[Federal Register Volume 66, Number 5 (Monday, January 8, 2001)]
[Rules and Regulations]
[Pages 1474-1478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-431]



[[Page 1473]]

-----------------------------------------------------------------------

Part VI





Department of Education





-----------------------------------------------------------------------



34 CFR Part 300



-----------------------------------------------------------------------



Assistance to States for the Education of Children With Disabilities; 
Final Rule

  Federal Register / Vol. 66 , No. 5 / Monday, January 8, 2001 / Rules 
and Regulations  

[[Page 1474]]


-----------------------------------------------------------------------

DEPARTMENT OF EDUCATION

34 CFR Part 300

RIN 1820-AB51


Assistance to States for the Education of Children With 
Disabilities

AGENCY: Office of Special Education and Rehabilitative Services, 
Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends the regulations for the Assistance to 
States for the Education of Children with Disabilities program under 
Part B of the Individuals with Disabilities Education Act (IDEA; Part 
B)). This amendment is needed to implement the statutory provision that 
for any fiscal year in which the appropriation for section 611 ofthe 
IDEA exceeds $4.1 billion, a local educational agency (LEA) may treat 
as local funds up to 20 percent of the amount it receives that exceeds 
the amount it received during the prior fiscal year. The amendment is 
intended to ensure effective implementation of the 20 percent rule by 
clarifying which funds under Part B of IDEA can be included in the 20 
percent calculation, and, as a result, to reduce the potential for 
audit exceptions.

DATES: These regulations are effective--February 9, 2001.

FOR FURTHER INFORMATION CONTACT: JoLeta Reynolds (202) 205-5507. If you 
use a telecommunication device for the deaf (TDD), you may call the TDD 
number at (202) 205-5465.
    Individuals with disabilities may obtain this document in an 
alternate format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to Katie Mimcey, Director of the Alternate Formats 
Center. Telephone: (202) 205-8113.

