[Federal Register Volume 69, Number 110 (Tuesday, June 8, 2004)]
[Rules and Regulations]
[Pages 31883-31889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12827]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 61

RIN 2900-AL63


VA Homeless Providers Grant and Per Diem Program; Religious 
Organizations

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: This document adopts with changes the provisions of a proposed 
rule that revised the regulations concerning the VA Homeless Providers 
Grant and Per Diem Program (Program). Specifically, the proposed rule 
revised provisions that apply to religious organizations that receive 
Department of Veterans Affairs (VA) funds under the Program to ensure 
that VA activities under the Program are open to all qualified 
organizations, regardless of their religious character, and to clearly 
establish the proper uses to which funds may be put, and the conditions 
for the receipt of such funding.
    Consistent with Title VII of the Civil Rights Act of 1964, the 
proposed rule removed the regulatory prohibition against religious 
organizations making employment decisions on a religious basis; as such 
organizations do not forfeit that exemption when administering VA-
funded programs. Also, the proposed rule ensured that direct government 
funds are not used for inherently religious activities.

DATES: Effective Date: This final rule is effective on July 8, 2004.

FOR FURTHER INFORMATION CONTACT: Guy A. Liedke, VA Homeless Providers 
Grant and Per Diem Program, Mental Health Strategic Health Care Group 
(116E), Department of Veterans Affairs, 810 Vermont Avenue, NW., 
Washington, DC 20420; (877) 332-0334. (This is a toll-free number.)

SUPPLEMENTARY INFORMATION:

I. Background

    In a document published in the Federal Register on September 30, 
2003 at 68 FR 56426, we promulgated a proposed rule that would amend 
Sec.  61.64 of the regulations concerning the VA Homeless Providers 
Grant and Per Diem Program as explained in the SUMMARY portion of this 
document.
    We provided a 30-day comment period that ended October 30, 2003. We 
received comments from 13 commenters, of which nine were interest 
groups or civil or religious liberties organizations, two were 
individuals, one was a homeless veterans provider and one was a 
Congressman. We considered all comments in developing this final rule. 
Some of the comments generally supported the proposed rule; most were 
critical. The following is a summary of the comments, and VA's 
responses.

II. Comments and Reponses

Participation by Faith-Based Organizations in VA Programs

    Several commenters expressed appreciation and support for the 
Department's efforts to clarify the rules governing participation of 
faith-based organizations in its programs, one stating that ``[a]s a 
general matter we find the proposed regulations excellent and we 
enthusiastically support them.'' Another stated that it believed that 
the Sec.  61.64(a) provision that faith-based organizations are 
eligible on the same basis as any other organization to participate in 
VA programs should be maintained in the final rule. Further, several 
commenters were generally supportive of the President's Faith-Based and 
Community Initiative.
    However, some of those commenters, and others, disagreed with the 
proposed rule on the basis that it would allow Federal funds to be 
given to ``pervasively sectarian'' organizations. They maintained that 
the rule places no limitations on the kinds of religious organizations 
that can receive funds, and they requested that ``pervasively 
sectarian'' organizations be barred from receiving Department funds. 
Similarly, one commenter suggested that the proposed rule improperly 
allows direct grants of public funds to religious organizations in 
which religious missions overpower secular functions, and another 
suggested that it be revised to bar VA funding of programs that result 
in ``government-financed religious indoctrination.'' Another commenter 
``strongly oppose[d] all illegal and unconstitutional initiatives to 
use tax dollars for any form of faith based initiative.''
    We do not agree that the Constitution requires VA to distinguish 
between different religious organizations in providing funding under 
the Program. Religious organizations that receive direct VA funds may 
not use such funds for inherently religious activities. These 
organizations must ensure that such religious activities are separate 
in time or location from services directly funded by VA and must also 
ensure that participation in such religious activities is voluntary. 
Further, they are prohibited from discriminating against a program 
beneficiary on the basis of religion or a religious belief, and program 
participants that violate these requirements will be subject to 
applicable sanctions and penalties. The regulations thus ensure that 
there is no direct government funding of inherently religious 
activities, as required by current precedent. In addition, the Supreme 
Court's ``pervasively sectarian'' doctrine--which held that there are 
certain religious institutions in which religion is so pervasive that 
no government aid may be provided to them, because their performance of 
even ``secular'' tasks will be infused with religious purpose--no 
longer enjoys the support of a majority of the Court. Four Justices 
expressly abandoned it in Mitchell v. Helms, 530 U.S. 793, 825-829 
(2000) (plurality opinion), and Justice O'Connor's opinion in that 
case, joined by Justice Breyer, set forth reasoning that is 
inconsistent with its underlying premises, see id. at 857-858 
(O'Connor, J., concurring in judgment) (requiring proof of ``actual 
diversion of public support to religious uses''). Thus, six members of 
the Court have rejected the view that aid provided to religious 
institutions will invariably advance the institutions' religious 
purposes, and that view is the foundation of the ``pervasively 
sectarian'' doctrine. VA therefore believes that under current 
precedent, the Department may fund all service providers, without 
regard to religion and free of criteria that require the provider to 
abandon its religious expression or character.
    One commenter stated that the rule bans discrimination against 
faith-based providers who apply to participate in Department-funded 
programs, but not discrimination ``in favor of'' such providers. The 
commenter suggested that we prohibit discrimination both ``in

