request. The final rule retains without 
change two factors from the current rule: the special needs of clients 
and the recipient's financial management record. The final factor 
combines subparagraphs (3) and (4) of the proposed rule into a single 
subparagraph (3) in the final rule. As revised, subparagraph (3) in the 
final rule retains authority for the Corporation to consider the 
recipient's need for a cash reserve for payments to private attorneys 
participating in the recipient's private attorney involvement (``PAI'') 
program and adds language authorizing the consideration of the 
recipient's need to acquire equipment or property or for other 
expenditures which are reasonable and necessary for the performance of 
the LSC grant. The additional language, in part, replaces the proposed 
rule's subparagraph (4) which separately stated as a factor the 
recipient's need for a cash reserve to replace or update information 
technology systems. Only a few comments addressed the technology issue 
and a review of past fund balance requests and prior approval requests 
under Part 1630 (Cost standards and procedures) indicated no need for a 
specific regulatory factor related solely to information technology 
systems. The language in the final rule is expected to provide the 
Corporation with sufficient discretion and flexibility to deal with a 
variety of requests for waivers, not merely those related to 
information technology systems. For example, a cash reserve in a coming 
fiscal year may be needed to acquire new property or to acquire 
equipment that may make the program more accessible to handicapped 
clients, or for additional staff necessary to handle an anticipated 
influx of clients due to changes in

[[Page 66642]]

medical, housing or other benefits adversely impacting on the client 
community.
    In the final rule, the proposed new paragraph (f) is re-lettered as 
paragraph (e), and its substantive provisions for tighter controls on 
the use of fund balances by recipients are retained without change. 
Thus, the Corporation's written approval of waiver request will specify 
the time period within which the excess fund balance must be expended 
and the uses for which the funds may be expended. In specifying the 
time period for the expenditure of any excess fund balances, the 
Corporation's written approval will indicate whether the expenditure 
may be permitted beyond the end of the current fiscal year.
    The final rule retains as paragraph (f) the current and proposed 
requirements for the separate reporting of any excess fund balance 
retained by a recipient for expenditure pursuant to an approved waiver 
request. Revisions to this paragraph clarify that approved excess fund 
balances should be reported separately by natural line item in the 
current fiscal year's audited financial statements. ``Natural line 
item'' or ``natural expense classification'' is a term of art in the 
accounting field which means the itemizing of expenses according to the 
kinds of economic benefits received by incurring the expense. Examples 
of natural line items or natural expense classifications include 
salaries and wages, employee benefits, supplies, rent, and utilities. 
See the American Institute of Certified Public Accountants Audit and 
Accounting Guide for Not-for-Profit Organizations, June 1, 1996 
edition, Glossary, at 367.
    Finally, in the final rule, a new paragraph (g) has been added. 
Paragraph (g) requires recipients to inform the Corporation of and seek 
its guidance with respect to changes in the conditions on the timing or 
purposes for the expenditure of excess fund balances as set out in the 
Corporation's written approval of a waiver request. The new paragraph 
is intended to place recipients on notice of their obligation to inform 
LSC of changes in circumstances which make compliance with the terms 
and conditions of their waiver difficult or impossible, for example, 
uncontrollable delays in settling on the purchase of new property, 
sudden and unexpected market changes that may alter the economics of a 
planned purchase, or newly emergent priorities for which the 
expenditure should be redirected. The Corporation will then provide the 
recipient with guidance on whether the change in the purpose of the 
expenditure or the need for more time for the expenditure, or both, 
warrants a change in the conditions for the waiver. Failure of a 
recipient to notify the Corporation and obtain approval for changes in 
its waiver conditions could result in any nonconforming expenditures 
being treated as a questioned cost by the Corporation under Part 1630.

Section 1628.5  Fund Balance Deficits

    The final rule retains with only minor technical or clarifying 
changes the provisions of the current rules governing recipient 
deficits. Deficits continue to be discouraged and use of LSC funds to 
liquidate a deficit requires prior Corporation approval. Absent prior 
approval, LSC funds used for this purpose will result in a questioned 
cost. Only a few conforming language changes have been made to this 
section.

List of Subjects in 45 CFR Part 1628

    Administrative practice and procedures, Legal services

    For reasons set forth in the preamble, LSC revises 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.
1628.5   Fund balance deficits.

    Authority: 42 U.S.C. 2996e(b)(1)(A), 2996f (a)(3).


