[Federal Register Volume 81, Number 209 (Friday, October 28, 2016)]
[Proposed Rules]
[Pages 75006-75024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25831]
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LEGAL SERVICES CORPORATION
45 CFR Parts 1600, 1630, and 1631
Definitions; Cost Standards and Procedures; Purchasing and
Property Management
AGENCY: Legal Services Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Legal Services Corporation (LSC or Corporation) is issuing
this notice of proposed rulemaking to request comment on the
Corporation's proposed revisions to its Definitions and Cost Standards
and Procedures rules and the creation of a new part from LSC's Property
Acquisition and Management Manual (PAMM).
DATES: Comments must be submitted by December 27, 2016.
ADDRESSES: You may submit comments by any of the following methods:
Email: [email protected]. Include ``Parts 1630/1631
Rulemaking'' in the subject line of the message.
Fax: (202) 337-6519.
Mail: Stefanie K. Davis, Assistant General Counsel, Legal Services
Corporation, 3333 K Street NW., Washington, DC 20007, ATTN: Parts 1630/
1631 Rulemaking.
Hand Delivery/Courier: Stefanie K. Davis, Assistant General
Counsel, Legal Services Corporation, 3333 K Street NW., Washington, DC
20007, ATTN: Parts 1630/1631 Rulemaking.
LSC prefers electronic submissions via email with attachments in
Acrobat PDF format. LSC may not consider written comments sent via any
other method or received after the end of the comment period.
FOR FURTHER INFORMATION, CONTACT: Stefanie K. Davis, Assistant General
Counsel, Legal Services Corporation, 3333 K Street NW., Washington, DC
20007, (202) 295-1563 (phone), (202) 337-6519 (fax), [email protected].
SUPPLEMENTARY INFORMATION:
I. Regulatory Background of Part 1630 and the PAMM
The purpose of 45 CFR part 1630 is ``to provide uniform standards
for allowability of costs and to provide a
[[Page 75007]]
comprehensive, fair, timely, and flexible process for the resolution of
questioned costs.'' 45 CFR 1630.1. LSC last revised part 1630 in 1997,
when it published a final rule intended to ``bring the Corporation's
cost standards and procedures into conformance with applicable
provisions of the Inspector General Act, the Corporation's
appropriations [acts], and relevant Office of Management and Budget
(OMB) Circulars.'' 62 FR 68219, Dec. 31, 1997. Although the OMB
Circulars are not binding on LSC because LSC is not a federal agency,
LSC adopted relevant provisions from the OMB Circulars pertaining to
non-profit grants, audits, and cost principles into the final rule for
part 1630. Id. at 68219-20 (citing OMB Circulars A-50, A-110, A-122,
and A-133).
LSC published the PAMM in 2001 ``to provide recipients with a
single complete and consolidated set of policies and procedures related
to property acquisition, use and disposal.'' 66 FR 47688, Sept. 13,
2001. Prior to the PAMM's issuance, such policies and procedures were
``incomplete, outdated and dispersed among several different LSC
documents.'' Id. The PAMM contains policies and procedures that govern
both real and non-expendable personal property, but, with the exception
of contract services for capital improvements, the PAMM does not apply
to contracts for services. Id. at 47695. The PAMM's policies and
procedures were developed with guidance from the Federal Acquisition
Regulation at 48 CFR parts 1-52, federal property management
regulations, and OMB Circular A-110. Id. at 47688. The PAMM also
incorporates several references to provisions of part 1630 pertaining
to costs that require LSC's prior approval and the proper allocation of
derivative income. Id. at 47696-98 (containing references to 45 CFR
1630.5(b)(2)-(4), 1630.5(c), and 1630.12, respectively).
II. Impetus for This Rulemaking
Part 1630 and the PAMM have not been revised since 1997 and 2001,
respectively. Since then, procurement practices and cost-allocation
principles applicable to awards of federal funds have changed
significantly. For instance, in 2013, OMB revised and consolidated
several Circulars, including the Circulars LSC relied upon to develop
part 1630, into a single Uniform Guidance. 78 FR 78589, Dec. 26, 2013;
2 CFR part 200. OMB consolidated and simplified its guidance to
``reduce administrative burden for non-Federal entities receiving
Federal awards while reducing the risk of waste, fraud and abuse.'' 78
FR 78590, Dec. 26, 2013.
LSC has determined that it should undertake regulatory action at
this time for three reasons. The first reason is to account, where
appropriate for LSC, for changes in Federal grants policy. The second
reason is to address the difficulties that LSC and its grantees
experience in applying ambiguous provisions of Part 1630 and the PAMM.
Finally, LSC believes rulemaking is appropriate at this time to address
the limitations that certain provisions of both documents place on
LSC's ability to ensure clarity, efficiency, and accountability in its
grant-making and grants oversight practices.