[[Page 31884]]

favor of'' and against faith-based providers. Similarly, another 
commenter suggested that the rule not give favorable treatment to 
religious organizations by exempting them from requirements applicable 
to secular organizations.
    We agree with the first commenter and have therefore modified the 
language of the final rule to address this concern and to clarify that 
the requirement of nondiscrimination applies to both VA and state or 
local officials administering Department funds. Section 61.64(a) of the 
final rule reads: ``Neither the Federal Government nor any state or 
local government receiving funds under any Department program shall, in 
the selection of service providers, discriminate for or against an 
organization on the basis of the organization's religious character or 
affiliation.'' Far from favoring religious organizations, the same 
subsection of the rule articulates that faith-based organizations are 
``eligible, on the same basis as any other organization.'' Rather the 
intent of the rule is to ensure that both secular and faith-based 
organizations receive equal treatment under the Program. We do note, 
however, that while the final rule does not permit discrimination 
either in favor of or against religious providers, nothing in the rule 
precludes those administering VA-funded programs from accommodating 
religious organizations in a manner consistent with the Establishment 
Clause.
    One commenter noted that by equating religious and non-religious 
providers and seeking to treat them as equals, VA fails to recognize 
the unique place that religion has in our society and in our 
constitutional scheme, and that religion should be above the fray of 
government funding, government regulation, and government auditing, not 
reduced to it.
    VA disagrees. This rule does not present any violation of the 
Establishment Clause or Free Exercise Clause of the First Amendment of 
the Constitution. Rather, this rule governs the conscious decision of a 
religious organization to administer regulated activities, by accepting 
public funds to do so. Therefore, we have retained language that 
enables faith-based organizations to compete on an equal footing for 
funding, within the framework of constitutional church-state 
guidelines.

Inherently Religious Activities

    Some commenters suggested that the proposed rule does not 
sufficiently detail the scope of religious content that must be omitted 
from government-funded programs. For example, one commenter suggested 
that the explanation given of ``inherently religious activities'' as 
``worship, religious instruction, or proselytization'' is unclear or 
incomplete. Relatedly, it was suggested that the proposed rule 
authorizes conduct that will impermissibly convey the message that the 
government endorses religious content. One commenter requested that the 
proposed rule be changed to make clear that the government may not 
disburse public funds to organizations that convey religious messages 
or in any way advance religion.
    VA disagrees with these comments. Concerning the rule's treatment 
of ``inherently religious'' activities, as the commenters' own 
submissions suggest, it would be difficult to establish an acceptable 
list of all inherently religious activities. Inevitably, the regulatory 
definition would fail to include some inherently religious activities 
or include certain activities that are not inherently religious. Rather 
than attempt to establish an exhaustive regulatory definition, with the 
exception of the editorial change noted below, VA has decided to retain 
the language of the proposed rule, which provides examples of the 
general types of activities that are prohibited by the regulations. 
This approach is consistent with Supreme Court precedent, which 
likewise has not comprehensively defined inherently religious 
activities. For example, prayer and worship are inherently religious, 
but VA-funded services do not become inherently religious merely 
because they are conducted by individuals who are religiously motivated 
to undertake them or view the activities as a form of ``ministry.'' As 
to the suggestion that the rule indicates that VA endorses religious 
content, it again merits emphasis that the rule forbids the use of 
direct government assistance for inherently religious activities and 
states that any such activities must be voluntary and separated, in 
time or location, from activities directly funded by VA. Finally, there 
is no constitutional support for the view that the government must 
exclude from its programs those organizations that convey religious 
messages or advance religion with their own funds. As noted above, the 
Supreme Court has held that the Constitution forbids the use of direct 
government funds for inherently religious activities, but the Court has 
rejected the presumption that religious organizations will inevitably 
divert such funds and use them for their own religious purposes. VA 
rejects the view that organizations with religious commitments cannot 
be trusted to fulfill their written promises to adhere to grant 
requirements.
    One commenter noted that VA omitted the phrase ``inherently 
religious activities'' in Sec.  61.64(b)(1), which prohibits use of 
direct VA financial assistance for certain religious activities, and 
noted that similar provisions in other agency faith-based regulations 
contained this language.
    VA agrees and has revised Sec.  61.64(b)(1) to read:

    (b)(1) No organization may use direct financial assistance from 
VA under this part to pay for any of the following:
    (i) Inherently religious activities such as, religious worship, 
instruction or proselytization * * *.

Voucher-Style Programs Under the Rule

    Some commenters claimed that the proposed rule authorizes a voucher 
program for religious organizations without instituting adequate 
constitutional safeguards and requested that the rule be revised to 
comply with the framework instituted by Zelman v. Simmons Harris, 536 
U.S. 639 (2002). These commenters stated that secular alternatives are 
not available in the social service context, eliminating the 
possibility of real choice by program beneficiaries. They requested 
that the proposed rule clearly state that beneficiaries have the right 
to object to a religious provider assigned to them, to receive a 
secular provider, and that they be given notice of these rights.
    VA respectfully declines to adopt the recommendations of the 
commenters, but has revised the final rule to more explicitly reflect 
the Court's holding in Zelman. First, VA does not currently operate any 
voucher-style programs, so the application of any regulations in this 
regard would be purely hypothetical. In addition, as the rule now 
states, any voucher-style programs offered by the VA will comply with 
Federal law, including current precedent. So that the rule better 
reflects current precedent VA has modified the final rule to include a 
new paragraph (g) that reads

    (g) To the extent otherwise permitted by federal law, the 
restrictions on inherently religious activities set forth in this 
section do not apply where VA funds are provided to religious 
organizations through indirect assistance as a result of a genuine 
and independent private choice of a beneficiary, provided the 
religious organizations otherwise satisfy the requirements of this 
Part. A religious organization may receive such funds as the result 
of a beneficiary's genuine and independent choice if, for example, a 
beneficiary redeems a voucher, coupon, or certificate, allowing the 
beneficiary to direct where funds are to be

[[Page 31885]]

paid, or a similar funding mechanism provided to that beneficiary 
and designed to give that beneficiary a choice among providers.

    VA thus believes that the final rule adequately addresses these 
commenters' constitutional concerns.

The ``Separate, in Time or Location'' Requirement

    One commenter stated that the provisions of Sec.  61.64(c), 
requiring inherently religious activities to be separate in time or 
location, should be maintained in the final rule. Others maintained 
that the proposed rule should be amended to clarify the ``separate, in 
time or location'' requirement. One commenter suggested that the 
requirement be strengthened to require activities be ``separate by both 
time and location.''
    VA declines to adopt the suggested revisions. As an initial matter, 
VA does not believe that the requirement is ambiguous or necessitates 
additional regulation for proper adherence. Where a religious 
organization receives direct government assistance, any inherently 
religious activities that the organization offers must simply be 
offered separately--in time or place--from the activities supported by 
direct government funds. As to the suggestion that the rule must 
require separation in both time and location, VA believes that such a 
requirement is not legally necessary and would impose an unnecessarily 
harsh burden on small faith-based organizations, which may have access 
to only one location that is suitable for the provision of VA-funded 
services.

Applicability of Rule to ``Commingled'' Funds

    One commenter noted that the term ``voluntarily contributes'' as 
used in proposed Sec.  61.64(f)--which stated that

    [i]f a State or local government voluntarily contributes its own 
funds to supplement Federally funded activities * * * if the funds 
are commingled, this provision applies to all of the commingled 
funds