SUPPLEMENTARY INFORMATION: On May 10, 2000, the Secretary published a 
notice of proposed rulemaking (NPRM) in the Federal Register (65 FR 
30314) to amend the regulations governing the Assistance to States for 
the Education of Children with Disabilities program (34 CFR part 300). 
The NPRM proposed to implement a statutory provision regarding the 
permissive treatment of a portion of Part B funds by LEAs in certain 
fiscal years, as added by the IDEA Amendments of 1997 (see section 
613(a)(2)(C) of the Act and Sec. 300.233 of the regulations).
    Under the new statutory provision, for any fiscal year (FY) for 
which the appropriation for section 611 of the IDEA exceeds $4.1 
billion, an LEA may treat as local funds up to 20 percent of the amount 
it receives that exceeds the amount it received under Part B during the 
prior year. By treating certain Federal funds as local funds, and LEA 
will be able to meet the maintenance of effort requirement of 
Sec. 300.231 even though it reduces the amount of other local or local 
and State funds, as the case may be, by an amount equal to the amount 
of Federal funds that may be treated as local funds. The fiscal year 
ending September 30, 1999 was the first year that the Part B 
appropriation exceeded $4.1 billion.
    A key question the NPRM proposed to resolve was whether only LEA 
subgrant funds under section 611(g) of the Act or LEA subgrant funds 
and other Part B funding sources (i.e., subgrants to LEAs for capacity-
building and improvement under section 611(f), other funds the SEA may 
provide to LEAs under section 611(f) or preschool grant funds under 
section 619) would be affected by the 20 percent rule in section 
613(a)(2)(C) of the Act (Sec. 300.233 of the regulations).
    In the NPRM, we proposed that the 20 percent rule apply only to LEA 
subgrant funds under section 611(g) of the Act (Sec. 300.712 of the 
regulations), for the reasons described in the preamble to the NPRM. We 
believe that the position taken in the NPRM is the most appropriate and 
reasonable position to follow in implementing the 20 percent rule. 
Therefore, we have retained proposed Sec. 300.233(a)(1), without 
change, in these final regulations.
    There are only two significant differences between the NPRM and 
these final regulations:
     First, we have amended proposed Sec. 300.233(a)(3) (which 
provided that if funds are being withheld from an LEA, those funds 
would not be included in the 20 percent calculation) to clarify that if 
funds that have been withheld are subsequently released to the LEA, the 
LEA may apply the 20 percent rule to those funds.
     Second, we have added (in a new Appendix C to the 
regulations for Part 300) information to assist LEAs in implementing 
the 20 percent rule, including a full, substantive description of the 
provision (with examples) that is similar to the information contained 
in the Background section of the preamble to the NPRM.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, six parties 
submitted comments on the proposed regulations. An analysis of the 
comments and of the changes in the regulations since publication of the 
NPRM follows. In the analysis, we address substantive comments, but we 
do not address comments that are not directly relevant to these 
regulations.
    Comment: The comments generally acknowledged the need for having 
the proposed regulation, but were varied in their recommendations for 
change. With respect to which funds under section 611 of the Act apply 
in determining the amount of money that will be treated as local funds, 
one commenter agreed with the position in the NPRM (i.e., that the 
funds should be limited to LEA subgrants under section 611(g) 
(Sec. 300.712 of the regulations)). Two commenters recommended that the 
provision be expanded to also include funds for local capacity-building 
and improvement under section 611(f) of the Act (Sec. 300.622 of the 
regulations). Another commenter noted that States routinely flow 
through additional Part B (section 611) funds beyond the required LEA 
subgrants under section 611(g), and recommended that the regulations 
clarify that the 20 percent rule applies to all section 611 funds LEAs 
receive, including funds that are not retained by States for 
administrative purposes and other State-level activities specified 
under section 611(f).
    Discussion: We believe that the position taken in the NPRM--that 
the money that may be treated by LEAs as local funds under the section 
611 appropriation should be limited to statutory subgrant funds under 
section 611(g)--is the most appropriate and reasonable position to 
follow in implementing section 613(a)(2)(C) of the Act (Sec. 300.233 of 
the regulations). There were no compelling reasons presented by 
commenters to do otherwise. Therefore, we have retained proposed 
Sec. 300.233(a)(1), without change, in these final regulations. The 
reasons for taking this position were specified in the preamble to the 
NPRM (and are also included in a new Appendix C to these Part 300 
regulations). We believe that the regulations clearly indicate that, 
while States may provide additional funds to LEAs from their section 
611(f) set-aside, only section 611(g) funds are subject to the 20 
percent rule.
    Changes: None.

    Comment: A commenter noted that the NPRM did not indicate at what 
point in the year an LEA should make its calculation (e.g., at the 
beginning of the year or at another time), and added that the point in 
time when the determination is made could have an impact on the LEA, 
especially if the LEA has had funds withheld that are later restored. 
The commenter further requested that the background section from the 
NPRM be expanded to include more complex examples for calculating

[[Page 1475]]

the 20 percent formula, and to specify resources in the Department that 
LEAs might turn to for assistance in this regard.
    Discussion: The LEA may make its calculation--and spend the 20 
percent of the increase in the Federal grant as local funds--at any 
point from the time the LEA receives its grant under section 611(g) of 
the Act (Sec. 300.712 of the regulations), to the end of the period 
that these funds are available for obligation. Thus, if an LEA's 
Federal fiscal year 2001 funds were withheld at the beginning of a 
school year, but were subsequently released by the SEA on January 1, 
2002, the LEA could do the calculation and spend those funds any time 
between January 1, 2002 and September 30, 2003.
    We agree with the commenter's request for additional examples. We 
also believe that it is important to retain, on a permanent basis, the 
background section from the NPRM related to the 20 percent rule (along 
with the examples), so that school officials at both the State and 
local levels will have a technical assistance source to turn to 
regarding implementation of that provision. Thus, we have included the 
basic content of the background section in the NPRM (with examples) in 
a new Appendix C to the regulations for this part.
    With respect to providing technical assistance on the 20 percent 
rule at the Federal level, we believe that it would be more appropriate 
for LEAs to seek advice and guidance from the SEA within each State 
regarding implementation of the 20 percent rule, rather than directly 
seeking assistance from the Department. Because each SEA is responsible 
for monitoring an LEA's compliance with the Part B requirements 
(including the 20 percent rule), it would not be appropriate for the 
Department to provide direct assistance to individual LEAs on this 
provision. On the other hand, if the SEA, in assisting an LEA to apply 
the 20 percent rule, needs policy guidance regarding the provision, it 
would be appropriate for the SEA to contact the Department for that 
assistance.
    Changes: A new Appendix C has been added to the regulations, as 
described in the preceding discussion.