III. Procedural History of This Rulemaking
In July 2014, the Operations and Regulations Committee (Committee)
of LSC's Board of Directors (Board) approved Management's proposed
2014-2015 rulemaking agenda, which included revising Part 1630 and the
PAMM as a priority item. On July 7, 2015, Management presented the
Committee with a Justification Memorandum recommending publication of
an Advance Notice of Proposed Rulemaking (ANPRM) to seek public comment
on possible revisions to Part 1630 and the PAMM. Management stated that
collecting input from the regulated community through an ANPRM would
significantly aid LSC in determining the scope of this rulemaking and
in developing a more accurate understanding of the potential costs and
benefits that certain revisions may entail. On July 18, 2015, the LSC
Board authorized rulemaking and approved the preparation of an ANPRM to
revise Part 1630 and the PAMM.
Pursuant to LSC's Rulemaking Protocol, on October 4, 2015, the
Committee voted to authorize publication of this ANPRM in the Federal
Register for notice and comment. The ANPRM was published on October 9,
2015, with a 45-day comment period closing on December 8, 2015. 80 FR
61142, Oct. 9, 2015. After receiving comments on the ANPRM, LSC sought
authorization from the Committee to conduct a series of rulemaking
workshops to obtain additional stakeholder input on the questions asked
in the ANPRM. The Committee authorized the workshops and publication of
a Federal Register notice announcing the topics to be discussed and
soliciting participants for the workshops. 81 FR 9410, Feb. 25, 2016.
LSC held workshops on April 20, May 18, and June 15, 2016, at its
headquarters in Washington, DC. The three topics discussed were:
Topic 1: Requirements of Other Funders--How do LSC's proposed
changes to its cost standards and procedures and property
acquisition and disposition requirements interact with the
requirements imposed by recipients' other funders, including the
requirements governing intellectual property created using various
sources of funding?
Topic 2: LSC's Proposals--In the ANPRM, LSC proposed to regulate
services contracts. LSC also proposed to require recipients to seek
prior approval of aggregate purchases of personal property,
acquisitions of personal and real property purchased or leased using
LSC funds, and disposal of real or personal property purchased or
leased using LSC funds.
Topic 3: Establishing Standards Based on the Office of
Management and Budget's (OMB) Uniform Guidance. LSC proposed to
establish minimum standards for recipients' procurement policies
based on the OMB Uniform Guidance. LSC also proposed to revise part
1630 for consistency with the Uniform Guidance, where appropriate.
81 FR 9410, 9411, Feb. 25, 2016. The participants in the workshops
were:
Steve Pelletier, Northwest Justice Project.
George Elliott, Legal Aid of Northwest Texas.
Dilip Shah, Legal Aid of Northwest Texas.
Steve Ogilvie, Inland Counties Legal Services.
AnnaMarie Johnson, Nevada Legal Services.
Shamim Huq, Legal Aid Society of Northeastern New York.
Patrick McClintock, Iowa Legal Aid Foundation.
Jonathan Asher, Colorado Legal Services.
Michael Maher, Legal Action of Wisconsin, Inc.
Frank Bittner, California Rural Legal Assistance, Inc.
Jose Padilla, California Rural Legal Assistance, Inc.
Diana White, Legal Aid Foundation of Metropolitan
Chicago.
Nikole Nelson, Alaska Legal Services Corporation.
Tracey Janssen, Alaska Legal Services Corporation.
Robin Murphy, National Legal Aid and Defender
Association.
All materials related to the workshops, including agendas, audio
recordings, and transcripts, are available at the rulemaking page for
part 1630 on LSC's Web site, http://www.lsc.gov/rulemaking-cost-standards-and-property-management-acquisition-and-disposal.
IV. Discussion of Proposed Changes
A. Part 1600
LSC proposes to add or revise several definitions to Chapter XVI.
First, LSC proposes to add a new definition for the terms Corporation
funds and LSC funds.
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LSC currently uses these terms interchangeably throughout Chapter XVI,
but does not define either term. LSC does define the term financial
assistance as ``annualized funding from the Corporation granted under
section 1006(a)(1)(A) for the direct delivery of legal assistance to
eligible clients.'' 45 CFR 1600.1. LSC uses this term in very few
places in Chapter XVI.
LSC believes that new definitions are necessary for three reasons.
The first is to account for the widespread use of the terms Corporation
funds and LSC funds throughout its regulations. The second is to
distinguish between appropriated funds granted by LSC, which generally
are governed by LSC's regulations, and private funds granted by LSC,
which must be used consistent with 45 CFR part 1610. The third reason
is to formalize LSC's longstanding policy that its regulations apply to
all grant awards that LSC makes to carry out the purposes of the Legal
Services Corporation Act, not just those grants described in the
definition of financial assistance.
In recent years, LSC has begun receiving funds from private sources
to make grants for specified purposes, not all of which are for the
delivery of legal assistance to eligible clients. For example, LSC
receives funding from the Arnold & Porter Foundation to make grants to
LSC recipients to support leadership development training. Grants made
through the G. Duane Vieth Leadership Development Program may be used
to pay for individuals in leadership positions at LSC grantees to
receive training, coaching, or other professional development in
nonprofit leadership skills. Because the funding for this program is
provided by a private foundation, it is not subject to LSC's
regulations, which govern only those grants made with funds that
Congress appropriated for the purpose of carrying out activities
authorized by the LSC Act.