--may lead to confusion over the applicability of the section to 
matching funds. The commenter suggested that paragraph (f) specifically 
provide that if a State or local government provides matching funds, 
then the provisions of this section shall apply to all of the funds 
whether or not commingled.
    VA believes that this section of the rule is sufficiently clear. As 
the rule states, when States and local governments have the option to 
commingle their funds with Federal funds or to separate State and local 
funds from Federal funds, Federal rules apply if they choose to 
commingle their own funds with Federal funds. Some Department programs 
explicitly require that Federal rules apply to state ``matching'' 
funds, ``maintenance of effort'' funds, or other grantee contributions 
that are commingled with Federal funds--i.e., are part of the grant 
budget. In these circumstances, Federal rules of course remain 
applicable to both the Federal and State or local funds that implement 
the program.
    Another commenter stated that under the proposed rule, a State or 
local government has the option to segregate the Federal funds or 
commingle them. The commenter requested that the Department mandate 
that State and local funds should be kept separate from any Federal 
funds.
    VA disagrees with this comment. As an initial matter, VA believes 
it would be inappropriate to require States and local governments to 
separate their own funds from Federal funds in the absence of a 
matching requirement or other required grantee contribution. Where no 
matching requirement or other required grantee contribution is 
applicable, whether to commingle State and Federal funds is a decision 
for the States and local governments to make.

Faith-Based Organizations and State Action

    One commenter claimed that there is a sufficient nexus between the 
organizations covered by the proposed regulation and the government, 
such that the organizations are state actors subject to constitutional 
requirements.
    VA disagrees with this comment. The receipt of government funds 
does not convert a non-governmental organization into a state actor 
subject to constitutional norms. See Rendell-Baker v. Kohn, 457 U.S. 
830 (1982) (holding that the employment decisions of a private school 
that receives more than 90 percent of its funding from the state are 
not state actions).

State and Local Diversity Requirements and Preemption

    Some commenters expressed concern that the proposed rule will 
exempt religious organizations from State and local diversity 
requirements or anti-discrimination laws. Further, commenters suggested 
that the proposed rule be modified to state that State and local laws 
will not be preempted by the rule.
    The requirements that govern funding under the VA Homeless 
Providers Grant and Per Diem Program (Program) do not address 
preemption of State or local laws. Federal funds, however, carry 
Federal requirements. No organization is required to apply for funding 
under these programs, but organizations that apply and are selected for 
funding must comply with the requirements applicable to the Program 
funds.

Religious Organizations' Display of Religious Art or Symbols

    Several commenters have disagreed with the provisions allowing 
religious organizations conducting VA-funded programs in their 
facilities to retain the religious art, icons, scriptures, or other 
religious symbols found in their facilities. These commenters contend, 
among other things, that such displays impermissibly foster the 
impression of Government support for the religious mission and will 
necessarily lead to indoctrination of beneficiaries.
    VA disagrees with these comments. A number of Federal statutes 
affirm the principle embodied in this rule. See, e.g., 42 U.S.C. 290kk-
1(d)(2)(B). In addition, a prohibition on the use of religious icons 
would make it more difficult for many faith-based organizations to 
participate in VA's Program than other organizations by forcing them to 
procure additional space. It would thus be an inappropriate and 
excessive restriction, typical of the types of regulatory barriers that 
this final rule seeks to eliminate. Consistent with constitutional 
church-state guidelines, a faith-based organization that participates 
in the Program will retain its independence and may continue to carry 
out its mission, provided that it does not use direct VA funds to 
support any inherently religious activities. Accordingly, this final 
rule continues to provide that faith-based organizations may use space 
in their facilities to provide VA-funded services, without removing 
religious art, icons, scriptures, or other religious symbols.

Religious Freedom Restoration Act

    Another commenter requested that VA include language in the 
regulation by way of notice that the Religious Freedom Restoration Act 
(``RFRA''), 42 U.S.C. 2000bb et seq., may also provide relief from 
otherwise applicable provisions prohibiting employment discrimination 
on the basis of religion. The commenter noted that, for example, the 
Department of Health and Human Services has recognized RFRA's ability 
to provide relief from certain employment nondiscrimination 
requirements in the final regulations it promulgated governing its 
substance abuse and mental health programs.
    VA notes that RFRA, which applies to all Federal law and its 
implementation, 42 U.S.C. 4000bb-3, 4000bb-2(1), is

[[Page 31886]]

applicable regardless of whether it is specifically mentioned in these 
regulations. Whether or not a party is entitled to an exemption or 
other relief under RFRA simply depends upon whether the party satisfies 
the requirements of that statute. VA therefore declines to adopt this 
recommendation at this time.