    Comment: One commenter stated that the preamble to the NPRM 
suggests that the 20 percent rule would be implemented beginning with 
fiscal year (FY) 2000, even though FY 1999 was the first year in which 
the section 611 appropriation exceeded $4.1 billion. The commenter 
added that the statutory authority relating to this provision was 
established by the IDEA Amendments of 1997, and, therefore, it would be 
inappropriate for the regulation to exclude the FY 1999 appropriation.
    Discussion: Because funds for FY 1999 had already been received 
(and, in many cases already obligated by LEAs), we believed that it 
would be inappropriate to apply this amendment to Sec. 300.233 
retroactively to FY 1999 funds). Therefore, we proposed to apply the 
amended regulation to FY 2000 funds and thereafter. In the NPRM, we 
should have definitively stated that the FY 1999 appropriation was not 
affected by the proposed regulations, and, therefore, States and LEAs 
could apply a broader interpretation of section 613(a)(2)(C) of the Act 
(Sec. 300.233 of the regulations) to the funds they received from that 
appropriation.
    Changes: None.

    Comment: A commenter disagreed with the interpretation of the year 
by year applicability of the 20 percent rule in the NPRM, and stated 
that the provision should apply throughout the entire period of 
appropriations availability, including the carryover year authorized by 
the Tydings Amendment. The commenter further recommended that the 
regulation be revised to allow for the 20 percent rule to be applied on 
a cumulative basis, so that (for example) if there is no increase in 
appropriations for FY 2002 from the prior year, an LEA that has not 
used the 20 percent rule in fiscal years 1999, 2000, and 2001 would be 
allowed to take advantage of the appropriations increases received in 
those prior years for local budgetary relief.
    Discussion: An LEA can take advantage of the 20 percent rule at any 
point throughout the period in which the LEA can use its section 611(g) 
funds, including the carryover year under the Tydings Amendment. (The 
Tydings Amendment allows States to obligate their grant funds for one 
additional year after the initial period of availability. See General 
Education Provisions Act, section 421.) However, there is no statutory 
authority to allow the provision to be applied on a cumulative basis. 
The Act makes it clear that the provision applies only on a year to 
year basis (i.e., section 613(a)(2)(C) specifies that, for any fiscal 
year for which the amounts appropriated to carry out section 611 
exceeds $4.1 billion, an LEA ``may treat as local funds * * * up to 20 
percent of the amount of funds it receives under this part that exceeds 
the amount it received under this part for the previous fiscal 
year.''). Emphasis added.
    Changes: None.