Since 1996, Congress has placed restrictions on how funds it
appropriates to LSC may be used. In its annual directive, Congress does
not distinguish between funds appropriated to make grants to provide
legal assistance to eligible clients--Basic Field Grants--and funds
that LSC may use to make other types of grants authorized by the LSC
Act. At the current time, LSC uses the funds that Congress appropriates
to carry out the purposes of the LSC Act to make awards in the
following programs: (1) Basic Field Grants, (2) Technology Initiative
Grants, and (3) the Pro Bono Innovation Fund. In addition to these
grant programs, LSC uses recovered funds to award emergency relief
grants to grantees in areas with government-declared emergencies on an
as-needed basis. LSC historically has considered its regulations
applicable to all three grant programs and grants made with recovered
funds, as well as to any other funds that Congress occasionally
appropriates to LSC for the purposes of carrying out the LSC Act. An
example of the latter would be the 2013 supplemental appropriation to
``carry out the purposes of the Legal Services Corporation Act by
providing for necessary expenses related to the consequences of
Hurricane Sandy[.]'' Public Law 113-2, Div. A, Title X, Chap. 2, 127
Stat. 4, Jan. 29, 2013.
Against this background, LSC believes that it is necessary to
define the terms Corporation funds and LSC funds, rather than to revise
the regulations to replace those terms with the more limited term
financial assistance. LSC proposes to define these terms to mean ``any
funds appropriated by Congress to carry out the purposes of the Legal
Services Corporation Act of 1974, 42 U.S.C. 2996 et seq., as amended.''
LSC believes that the proposed definition accurately describes the
funds implicated by the use of these terms throughout Chapter XVI.
Second, LSC proposes to define the term non-LSC funds. LSC proposes
to define the term in reference to the new definition of Corporation
funds or LSC funds. LSC proposes this definition to make clear that the
term non-LSC funds has the same meaning throughout LSC's regulations.
B. Part 1630
Organizational note. LSC proposes to reorganize part 1630 into four
subparts. Subpart A will contain provisions generally applicable to all
of part 1630. These provisions include the purpose and definitions.
Subpart B will contain the sections governing the allocability and
allowability of costs charged to LSC grants. It will also set forth the
process that recipients should use to request prior approval for
certain classes of costs. Subpart C will contain the sections governing
questioned cost proceedings. In Subpart D, LSC will establish the rules
governing the closeout of an LSC grant when a recipient stops receiving
LSC funds. LSC believes that restructuring part 1630 in this way will
improve the organization and coherence of the rule.
Subpart A--General Provisions
Sec. 1630.1 Purpose. LSC proposes to make no changes to this
section.
Sec. 1630.2 Definitions. LSC proposes several revisions to this
section. LSC proposes to remove the definition of the term allowed cost
from Sec. 1630.2(a) as that term is not used in part 1630. LSC also
proposes to delete the definition of the term final action and remove
references to final action throughout part 1630 because the term does
not appear to have legal significance in this part. The remaining
definitions will be redesignated as appropriate.
LSC proposes to revise definitions that are currently taken from
the Inspector General Act, 5 U.S.C. Appx., as amended, to track the
Uniform Guidance issued by the Office of Management and Budget (OMB), 2
CFR part 200. LSC believes that the OMB-defined terms are more
appropriate in the context of LSC's cost standards and disallowance
procedures, which are more similar to an agency's standards and
procedures than to an inspector general's operations.
Sec. 1630.2(c) Disallowed cost. In addition to renumbering this
definition, LSC proposes to revise the definition to substantially
mirror the definition of disallowed cost contained in the Uniform
Guidance, 2 CFR 200.31.
Sec. 1630.2(d) Final written decision. LSC proposes to replace the
term management decision with the term final written decision.
Management decision was adopted from section 5(f)(5) of the Inspector
General Act, as the decision of an agency head ``concerning its
response to such findings and recommendations'' made in an audit report
issued by the agency's inspector general. For LSC's purposes, the
decision described is not a final decision made by LSC management.
Rather, the decision that this term refers to is made by an officer of
LSC below the President after reviewing the evidentiary record
supporting a staff determination that certain costs should be
disallowed. In addition to replacing the term, LSC proposes to redefine
the term to mean (1) the decision issued by the Vice President for
Grants Management after reviewing a recipient's response to a
questioned cost notice, or (2) that the notice of questioned costs will
become the final written decision after 30 days if the recipient does
not file a response.
Sec. 1630.2(e) Membership fees or dues. LSC proposes to adopt the
definition of this term from part 1627 in substantial part. As noted in
the April 20, 2015 NPRM, LSC proposed to relocate this section of part
1627 to part 1630 in order to limit the scope of part 1627 to the
oversight of subgrants. 80 FR 21692, 21698, Apr. 20, 2015. LSC proposes
to add a nonexclusive description of the types of fees or dues that
recipients may use LSC funds to pay. Such fees or dues include those
that an attorney must pay
[[Page 75009]]
to the highest court of a state or a bar organization acting on behalf
of the court or in another governmental capacity in order to practice
law in the jurisdiction.