Sec.  1628.1   PurposeSection 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) Excess fund balance means a recipient's LSC fund balance that 
exceeds the amount a recipient is permitted to retain under this part.
    (b) LSC support means the sum of:
    (1) The amount of financial assistance awarded by the Corporation 
to the recipient for the fiscal year included in the recipient's annual 
audited financial statement, not including one-time and special purpose 
grants; and
    (2) Any LSC derivative income, as defined in Sec. 1630.2(c), earned 
by the recipient for the fiscal year included in the recipient's annual 
audited financial statement, not including derivative income from one-
time and special purpose grants.
    (c) The LSC fund balance is the excess of LSC support plus the 
prior year carryover amount over expenditures of LSC funds (including 
capital acquisitions), as each is reported in the recipient's annual 
financial statements.
    (d) The fund balance percentage is the amount of the LSC fund 
balance expressed as a percentage of the recipient's LSC support.
    (e) 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 one fiscal year to the 
next LSC 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 for special circumstances.
    (c) Recipients may request a waiver to retain a fund balance in 
excess of 25% of a recipient's LSC support only for the following 
extraordinary and compelling circumstances when the recipient receives 
an insurance reimbursement, the proceeds from the sale of real 
property, or a payment from a lawsuit in which the recipient was a 
party.
    (d) A waiver pursuant to paragraph (b) or (c) of this section may 
be granted at the discretion of the Corporation pursuant to the 
criteria set out in Sec. 1628.4(d).
    (e) In the absence of a waiver, a fund balance 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 in excess of the amount permitted 
to be retained shall be repaid to the Corporation.
    (f) A recovery of 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).
    (g) One-time and special purpose grants awarded by the Corporation 
are not subject to the fund balance policy set forth in this part. 
Revenue and expenses relating to such grants shall 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 expiration date 
of the grant without the

[[Page 66643]]

prior written approval of the Corporation. Absent approval from the 
Corporation, all unexpended funds under such grants shall be returned 
to the Corporation.


Sec. 1628.4    Procedures.

    (a) Within 30 days of the submission to LSC of its annual audited 
financial statements, a recipient may request a waiver of the 10% 
ceiling on LSC fund balances. The request shall specify:
    (1) The LSC fund balance as reported in the recipient's annual 
audited financial statements;
    (2) The reason(s) the excess fund balance resulted;
    (3) The recipient's plan for disposition of the excess fund balance 
during the current fiscal year;
    (4) The amount of fund balance projected to be carried forward at 
the close of the recipient's current fiscal year; and
    (5) The special circumstances justifying the retention of the 
excess fund balance up to 25%, or the extraordinary and compelling 
circumstances set out in Sec. 1628.3(c) justifying a fund balance in 
excess of 25%.
    (b) Within 45 days of receipt of the recipient's waiver request 
submitted pursuant to paragraph (a) of this section, the Corporation 
shall provide a written response to the request and a written notice to 
the recipient of any fund balance due and payable to the Corporation as 
well as the method for repayment.
    (c) In the event that repayment is required, the Corporation shall 
give written notice 30 days prior to the effective date for repayment. 
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.
    (d) 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, unusual or unexpected occurrences, or the 
circumstances giving rise to the existence of a fund balance in excess 
of 10% of LSC support set out in Sec. 1628.3(b) or (c);
    (2) the special needs of clients;
    (3) The need to retain a cash reserve for payments to private 
attorneys participating in the recipient's private attorney involvement 
(PAI) program; for acquisition of equipment or property; or for other 
expenditures which are reasonable and necessary for the performance of 
the LSC grant; and
    (4) The recipient's financial management record.
    (e) 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 approved by the Corporation.
    (f) Excess fund balances approved by the Corporation for 
expenditure by a recipient shall be separately reported by natural line 
item in the current fiscal year's audited financial statements. This 
may be done by establishing a separate fund or by providing a separate 
supplemental schedule as part of the audit report.
    (g) The recipient shall promptly inform and seek guidance from the 
Corporation when it determines a need for any changes to the conditions 
on timing or purposes set out in the Corporation's written approval of 
a recipient's request for a waiver.


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) Within 30 days of the submission of the recipient's annual 
audit, the recipient may apply to the Corporation for approval of the 
expenses associated with the liquidation of the deficit balance 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 under 45 CFR part 1630.
    (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(a)(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 special 
circumstances giving rise to a deficit balance.

    Dated: October 31, 2000.
Victor M. Fortuno,
Vice President for Legal Affairs.
[FR Doc. 00-28473 Filed 11-06-00; 8:45 am]
BILLING CODE 7050-01-P