    Comment: A commenter stated that Sec. 300.233(a)(3) of the NPRM--
which provides that an LEA is not eligible to receive funds that have 
been withheld under Sec. 300.197 or Sec. 300.587--is overbroad, and 
ignores the fact that funds that have been withheld may subsequently be 
released when compliance has been achieved. The commenter recommended 
that the provision be deleted, noting, further, that it does not 
coincide with section 613(a)(2)(C)(ii) of the Act (Sec. 300.233(b) of 
the regulations), which provides that an SEA may prohibit an LEA from 
applying the 20 percent rule only if it is authorized to do so by State 
constitution or statute.
    Discussion: We agree with the commenter that proposed new 
Sec. 300.233(a)(3) does not appropriately reflect the requirements of 
the Act. It should have indicated that funds that have been withheld 
may subsequently be released when compliance has been achieved, and 
that the 20 percent rule may be applied to those funds during their 
period of availability. This is consistent with our intent in the NPRM. 
However, we continue to believe that it is necessary to provide 
guidance in this area.
    Upon further review of proposed Sec. 300.233(a)(3), we believe that 
it needs to be revised to clarify that during any period in which Part 
B funds are withheld from an LEA because of a finding of noncompliance 
under Sec. 300.197 or Sec. 300.587, the LEA may not implement the 20 
percent rule. However, if the funds are subsequently released to the 
LEA during the grant award period, the LEA may spend those funds 
consistent with the 20 percent rule.
    Changes: Section 300.233(c) has been amended, consistent with the 
preceding discussion.

Executive Order 12866

    We have reviewed these final regulations in accordance with 
Executive Order 12866. Under the terms of the order, we have assessed 
the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
we have determined as necessary for administering these programs 
effectively and efficiently. Elsewhere in this SUPPLEMENTARY 
INFORMATION section, we identify and explain any burdens specifically 
associated with the information collection requirements. See the 
heading Paperwork Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and

[[Page 1476]]

qualitative--of this regulatory action, we have determined that the 
benefits would justify the costs.
    We summarized the potential costs and benefits of these final 
regulations in the preamble to the NPRM (65 FR 30314).
    We have also determined that this regulatory action would not 
unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.

Regulatory Flexibility Act Certification

    The Secretary certifies that these final regulations will not have 
significant economic impact on a substantial number of small entities. 
The small entities affected will be small LEAs. The regulations will 
benefit the small entities affected by clarifying the statutory 
requirements and reducing the possibility of audit exceptions. By 
ensuring consistency, the regulations will promote more effective and 
efficient program administration.

Paperwork Reduction Act of 1995

    These final regulations do not contain any information collection 
requirements.

Intergovernmental Review

    This program is subject to the requirements of Executive Order 
12372 and the regulations in 34 CFR part 79. The objective of the 
Executive order is to foster an intergovernmental partnership and a 
strengthened federalism by relying on processes developed by State and 
local governments for coordination and review of proposed Federal 
financial assistance.
    In accordance with the order, we intend this document to provide 
early notification of our specific plans and actions for this program.

Federalism

    Executive Order 13132 requires us to ensure meaningful and timely 
input by State and local elected officials in the development of 
regulatory policies that have federalism implications. ``Federalism 
implications'' means substantial direct effects on the States, on the 
relationship between the National Government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government.
    Since these regulations relate solely to implementation of the 
statutory 20 percent rule, we do not believe these regulations have 
federalism implications as defined in Executive Order 13132. In 
addition, these regulations do not preempt State law. Accordingly, the 
Secretary has determined that these final regulations do not contain 
policies that have federalism implications or that preempt State law.

Assessment of Educational Impact

    In the NPRM, we requested comments on whether the proposed 
regulations would require transmission of information that any other 
agency or authority of the United States gathers or makes available.
    Based on the response to the NPRM and on our review, we have 
determined that these final regulations do not require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.

Electronic Access to this Document

    You may view this document, as well as all other Department of 
Education documents published in the Federal Register, in text or Adobe 
Portable Document Format (PDF) on the Internet at either of the 
following sites:

http://ocfo.ed.gov/fedreg.htm
http://www.ed.gov/news.html

To use the PDF you must have Adobe Acrobat Reader Program, which is 
available free at either of the previous sites. If you have questions 
about using the PDF, call the U.S. Government Printing Office (GPO), 
toll free, at 1-800-293-6498; or in the Washington, DC area, at (202) 
512-1530.

    Note: The official version of this document is the document 
published in the Federal Register. Free Internet access to the 
official edition of the Federal Register and the Code of Federal 
Regulations is available on GPO Access at:


http://www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number: 84.027 Assistance to 
States for the Education of Children with Disabilities)

List of Subjects

    Administrative practice and procedure, Education of individuals 
with disabilities, Elementary and secondary education, Equal 
educational opportunity, Grant programs-- education, Privacy, Private 
schools, Reporting and recordkeeping requirements.