Sec. 1630.2(f) Questioned cost. LSC proposes to revise this
definition to make clear that a questioned cost is one that LSC itself
is questioning. This definition was adopted from section 5(f)(1) of the
Inspector General Act. As currently drafted, the term indicates that
the Office of Inspector General, the General Accounting Office (now the
Government Accountability Office), and other authorized auditors may
also question costs. While it is true that any of those entities may
question costs, it is ultimately LSC's decision whether to issue a
notice of questioned costs. Additionally, LSC may question costs based
on information developed through its own oversight and program quality
activities or as a result of information received from the public or
whistleblowers. Finally, the text of existing Sec. 1630.5(a) provides
that LSC may question costs based on findings issued by the entities
listed in the existing definition of questioned costs. For these
reasons, LSC proposes to revise the definition of questioned costs.
Sec. 1630.3 Time. As part of the proposed reorganization of part
1630, LSC proposes to relocate existing Sec. 1630.13 to Sec. 1630.3
without change. This section prescribes the method for computing time
periods under part 1630.
Sec. 1630.4 Burden of proof. LSC proposes no changes to this
section.
Subpart B--Cost Standards and Prior Approval
Sec. 1630.5 Standards governing allowability of costs under LSC
grants or contracts. LSC proposes to redesignate existing Sec. 1630.3
as Sec. 1630.5 within Subpart B as part of the restructuring of part
1630. Except as described below, LSC proposes to make only technical
edits to this section.
LSC proposes to delete paragraph (a)(8) from this section. The
preamble to the 1986 final rule for part 1630 describes paragraph
(a)(8) as ``a standard federal provision to ensure that [matching funds
for federal grants] must be raised from a source other than the federal
treasury and taxpayer.'' 51 FR 29076, 29077, Aug. 13, 1986. Under
existing Sec. 1630.3(a)(8), recipients may use LSC funds to satisfy
the matching requirement of a federal grant program only if ``the
agency whose funds are being matched determines in writing that
Corporation funds may be used for federal matching purposes[.]'' LSC
introduced this language in response to comments expressing concern
that because LSC makes grants from appropriated funds, those grants
could not be used to match, for example, grants awarded by the
Administration on Aging within the U.S. Department of Health and Human
Services. Id. LSC's approach is unique in requiring recipients to
obtain a written determination from the agency whose grant the LSC
funds are intended to match that the LSC funds may be used to satisfy
the match. It is not clear from the regulatory history of the 1986
final rule why LSC believed it was appropriate for a different agency
to find that LSC's funds could be used to match the agency's funds in
order for the recipient to use LSC funds in that manner.
The 1986 preamble was correct that federal funds cannot be used to
satisfy the matching requirement of another federal grant unless
specifically authorized by law. See U.S. Government Accountability
Office, ``Principles of Federal Appropriations Law,'' 3rd Ed., Vol. II,
at 10-97 (Feb. 2006). But section 1005 of the Legal Services
Corporation Act states that, ``[e]xcept as otherwise specifically
provided in [the Act],'' LSC is not ``considered a department, agency,
or instrumentality, of the Federal Government.'' 42 U.S.C. 2996d(e)(1).
Therefore, LSC funds are not ``federal funds'' for matching purposes.
Several federal agencies, including the Department of the Treasury, the
Department of Justice, and the General Accountability Office, have
reached the same conclusion and do not consider LSC funds to be
``federal funds'' subject to federal grant policy. See, e.g.,
Department of Treasury Memorandum GLS-107648 (Mar. 26, 2011); U.S. Gen.
Accounting Office, Legal Services Corporation: Governance and
Accountability Practices Need to Be Modernized and Strengthened (2007).
Based on this language, LSC is reversing its prior policy with
respect to the use of LSC funds to match grants awarded by federal
agencies. LSC believes that recipients may use LSC grant funds to
satisfy cost-sharing or matching requirements of federal awards as long
as the funds are used consistent with LSC's governing statutes and
regulations. LSC is considering other mechanisms for communicating its
position on the use of LSC funds to satisfy cost-sharing or cost-
matching requirements to federal agency funders.
Sec. 1630.6 Prior approval. LSC proposes to redesignate existing
Sec. 1630.5, which lists costs requiring LSC's prior approval, as
Sec. 1630.6 with substantive changes. LSC proposes no changes to
paragraph (a) (Advance understandings.) or (c) (Duration.).