Recognition of Religious Organizations' Title VII Exemption

    A number of commenters expressed views on the proposed rule's 
repeal of the current rule's prohibition against primarily religious 
organizations discriminating in employment on the basis of religion. 
Two commenters agreed with the repeal of this prohibition, and one 
suggested that the proposed rule specifically provide that the Title 
VII exemption is not forfeited as a result of receiving VA funds.
    Others argued that it is unconstitutional for the government to 
provide funding for provision of social services to an organization 
that considers religion in its employment decisions. Some of these 
commenters either requested that the current prohibition be maintained 
or that the proposed rule be revised to prohibit employment 
discrimination based on religion for positions funded with VA 
assistance.
    VA disagrees with these objections to the rule's recognition that a 
religious organization does not forfeit its Title VII exemption when 
administering VA-funded services. As an initial matter, applicable 
statutory nondiscrimination requirements are not altered by this rule. 
Congress establishes the conditions under which religious organizations 
are exempt from Title VII; this rule simply recognizes that these 
requirements, including their limitations, are fully applicable to 
Federally funded organizations unless Congress says otherwise. As to 
the suggestion that the Constitution restricts the government from 
providing funding for social services to religious organizations that 
consider faith in hiring, that view does not accurately represent the 
law. As noted above, the employment decisions of organizations that 
receive extensive public funding are not attributable to the state, see 
Rendell-Baker v. Kohn, 457 U.S. 830 (1982), and it has been settled for 
more than 100 years that the Establishment Clause does not bar the 
provision of direct Federal grants to organizations that are controlled 
and operated exclusively by members of a single faith. See Bradfield v. 
Roberts, 175 U.S. 291 (1899); see also Bowen v. Kendrick, 487 U.S. 589, 
609 (1988). Finally, the Department notes that allowing religious 
groups to consider faith in hiring when they receive government funds 
is much like allowing a Federally funded environmental organization to 
hire those who share its views on protecting the environment--both 
groups are allowed to consider ideology and mission, which improves 
their effectiveness and preserves their integrity. Thus, the Department 
declines to amend the final rule to require religious organizations to 
forfeit their Title VII rights.

Discrimination on the Basis of Sexual Orientation

    One commenter objected to the ability of religious organizations to 
discriminate on the basis of sexual orientation.
    Although Federal law prohibits persons from being excluded from 
participation in VA services or subjected to discrimination based on 
race, color, national origin, sex, age, or disability, it does not 
prohibit discrimination on the basis of sexual orientation. We decline 
to impose additional restrictions by regulation.

Organizations That Discriminate

    One commenter stated that the proposed rule failed to take any 
steps to prevent government money from flowing to anti-Semite, racist, 
or bigoted organizations.
    VA disagrees. As discussed above, Federal law prohibits persons 
from being excluded from participation in VA services or subjected to 
discrimination based on race, color, national origin, sex, age, or 
disability.

Nondiscrimination in Providing Assistance

    Commenters have requested that the proposed rule include a 
provision protecting beneficiaries who object to the religious 
character of a grantee and a requirement that the government provide a 
secular alternative upon request. The commenters suggest language that 
not only protects beneficiaries ``on the basis of religion and 
religious belief,'' but also ``on the basis of religion, religious 
belief, a refusal to hold a religious belief, or a refusal to actively 
participate in a religious practice.'' One of these commenters 
suggested that the proposed rule prohibit religious discrimination 
against any person receiving assistance under the Program, either 
direct (grants) or indirect (vouchers). That commentator also suggested 
that the proposed rule prohibit providers from inquiring about a 
beneficiary's religious beliefs. One commenter understood the proposed 
regulation to forbid religious providers to compel participants to 
participate in religious activities even in a passive way. Another 
commenter recommended that the final rule specify that failure to 
participate in religious activities should not result in 
disqualification from, or reduction of one's chance to participate in, 
program activities in the future, or public beratement to remedy this 
lack of participation. One commenter requests that remedies and a 
grievance process be included in the proposed regulation for 
beneficiaries who do not voluntarily attend religious organization 
programs or who are not provided an adequate alternative.
    VA believes that the existing language prohibiting faith-based 
organizations from discriminating against program beneficiaries on the 
basis of ``religion or religious belief'' is sufficiently explicit to 
include beneficiaries who hold no religious belief. Such a prohibition 
is straightforward and requires no further elaboration. In addition, 
the rule provides that religious organizations may not use direct 
Federal funding from VA for inherently religious activities and that 
any such activities must be offered separately, in time or location, 
and must be voluntary for program beneficiaries. These requirements 
further protect the rights of program beneficiaries, for whom 
traditional channels of airing grievances are generally available.
    As to the rights of beneficiaries receiving indirect assistance, 
per the discussion on voucher style programs, we believe that the 
religious freedom of beneficiaries is protected by the guarantee of 
genuine and independent choice among providers. Such choice will ensure 
that any participation in religious activities is voluntary and that, 
regardless of religion, beneficiaries have access to government-funded 
services. Whether the context is direct or indirect assistance, 
therefore, beneficiaries may not be required to receive religious 
services to which they object: In the direct aid context, such 
activities must be voluntary and separate from the government-funded 
activities; in the indirect aid context, beneficiaries have a choice 
among providers and may choose a provider that does not integrate 
religion into its provision of services. We have modified the final 
rule to make clear that the nondiscrimination provision of part (e) of 
the rule applies to direct financial assistance.