    Dated: December 12, 2000.
Richard W. Riley,
Secretary of Education.

    For the reasons described in the preamble, the Secretary amends 
title 34, part 300, of the Code of Federal Regulations as follows:

PART 300--ASSISTANCE TO STATES FOR THE EDUCATION OF CHILDREN WITH 
DISABILITIES PROGRAM

    1. The authority citation for part 300 continues to read as 
follows:

    Authority: 20 U.S.C. 1411--1420, unless otherwise noted.

    2. Section 300.233 is amended by revising paragraph (a)(1), and by 
adding a new paragraph (a)(3), to read as follows:


Sec. 300.233  Treatment of Federal funds in certain fiscal years.

    (a)(1) Subject to paragraphs (a)(2), (a)(3), and (b) of this 
section, for any fiscal year for which amounts appropriated to carry 
out section 611 of the Act exceed $4.1 billion, an LEA may treat as 
local funds up to 20 percent of the amount of funds it is eligible to 
receive under Sec. 300.712 from that appropriation that exceeds the 
amount from funds appropriated for the previous fiscal year that the 
LEA was eligible to receive under Sec. 300.712.
* * * * *
    (3) For purposes of this section:
    (i)(A) An LEA is not eligible to receive funds during any period in 
which those funds under this part are withheld from the LEA because of 
a finding of noncompliance under Sec. 300.197 or Sec. 300.587.
    (B) An LEA is eligible to receive funds that have been withheld 
under Sec. 300.197 or Sec. 300.587 but are subsequently released to the 
LEA within the period of the funds availability.
    (ii) An LEA is not eligible to receive funds that have been 
reallocated to other LEAs under Sec. 300.714.

    3. Part 300 is further amended by adding a new Appendix C--
Implementation of the 20 Percent Rule under Sec. 300.233, to read as 
follows:

APPENDIX C TO PART 300--IMPLEMENTATION OF THE 20 PERCENT RULE UNDER 
Sec. 300.233

    This appendix is intended to assist States and LEAs to implement 
the ``20 percent rule'' under Part B (section 613(a)(2)(C)) of the 
Individuals with Disabilities Education Act (IDEA), and, 
specifically, the regulation implementing that provision in 
Sec. 300.233. The purposes of the appendix are to--(1) provide 
background information about the 20 percent rule and its intended 
effect, including specifying which funds under Part B of the Act are 
covered by the provision (as described in Sec. 300.233), and the 
basis for the Department's decision regarding those funds; and (2) 
include examples showing how the 20 percent rule would apply in 
several situations.

A. Background

    1. Purpose of 20 Percent Rule. The IDEA Amendments of 1997 (Pub. 
L. 105-17) added

[[Page 1477]]