LSC proposes to simplify paragraph (b) and relocate all provisions
pertaining to prior approval for purchases and leases of personal
property, contracts for services, purchases of real estate, contracts
for capital improvements, and use of LSC funds to pay costs after the
cessation of an LSC grant. LSC proposes to relocate the provisions
governing prior approval of purchases and contracts to proposed part
1631. LSC also proposes to create a new Subpart D in part 1630 that
will establish the procedures for closing out an LSC grant, including
the use of LSC funds to complete the closeout process. Because LSC does
not permit applicants for funding to charge costs incurred prior to the
start date of the grant to LSC funds, LSC proposes to eliminate pre-
award costs from the list of costs for which recipients must seek prior
approval.
Consistent with the proposal to relocate the prior approval
provisions, LSC also proposes to eliminate existing Sec. 1630.6--
Timetable and basis for granting prior approval.
Finally, LSC proposes to redesignate newly transferred Sec. Sec.
1630.14 (Membership fees or dues), 1630.15 (Contributions), and 1630.16
(Tax-sheltered annuities, retirement accounts, and penalties) as
Sec. Sec. 1630.7-1630.9, respectively, with no changes.
Subpart C--Questioned Cost Proceedings
For readability and ease of reference, LSC proposes to split
existing Sec. 1630.7 into two discrete sections. Proposed Sec.
1630.10 will govern only LSC's initial decision to question costs, and
proposed Sec. 1630.11 will describe the process by which a recipient
may appeal a disallowed cost of $2,500 or more to the LSC President.
Finally, LSC proposes to redesignate existing Sec. Sec. 1630.8-1630.12
as Sec. Sec. 1630.12-1630.16 with only minor technical changes.
Sec. 1630.10 Review of questioned costs. LSC proposes to
redesignate Sec. 1630.7(a)-(d) as Sec. 1630.10(a)-(b) and (e)-(f),
respectively. In order to locate all provisions governing questioned
costs in one section, LSC proposes to move the second sentence of
existing Sec. 1630.4(b) to paragraph (c) of this section. In that
paragraph, LSC states that when it disallows a cost solely because the
cost is excessive, LSC will disallow only the amount that LSC has
determined is excessive.
LSC is proposing to eliminate the five-year lookback period within
which LSC may recover questioned costs. The LSC Act does not place any
temporal limitation on LSC's ability to recover
[[Page 75010]]
costs inappropriately charged by a recipient to its LSC grant. LSC
adopted the five-year period when it revised part 1630 in 1997. 62 FR
68219, 68226, Dec. 31, 1997. This requirement is located currently at
45 CFR 1630.7(b) and states that LSC must provide a recipient with
notice when LSC ``determines that there is a basis for disallowing a
questioned cost, and if not more than five years have elapsed since the
recipient incurred the cost[.]''
Since LSC first promulgated part 1630 in 1986, it has chosen to
limit the amount of time for which it may recover questioned costs from
a recipient. LSC adopted a six-year period in the original version of
Sec. 1630.7(b), which it shortened to five years in 1997. 51 FR 29076,
29083, Aug. 13, 1986 (1986 final rule); 62 FR 68219, 68226, Dec. 31,
1997 (1997 final rule). The preamble to the 1997 final rule contains
the most substantive discussion about LSC's intent regarding the
limitation. Initially, the Board proposed a three-year limitation
period on the recovery of questioned costs. 62 FR 68223. LSC Management
and the Office of Inspector General recommended that the Board adopt a
five-year period
on the grounds that a three-year time period might be too short to
enable the Corporation to fulfill its statutory obligation to follow
up on questioned costs which might arise during the course of a GAO
or OIG audit, or during a complaint investigation by Corporation
management. Such an audit or investigation might occur at the end of
the three-year period, and the time limitation in the proposed rule
would prevent the Corporation from following up on a questioned cost
finding.
Id. The Board accepted the recommendation and adopted a five-year
lookback period.
Based on its oversight experience in the intervening years, LSC has
come to the conclusion that limiting its ability to recover misspent
costs is not consistent with its duty to responsibly administer
appropriated funds. In LSC's experience, some misuses of funds are not
discovered within the five-year period, even though LSC conscientiously
reviews the reports and other documentation it requires recipients to
provide. In some cases, recipients have failed to represent uses of LSC
funds accurately, and those misrepresentations have come to LSC's
attention only through complaints to LSC itself or via the Office of
Inspector General. LSC also proposes to streamline the questioned costs
review procedure. In the current version of Sec. 1630.7, a recipient
has 30 days from the date it receives a questioned cost notice from LSC
to respond with evidence and an argument for why LSC should not
disallow the cost. 45 CFR 1630.7(c). If the recipient does not respond
within 30 days, LSC management must issue a second decision. LSC
believes that this second step is redundant. It places an unnecessary
administrative burden on LSC to confirm its own action in the absence
of a challenge by the recipient. LSC proposes to replace this step with
a new paragraph (d)(2), which states that if the recipient does not
respond within 30 days, the notice of questioned costs automatically
converts to LSC's final written decision.