Assurance/Notice Requirements

    One commenter suggested that the proposed rule retain the current 
requirement that religious organizations provide assurance that they 
will

[[Page 31887]]

conduct activities for which assistance is provided in a manner free 
from religious influences, while another suggested that all recipients, 
secular and religious, should be required to make this assurance. 
Further, several commenters suggested that the proposed rule require 
recipients to provide notice to beneficiaries at the outset of their 
receipt of services that participation in inherently religious 
activities is voluntary, or that their receipt of benefits may not be 
conditioned upon such participation.
    The final rule remains unchanged from the proposed rule on this 
matter. Each grantee must sign assurances certifying that the grantee 
will comply with the various laws applicable to recipients of Federal 
grants, including this final rule and its prohibition on the use of 
direct financial assistance from VA for inherently religious 
activities. Thus VA does not believe that the assurance, such as that 
which is being removed, is necessary for any type of organization.
    We also decline to require that religious organizations provide a 
notice to a beneficiary or potential beneficiary assuring that 
participation in religious activities would be entirely on a voluntary 
basis. We recommend that States and participating organizations work 
together to ensure that clients and potential clients have a clear 
understanding of the services offered by the organization, including 
any religious activities, as well as the organization's expectations 
and requirements. The requirement that participation be voluntary, 
however, is sufficient to address concerns about the religious freedom 
of program beneficiaries.
    VA believes that no additional requirements above and beyond those 
imposed on all participating organizations are needed. In issuing this 
rule, VA's general approach is that faith-based organizations are not a 
category of applicants or recipients who need additional requirements 
or oversight in order to ensure compliance with program regulations. 
Rather, VA believes that faith-based organizations, like other 
recipients of VA funds, fully understand the restrictions on the 
funding they receive, including the restriction that inherently 
religious activities cannot be undertaken with direct Federal funding 
and must remain separate from Federally funded activities. The 
requirements for use of funds under the Program apply to, and are 
binding on, all participants.