a provision related to the permissive treatment of a portion of Part 
B funds by LEAs for maintenance of effort and non-supplanting 
purposes in certain fiscal years (see section 613(a)(2)(C) of the 
Act and Sec. 300.233). Under that provision, for any fiscal year 
(FY) for which the appropriation for section 611 of IDEA exceeds 
$4.1 billion, an LEA may treat as local funds, for maintenance of 
effort and non-supplanting purposes, up to 20 percent of the amount 
it receives that exceeds the amount it received under Part B during 
the prior year.
    Thus, under Sec. 300.233, an LEA is able to meet the maintenance 
of effort requirement of Sec. 300.231 and the non-supplanting 
requirement of Sec. 300.230(c) even though it reduces the amount it 
spends of other local or local and State funds, as the case may be, 
by an amount equal to the amount of Federal funds that may be 
treated as local funds.
    2. 20 Percent Rule Applies Only to LEA Subgrants. Following 
enactment of the IDEA Amendments of 1997 (and publication of Part B 
regulations on March 12, 1999), State and local educational agency 
officials stated that it is not clear from the Act and regulations 
whether the funds affected by the 20 percent rule are only those 
that an LEA receives through statutory subgrants under section 
611(g), or whether the provision also applies to other Part B 
funding sources (i.e., subgrants to LEAs for capacity-building and 
improvement under section 611(f)(4); other funds the SEA may provide 
to LEAs under section 611(f); or funds provided under section 619 
(Preschool Grants program)).
    Further, because section 613(a)(2)(C) refers to an amount of 
funds that an LEA ``receives'' in one fiscal year compared to the 
amount it ``received'' in the prior fiscal year (and because 
agencies may, at any one point in time, be using funds appropriated 
in several Federal fiscal years), agency officials were uncertain as 
to how to determine that an LEA had ``received'' Federal funds.
    Because the statute and regulations were not sufficiently clear 
with respect to which precise funds are affected by the 20 percent 
rule, this could have resulted in the provision being interpreted 
and applied differently from LEA to LEA. If that situation were to 
occur, it could result in a significant increase in the number of 
audit exceptions against LEAs.
    Given the confusion about which funding sources are affected by 
the 20 percent rule, there was a critical need to set out in the 
regulations a clear interpretation of section 613(a)(2)(C) in order 
to support its consistent application across LEAs and States, and to 
reduce the potential for audit exceptions. Thus, on June 10, 2000, 
the Department published a notice of proposed rulemaking (NPRM) 
regarding this provision (65 FR 30314). The NPRM stated that--
    In light of the statutory structure for distribution of Federal 
funds to LEAs, we believe that the most reasonable interpretation is 
to apply that provision only to subgrants to LEAs under section 
611(g) of the Act (Sec. 300.712 of the regulations) from funds 
appropriated from one Federal fiscal year compared to funds 
appropriated for the prior Federal fiscal year. (Emphasis added.)
    Thus, the NPRM proposed to exclude the other Federal funds under 
Part B of the Act (i.e., Subgrants to LEAs for capacity-building and 
improvement under section 611(f)(4) (Sec. 300.622); other funds the 
SEA may provide to LEAs under section 611(f) (Sec. 300.602); and 
preschool grant funds under section 619 (34 CFR part 301)) from the 
funds that could be treated as local funds. The reasons for 
excluding these other Part B funds were stated in the NPRM, as 
follows:
     If IDEA funds that States have the authority to provide 
to LEAs on a discretionary basis (such as those identified in the 
preceding paragraph) are included in the 20 percent calculation, it 
would result in some LEAs receiving a proportionately greater 
benefit from this provision than other LEAs, based on receipt of 
funds that may be earmarked for a specific, time-limited purpose. 
This would lead to inequitable results of the Sec. 300.233 exception 
across LEAs in a State.
     Including section 619 formula grant funds (34 CFR part 
301) in the calculation does not appear to be justified as the 
``trigger'' appropriation amount applies only with respect to the 
amount appropriated under section 611.
    The Department subsequently determined that the position taken 
in the NPRM (that the provision under Sec. 300.233 should apply only 
to LEA subgrant funds under section 611(g) of the Act) is the most 
appropriate and reasonable position to follow in implementing the 20 
percent rule. Therefore, the proposed provision in 
Sec. 300.233(a)(1) was retained, without change, in the final 
regulations.