Sec. 1630.11 Appeals to the President. LSC proposes to move
existing Sec. 1630.7(e)-(g) to Sec. 1630.11 with one substantive
change. LSC proposes to introduce paragraph (a)(2), which prohibits a
recipient from appealing a final written decision to the LSC President
when the recipient did not seek review of the initial notice of
questioned costs. In LSC's view, a senior manager with direct oversight
of the office that issues a notice of questioned costs should have the
first opportunity to review the evidence relating to the decision to
question costs for two reasons. First, reviews of questioned cost
notices may involve consultations with several offices within LSC, as
well as several rounds of engagement with the recipient to obtain all
of the information necessary to fairly consider the recipient's request
for review. Second, an intermediate level of review may provide the
recipient with the relief sought, reduce the amount of the costs LSC
proposes to disallow, or narrow the issues in dispute. The effort
needed to fully evaluate the recipient's defenses and narrow down the
amount and issues in dispute is better invested at an earlier,
lengthier stage in the process than during review by the President, who
is the ultimate decision-maker for the Corporation. The President has
only 30 days to make a decision on the recipient's appeal under Sec.
1630.11(c), compared to the 60 days provided for review at the senior
management stage in Sec. 1630.10(e).
Sec. 1630.12 Recovery of disallowed costs and other corrective
action. LSC proposes to redesignate existing Sec. 1630.8 to Sec.
1630.12 with only minor technical changes to reflect the removal of
final action from the rule.
Sec. 1630.13 Other remedies; effect on other parts. LSC proposes
to redesignate existing Sec. 1630.9 as Sec. 1630.13 with only minor
technical edits. LSC proposes to remove the references to denials of
refunding under part 1625 as obsolete. In paragraph (b), which
describes types of sanctions that are not equivalent to a disallowed
cost proceeding, LSC proposes to include limited reductions of funding
under part 1606. LSC added limited reductions of funding as an
enforcement mechanism in 2013. 78 FR 10085, Feb. 13, 2013.
LSC proposes to redesignate existing Sec. Sec. 1630.10
(Applicability to subgrants.); 1630.11 (Applicability to non-LSC
funds.); and 1630.12 (Applicability to derivative income.) to
Sec. Sec. 1630.13-16 without change.
Subpart D--Closeout Procedures
LSC proposes to create Subpart D to formalize its procedures to
close out grants whenever a recipient ceases to receive LSC funding.
LSC's closeout procedures are currently located on its Web site at
http://www.lsc.gov/orderly-conclusion-role-responsibilities-recipient-lsc-funds. LSC proposes to promulgate the procedures as rules in the
interest of formalizing and consolidating its grant requirements. The
procedures established in Subpart D reflect LSC's current process for
closing out grants.
Sec. 1630.17 Applicability. In this section, LSC proposes to
describe when the procedures of Subpart D apply. Cessation of LSC
funding may occur either voluntarily or involuntarily and may take
different forms. Changes requiring closeout of the LSC grant include
merger or termination with another LSC funding recipient, changes to
the recipient's current identity or status as a legal entity, or the
recipient's decision to stop receiving LSC grants. Involuntary
termination occurs when LSC decides to stop funding a recipient.
Terminations may occur during or at the end of a grant period.
Sec. 1630.18 Closeout plan; Timing. LSC proposes to require
recipients who stop receiving funding to provide LSC with a plan for
the orderly closeout of the grant. Recipients who are merging or
consolidating with another LSC recipient, changing legal status, or
opting out of further LSC grants must provide LSC with notice and the
closeout plan no less than 60 days prior to the change ending the
grant. If LSC involuntarily terminates a recipient's funding, the
recipient must provide LSC with the closeout plan no more than 15
business days after receiving the notice of termination from LSC.
LSC proposes to maintain the required elements of a closeout plan
on its Web site and to provide recipients with a link to the relevant
page in the grant award documents. Currently, LSC provides the link in
the annual grant assurances that recipients must sign. LSC proposes to
continue this practice, which is similar to the approach that
[[Page 75011]]
LSC has taken in other rules that require compliance with statutes or
policies that may be updated without needing to go through the
regulatory process. For example, when LSC updated 45 CFR part 1640--
Application of Federal Law to LSC Recipients in 2015, it undertook an
obligation to post and maintain the list of applicable federal laws on
its Web site. 80 FR 21654, 21655, Apr. 20, 2015. LSC believes this
approach is desirable because it allows LSC the flexibility to change
the information it needs to ensure that grants are closed out properly
without having to engage in rulemaking.
Sec. 1630.19 Closeout costs. In this section, LSC proposes to
formalize its policies for approving the use of LSC funds to complete
closeout activities. Recipients must submit a detailed budget and
timeline for completing the activities described in the closeout plan.
LSC must approve both the budget and the proposed timeline before
closeout activities may begin. In paragraphs (b) and (c) LSC proposes
to restate its policy of withholding any unreleased funds until the
recipient has satisfactorily completed all closeout activities.
Sec. 1630.20 Returning funds to LSC. In new Sec. 1630.20, LSC
proposes to formalize the procedures for recipients to return to LSC
excess fund balances and derivative income received after the end of
the LSC grant period. The procedure for returning derivative income
described in paragraph (b) applies only to derivative income
attributable to work performed by the recipient during the term of and
attributable to work funded by the LSC grant.