Oversight and Corporate Structure

    A few commenters also requested that the proposed rule require 
monthly reports and periodic site visits of faith-based recipients to 
ensure that Federal funds are not used to support inherently religious 
activities. Commenters also suggested that the rule should require 
religious organizations to establish separate 501(c)(3) corporations 
and/or separate accounts to receive VA funds to allow for proper 
oversight.
    VA declines to adopt these changes. VA currently subjects all 
grantee facilities and records to inspections ``at such times as are 
deemed necessary to determine compliance with the provisions of this 
part [61].'' 38 CFR 61.65. Hence it is unnecessary to subject religious 
organizations to additional inspections.
    Further, VA finds no basis for requiring greater oversight and 
monitoring of faith-based organizations than of other recipients simply 
because they are faith-based organizations. All program participants 
must be monitored for compliance with Program requirements, and no 
grantee may use VA funds for any ineligible activity, whether that 
activity is an inherently religious activity or a nonreligious activity 
that is outside the scope of the Program. Many secular organizations 
participating in the VA Program also receive funding from several 
sources (private, State, or local) to carry out activities that are 
ineligible for funding under the VA Program, e.g., permanent housing. 
The non-eligible activities are often secular activities but not 
activities eligible for funding under the VA Program. All recipients 
receiving funding from various sources and carrying out a wide range of 
activities must ensure through proper accounting principles that each 
set of funds is applied only to the activities for which the funding 
was provided. Applicable policies, guidelines, and regulations 
prescribe the cost accounting procedures that are to be followed in 
using VA funds. This system of monitoring is more than sufficient to 
address the commenters' concerns, and the amount of oversight of 
religious organizations necessary to accomplish these purposes is no 
greater than that involved in other publicly funded programs that the 
Supreme Court has upheld.
    Likewise, VA finds no basis to require religious organizations to 
establish separate corporations and/or separate accounts to receive VA 
funds. Further, such requirements would make it more difficult for many 
faith-based organizations to participate in VA's Program than other 
organizations by creating additional corporate governance and/or 
accounting burdens. They would thus be inappropriate and excessive 
requirements, typical of the types of regulatory barriers that this 
final rule seeks to eliminate.
    One commenter suggested that the rule define ``religious 
organization'' and ``faith-based organization'' by reference to the tax 
code in order to create clarity and consistency, and facilitate 
reporting rules for religious organizations receiving public funds that 
establish the same public accountability applicable to secular non-
profits. The same commenter stated that all recipients, faith-based and 
secular, should be required to qualify as 501(c)(3) corporations and to 
comply with the accounting standards established in OMB Circulars A-122 
and A-133.
    VA declines to adopt these suggestions. One of the objectives of 
this rule is to move away from unnecessary Federal inquiry into the 
religious nature, or absence of religious nature, of an applicant for 
VA funds. With respect to any applicant for VA funds, VA's focus should 
always be that (1) the applicant is an eligible applicant for a 
program, as ``eligible applicant'' is defined for that program; (2) the 
applicant meets any other eligibility criteria that the program may 
require; and (3) the applicant commits to undertake only eligible 
activities with VA funds and abide by all program requirements that 
govern those funds. Regardless of how an organization labels itself, it 
will be treated the same under the rule. As to public accountability, 
as discussed, VA has the right to inspect recipients' records related 
to assistance under the Program, and the public may obtain from VA 
through the Freedom of Information Act any documentation obtained in 
such investigations.
    Further, the regulations at this Part already require nonprofit 
recipients to qualify as 501(c)(3) or (c)(19) corporations, and require 
all recipients to comply with accounting standards of OMB Circulars A-
122 and A-133. 38 CFR 61.1, 61.12(b), 61.66.

III. Findings and Certifications

    Based on the rationale set forth in the proposed rule and our 
responses to comments on that rule, we are adopting the provisions of 
the proposed rule as a final rule with changes. This final rule is 
issued under authority of 38 U.S.C. 501, 2002, 2011, 2012, 2061, 2064, 
and 7721 note.

Paperwork Reduction Act

    This final rule does not contain any new collections of information 
under the Paperwork Reduction at Sec. Sec.  61.11, 61.15, 61.17, 61.20, 
61.31, 61.41, 61.51, 61.55 and 61.80. The Office of Management and 
Budget has assigned

[[Page 31888]]

control number 2900-0554 to the information collections. VA may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays this currently valid OMB 
control number.

Executive Order 12866

    Executive Order 12866 (as amended by Executive Order 13258) directs 
agencies to assess all costs and benefits of available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any one year). Executive Order 12866 requires that regulations be 
reviewed to ensure that they are consistent with the priorities and 
principles set forth in the Executive Order. The Department has 
determined that this rule is consistent with these priorities and 
principles. This rule is considered a ``significant regulatory action'' 
under the Executive Order (although not an economically significant 
regulatory action), and therefore has been reviewed by the Office of 
Management and Budget.

Regulatory Flexibility Act

    The Secretary hereby certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities 
as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601-
602. In all likelihood, only similar entities that are small entities 
will participate in the Homeless Providers Grant and Per Diem Program. 
The proposed rule would not impose any new costs, or modify existing 
costs, applicable to Department grantees. Rather, the purpose of the 
proposed rule is to remove policy prohibitions that currently restrict 
the equal participation of religious or religiously affiliated 
organizations in the Department's programs. Therefore, pursuant to 5 
U.S.C. 605(b), this final rule is exempt from the initial and final 
regulatory flexibility analysis requirement of sections 603 and 604.

Unfunded Mandates

    The Unfunded Mandates Reform Act requires, at 2 U.S.C. 1532, that 
agencies prepare an assessment of anticipated costs and benefits before 
developing any rule that may result in an expenditure by State, local, 
or tribal governments, in the aggregate, or by the private sector, of 
$100 million or more in any given year. This rule would have no such 
effect on State, local, or tribal governments, or the private sector.

Catalog of Federal Domestic Assistance Program

    The Catalog of Federal Domestic Assistance program number is 
64.024.