B. Application of the 20 percent rule

1. Examples Related to Implementing the 20 percent rule

    The following are examples showing how the 20 percent provision 
would apply under several situations:
     Example 1: An LEA receives $100,000 in Federal LEA 
Subgrant funds under section 611(g) of the Act from the 
appropriation for one fiscal year (FY-1), and $120,000 in section 
611(g) funds from the appropriation for the following fiscal year 
(FY-2). The LEA may spend and treat as local funds up to 20 percent 
of the $20,000 in section 611(g) funds it receives from FY-2 (i.e., 
up to $4,000), since this is the amount that exceeds the amount it 
received from the prior year.
     Example 1-A:  In Example 1, an LEA in FY-2 is uncertain 
whether to exercise its option to treat as local funds during FY-2 
up to $4,000 of its section 611(g) funds received from FY-2, and 
wishes to wait until the carry-over year to make a decision. If the 
LEA decides to exercise its option during the carry-over period 
regarding the $4,000 from the FY-2 appropriation, it could do so as 
long as those funds are used within the carry-over period for FY-2.
     Example 1-B:  An LEA receives $100,000 in section 
611(g) funds from FY-1, $120,000 from FY-2 and $140,000 from FY-3. 
The LEA may spend and treat as local funds up to 20 percent of the 
$20,000 from FY-2 funds and $20,000 of FY-3 funds (i.e., up to 
$4,000 for each year). Thus, if its FY-2 funds are not used until 
FY-3, and the LEA so chooses, it may spend and treat as local funds 
during FY-3 a total of up to $8,000 in section 611(g) funds (i.e., 
$4,000 from FY-2 and $4,000 from FY-3), provided those funds are 
obligated by the end of FY-3.
     Example 2: An LEA from one fiscal year (FY-1) receives 
$100,000 in section 611(g) funds and $20,000 in SEA discretionary 
funds under section 611(f) of the Act; and from the following year 
(FY-2) receives $120,000 in section 611(g) funds, but does not 
receive any funds under section 611(f). The LEA may spend and treat 
up to 20 percent of the $20,000 in section 611(g) funds it receives 
from FY-2 (i.e. up to $4,000), since $20,000 is the amount of 
section 611(g) funds that exceeds the amount it received from FY-1.
     Example 3: An LEA had all of its section 611(g) funds 
($100,000) withheld from one fiscal year (FY-1); but in the next 
fiscal year (FY-2), the LEA received a total of $220,000 in section 
611(g) funds (i.e., $100,000 from FY-1, plus $120,000 from FY-2). 
Because the LEA would have been entitled to $100,000 in FY-1, the 
LEA may spend and treat as local funds up to 20 percent of the 
$20,000 from FY-2 that exceeded the FY-1 allotment (i.e., up to 
$4,000).
     Example 4: An LEA received $100,000 under section 
611(g) from one fiscal year (FY-1), and would have received $120,000 
in section 611(g) funds for the next fiscal year (FY-2); but the LEA 
has had all of its section 611(g) funds withheld in FY-2 because of 
a finding of noncompliance under Sec. 300.197 or Sec. 300.587. The 
LEA would have no section 611(g) funds that could be spent or 
treated as local funds until those funds are released.
     Example 4-A: In example 4, the SEA subsequently 
determines that the LEA is in compliance, and releases the FY-2 
funds to the LEA later in that fiscal year. The LEA could then spend 
and treat as local funds up to 20 percent of the $20,000 that 
exceeds the amount it received in FY-1 (i.e., up to $4,000). Those 
funds could be used by the LEA for the remainder of FY-2 and through 
the end of the carry-over period for FY-2 funding.

2. Auditing for Compliance with Sec. 300.231 and the 20 percent 
rule in Sec. 300.233

    The following provides guidance for use by auditors in 
determining if LEAs are in compliance with the maintenance of effort 
requirement in Sec. 300.231 and the 20 percent rule in Sec. 300.233:
    a. Meeting the Maintenance of Effort Requirement. In order to be 
eligible to receive an IDEA-Part B subgrant in any particular fiscal 
year, an LEA is required to demonstrate that it has budgeted an 
amount of State and local funds, or just local funds, to be spent on 
special education and related services that equals or exceeds (on 
either an aggregate or per capita basis) the amount of those funds 
spent by the LEA for those purposes in the prior fiscal year, or in 
the most recent prior fiscal year for which information is 
available. 34 CFR 300.231.
    b. Auditing Compliance with Sec. 300.231. Auditors, in 
determining if an LEA has complied with Sec. 300.231 in any 
particular fiscal year, review the actual level of expenditures of 
State and local funds, or just local funds, on special education and 
related services for the year in question and the prior