C. Part 1631
In the ANPRM, LSC asked for comments on whether the PAMM should
remain a separate manual or be incorporated into Chapter XVI of the
Code of Federal Regulations as an official rule. Only the National
Legal Aid and Defender Association (NLADA) responded to this item,
recommending against codifying the PAMM as a rule. NLADA stated that
making the PAMM into a rule would ``deprive LSC of flexibility and
impose rigid rules on LSC and the programs in an ever-evolving delivery
system where modifications will need to be made.'' Instead, NLADA
advocated that LSC publish a regulation that provides ``a very general
description of the overall guidelines with references to a resource
that consolidates the LSC Accounting Guide, Property Management Guide
and other LSC documents with fiscal, property and accounting
policies.''
As indicated in the ANPRM, LSC believes that incorporating the PAMM
into Chapter XVI of the Code of Federal Regulations will ``promote and
preserve the effectiveness and consistency of LSC's property
acquisition, use, and disposal policies and procedures.'' 80 FR 61142,
61142, Oct. 9, 2015. The LSC Act requires LSC to publish all rules,
regulations, and guidelines for public comment, and to publish all
rules, regulations, guidelines, and instructions in the Federal
Register for 30 days prior to their effective date, which deprives LSC
of flexibility to make changes quickly to even informal grants
administration guidelines and instructions. In fact, the PAMM itself
was published after a notice and comment process, even though it is not
a formal rule. 66 FR 47688, Sept. 13, 2001.
LSC thus proposes to introduce a new procurement and property
management rule at 45 CFR part 1631. The new part 1631 will draw
substantially from the existing PAMM, but will differ from the PAMM in
three significant respects. First, LSC proposes to require that
recipients adopt policies for making purchases with LSC funds. Second,
LSC proposes to expand the rule to include contracts for services made
with LSC funds. Lastly, LSC proposes to restructure the PAMM into five
discrete subparts: Subpart A--General Provisions; Subpart B--
Procurement Policies and Procedures; Subpart C--Personal Property
Management; Subpart D--Real Estate Acquisition and Capital
Improvements; and Subpart E--Real Estate Management. LSC proposes this
restructuring to improve the coherence and usability of the rule.
Subpart A--General Provisions
Sec. 1631.1 Purpose. LSC proposes to describe the purpose of part
1631 as twofold: (1) Setting standards for policies governing the
purchase of property, including real estate, or contracts for services
with LSC funds; and (2) establishing the requirements governing the use
and disposition of property purchased with LSC funds.
Sec. 1631.2 Definitions. LSC proposes to adopt several definitions
from the PAMM into part 1631. LSC also proposes to add new definitions.
Sec. 1631.2(a) Capital improvements. LSC proposes to adopt the
definition of this term from the PAMM with technical changes for ease
of readability.
Sec. 1631.2(b) LSC property interest agreement. LSC proposes to
adopt the PAMM definition of this term with only technical changes.
Sec. 1631.2(c) Personal property. LSC proposes to simplify the
PAMM definition of this term to mean any property other than real
estate. LSC intends the revised definition to include both expendable
property (e.g., supplies) and non-expendable property (e.g., equipment,
furniture, law books). LSC believes this change is appropriate for
several reasons. First, LSC is proposing to require recipients to
establish procurement policies that apply to all purchases of property,
so that continuing to exclude supplies (expendable property) from the
definition no longer makes sense. Second, and similarly, LSC is
proposing to require recipients to seek prior approval for all
purchases of personal property that exceed a specific dollar threshold.
LSC does not believe it is appropriate to distinguish between
expendable and non-expendable personal property under this proposal.
Sec. 1631.2(d) Purchase. LSC proposes to revise this definition
for simplicity and to include contracts for services.
Sec. 1631.2(3) Quote. LSC proposes to adopt the PAMM definition of
this term with only minor technical changes.
Sec. 1631.2(f) Real estate. LSC proposes to revise the PAMM
definition of the term real property for clarity. LSC does not intend
the change from ``land, buildings, and appurtenances, including capital
improvements thereto, but not including moveable personal property'' in
the existing PAMM to limit, narrow, or expand the scope of property
captured by the revised definition.
Sec. 1631.2(g) Services. Because LSC is proposing to expand the
scope of the PAMM to include contracts for services, LSC believes it is
necessary to define the types of services it intends to regulate. LSC
proposes to adopt a definition of services that reflects how the term
is used in the Uniform Guidance, particularly 2 CFR 200.431 and
200.459.
LSC proposes to define services as those professional and
consultant services provided to a recipient by members of a particular
profession or individuals having a specific skill who are not employees
of the recipient. Such individuals would include, but are not limited
to, management consultants, payroll administrators, custodians,
plumbers, and computer maintenance personnel. LSC does not, however,
propose to include fringe benefits, such as health insurance, pensions,
and unemployment benefits, within the scope of services regulated by
part 1631.