List of Subjects in 38 CFR Part 61

    Administrative practice and procedure, Alcohol abuse, Alcoholism, 
Day care, Dental health, Drug abuse, Government contracts, Grant 
programs-health, Grant programs-veterans, Health care, Health 
facilities, Health professions, Health records, Homeless, Mental health 
programs, Per-diem program; Reporting and recordkeeping requirements, 
Travel and transportation expenses, Veterans.

    Approved: May 28, 2004.
Anthony J. Principi,
Secretary of Veterans Affairs.

0
Accordingly, the proposed rule amending 38 CFR part 61 that was 
published in the Federal Register at 68 FR 56426 on September 30, 2003, 
is adopted as a final rule with the following changes.

PART 61--VA HOMELESS PROVIDERS GRANT AND PER DIEM PROGRAM

0
1. The authority citation for part 61 continues to read as follows:

    Authority: 38 U.S.C. 501, 2002, 2011, 2012, 2061, 2064, 7721 
note.

0
2. Revise Sec.  61.64 to read as follows:


Sec.  61.64  Religious organizations.

    (a) Organizations that are religious or faith-based are eligible, 
on the same basis as any other organization, to participate in VA 
programs under this part. In the selection of service providers, 
neither the Federal Government nor a state or local government 
receiving funds under this part shall discriminate for or against an 
organization on the basis of the organization's religious character or 
affiliation.
    (b)(1) No organization may use direct financial assistance from VA 
under this part to pay for any of the following:
    (i) Inherently religious activities such as, religious worship, 
instruction, or proselytization; or
    (ii) Equipment or supplies to be used for any of those activities.
    (2) For purposes of this section, ``indirect financial assistance'' 
means Federal assistance in which a service provider receives program 
funds through a voucher, certificate, agreement or other form of 
disbursement, as a result of the independent and private choices of 
individual beneficiaries. ``Direct financial assistance,'' means 
Federal aid in the form of a grant, contract, or cooperative agreement 
where the independent choices of individual beneficiaries do not 
determine which organizations receive program funds.
    (c) Organizations that engage in inherently religious activities, 
such as worship, religious instruction, or proselytization, must offer 
those services separately in time or location from any programs or 
services funded with direct financial assistance from VA, and 
participation in any of the organization's inherently religious 
activities must be voluntary for the beneficiaries of a program or 
service funded by direct financial assistance from VA.
    (d) A religious organization that participates in VA programs under 
this part will retain its independence from Federal, State, or local 
governments and may continue to carry out its mission, including the 
definition, practice and expression of its religious beliefs, provided 
that it does not use direct financial assistance from VA under this 
part to support any inherently religious activities, such as worship, 
religious instruction, or proselytization. Among other things, faith-
based organizations may use space in their facilities to provide VA-
funded services under this part, without removing religious art, icons, 
scripture, or other religious symbols. In addition, a VA-funded 
religious organization retains its authority over its internal 
governance, and it may retain religious terms in its organization's 
name, select its board members and otherwise govern itself on a 
religious basis, and include religious reference in its organization's 
mission statements and other governing documents.
    (e) An organization that participates in a VA program under this 
part shall not, in providing direct program assistance, discriminate 
against a program beneficiary or prospective program beneficiary 
regarding housing, supportive services, or technical assistance, on the 
basis of religion or religious belief.
    (f) If a State or local government voluntarily contributes its own 
funds to supplement Federally funded activities, the State or local 
government has the option to segregate the Federal funds or commingle 
them. However, if the funds are commingled, this provision applies to 
all of the commingled funds.
    (g) To the extent otherwise permitted by Federal law, the 
restrictions on inherently religious activities set forth in this 
section do not apply where VA funds are provided to religious

[[Page 31889]]

organizations through indirect assistance as a result of a genuine and 
independent private choice of a beneficiary, provided the religious 
organizations otherwise satisfy the requirements of this Part. A 
religious organization may receive such funds as the result of a 
beneficiary's genuine and independent choice if, for example, a 
beneficiary redeems a voucher, coupon, or certificate, allowing the 
beneficiary to direct where funds are to be paid, or a similar funding 
mechanism provided to that beneficiary and designed to give that 
beneficiary a choice among providers.

(Authority: 38 U.S.C. 501, 2002, 2011, 2012, 2061, 2064, 7721 note.)
[FR Doc. 04-12827 Filed 6-7-04; 8:45 am]
BILLING CODE 8320-01-P