[[Page 1478]]

year. For example, consider an LEA that, in the LEA's FY-1, spent a 
total of $1,000,000 of local funds on special education and related 
services to serve 100 students with disabilities. (For this 
discussion, assume that the LEA does not receive any State funds for 
any year for special education and related services.) An auditor, in 
trying to determine if the LEA, in its FY-2, had complied with 
Sec. 300.231, would review the LEA's expenditure of local funds on 
special education and related services. If, in the LEA's FY-2, the 
LEA served 100 students with disabilities and spent $1,000,000 or 
more in local funds on special education and related services, it 
would have met the requirements of Sec. 300.231 for FY-2.
    c. Application of the 20 percent rule to 
Sec. 300.231. If the LEA in the preceding example had spent only 
$996,000 of local funds on special education and related services 
for its 100 students with disabilities in its FY-2 (not counting any 
section 611(g) subgrant funds that could be considered local funds 
under the 20 percent rule), then it would have failed to meet its 
obligation under Sec. 300.231, and an auditor would question $4,000 
of the LEA's IDEA-Part B subgrant expenditures in that year.
    This questioned cost, however, could be avoided, if the LEA had 
available, and spent, $4,000 of Federal funds under the 20 percent 
rule during its FY-2. These funds may be available from a variety of 
sources (see Examples in paragraph 1). If, as described in Example 1 
of paragraph 1 the LEA had received from the Federal FY-2 
appropriation, a section 611(g) subgrant that was $20,000 greater 
than the subgrant it received from the Federal FY-1 appropriation, 
then up to $4,000 of that subgrant could be treated as local funds. 
The LEA, however, would have to spend at least $4,000 of its Federal 
FY-2 section 611(g) subgrant during its FY-2 in order for those 
funds to count as part of its local expenditures for that year for 
purposes of Sec. 300.231.
    In this example, if the LEA had carried over all of its Federal 
FY-2 section 611(g) subgrant to the LEA's FY-3 (and thus did not 
spend any of those funds during its FY-2), then none of the section 
611(g) subgrant funds subject to the 20 percent rule could be 
considered as local funds for purposes of determining compliance 
with Sec. 300.231. (The reason for this is that auditors, in 
determining an LEA's compliance with Sec. 300.231, examine State and 
local, or local funds the LEA actually spent on special education 
and related services, and not those funds that the LEA could, but 
did not, spend for those purposes.)
    If the LEA, in its FY-2, spent $4,000 of its Federal FY-2 
section 611(g) subgrant, then the LEA could count those expenditures 
and bring itself into compliance with Sec. 300.231 (i.e., $996,000 
of the LEA's own local funds spent on special education and related 
services plus the $4,000 of Federal FY-2 section 611(g) funds that 
can be counted as local funds equals a total of $1,000,000 of local 
expenditures on special education in its FY-2--the amount of local 
expenditures needed to comply with Sec. 300.231). However, if the 
LEA elected to take this step, it could not count any of the Federal 
FY-2 section 611(g) subgrant funds that it will spend in its FY-3 as 
local funds.
    If the LEA, in its FY-2, spent only $3,000 of its Federal FY-2 
section 611(g) subgrant funds, then those funds could be counted by 
the LEA as local funds in calculating its compliance with 
Sec. 300.231 for its FY-2. If the remaining $1,000 of Federal FY-2 
funds available to be considered local funds were spent in the LEA's 
FY-3, those funds could be considered in determining the LEA's 
compliance with Sec. 300.231 for its FY-3. (Note, However, that if 
in its FY-2 the LEA had only spent $996,000 of local funds and 
$3,000 of its Federal funds, it would not have met the requirements 
of Sec. 300.231. In this case the auditor would have $1,000 of 
questioned costs ($1,000,000-[$996,000+$3,000]=$1,000) for FY-2).

[FR Doc. 01-431 Filed 1-5-01; 8:45 am]
BILLING CODE 4000-01-U