During the rulemaking workshops, several commenters identified an
issue that LSC had not considered when drafting the NPRM. Those
commenters noted that their largest contracts for services were
contracts with their employee insurance providers or
[[Page 75012]]
insurance brokers. They expressed concerns that (1) the process of
obtaining bids and negotiating terms with health insurance providers is
a time-sensitive process that would be complicated by having to
simultaneously engage in a prior approval process with LSC; (2) their
health insurance was provided by the county in which their offices were
located and it was not possible for them to negotiate terms with the
government agency providing the benefits; (3) there is only one
provider in the area, so it is not possible to obtain multiple quotes
for insurance; and (4) they use a healthcare administrator to handle
employee claims for benefits. See, e.g., Transcript of April 20, 2016
Rulemaking Workshop, at 67-68 (comments of Steve Pelletier), 69
(comments of AnnaMarie Johnson); Transcript of May 18, 2015 Rulemaking
Workshop, at 55-56 (comments of Steve Pelletier), 63-64 (comments of
Diana White). When LSC proposed to regulate services contracts, it did
not consider whether employee benefits were services that should be
subject to part 1631. After the commenters raised the concern that
employee benefits could be covered by the proposed rule, LSC considered
the issue and determined that employee benefits are not the type of
services over which LSC intended to increase its oversight.
Consequently, LSC proposes to exclude contracts for employee benefits
from the definition of services. LSC notes that contracts for employee
benefits are subject to the reasonable and necessary standard of part
1630 for costs charged to the LSC grant.
Sec. 1631.2(h) Source. LSC proposes to adopt the PAMM definition
of this term with technical changes to reflect the inclusion of
contracts for services within part 1631.
Sec. 1631.3 Prior approval process. LSC proposes to relocate the
provisions governing the timetable and basis for granting prior
approval from existing Sec. 1630.6 to new Sec. 1631.3. LSC proposes
to require recipients to obtain prior approval for (1) all purchases
and leases of personal property, (2) contracts for services, and (3)
capital improvements when the cost of any of those transactions exceeds
$25,000 of LSC funds. LSC also proposes to increase the prior approval
threshold. Currently, the prior approval threshold in the PAMM is
$10,000. LSC established this threshold when it revised part 1630 in
1986. 51 FR 29076, 29082, Aug. 13, 1986. In its comments on the ANPRM,
Northwest Justice Project (NJP) encouraged LSC to increase this
threshold to $25,000 to account for inflation in the intervening years.
LSC agrees that an increase in the threshold is appropriate. Consistent
with NJP's recommendation and reasoning, LSC proposes to increase the
prior approval threshold to $25,000.
LSC proposes to expand the prior approval process to include
contracts for services and all purchases of personal property, whether
the purchase is for a single item or multiple items, exceeding the
$25,000 threshold. Throughout the initial stages of this rulemaking,
commenters opposed the potential application of the prior approval
requirement to contracts for services. In its response to the ANPRM,
NLADA stated that its members ``strongly oppose prior approval of
service contracts.'' NLADA observed that recipients need the
flexibility to make rapid decisions about how to address, for example,
a computer system crash. NLADA also asserted that whatever policy LSC
adopted should allow recipients to enter into sole-source contracts for
reasons other than exigent circumstances. As examples, NLADA discussed
the situations where a recipient purchases hardware or software form a
vendor that includes routine maintenance, or the service is a specialty
service for which only one vendor is available in the recipient's area.
NLADA concluded that ``[s]ound fiscal policies and internal controls
will promote clarity, efficiency, and accountability while not unduly
burdening the recipient.''
Workshop panelists discussed the problems with expanding the prior
approval requirement to both contracts for services and aggregate
purchases of property. Like NLADA, panelists discussed the need to
react quickly in emergency situations, which generally makes prior
approval impractical as well as impossible. See, e.g., Transcript of
April 20, 2016 Workshop at 72-73 (statement of AnnaMarie Johnson); May
18, 2016 Workshop at 57-58 (statement of Jonathan Asher), 69-71
(statement of Jose Padilla). Panelists also observed that some
situations in which they must contract for services, such as labor-
management negotiations or mediating employment issues, are sensitive
situations in which is it inappropriate for LSC to weigh in on the
recipient's choice of contractor. See Transcript of May 18, 2016
Workshop at 57 (statement of Jonathan Asher), 59-63 (statement of Jose
Padilla), 67-69 (statement of Jonathan Asher), 69-72 (statement of Jose
Padilla).
Panelists opined as well on the issue of prior approval of
aggregate purchases. Several panelists expressed concern that the
concept of aggregate purchases was ambiguous, with respect to both
timing--did LSC mean a purchase of multiple items occurring at one
time, or several purchases of the same type of item over a certain
period?--and nature--do all items in the purchase have to be the same,
or would aggregate purchase include a copier and all of the accessories
needed to operate it?--of the purchase. See, e.g., Transcript of April
20, 2016 Workshop at 53-54 (statements of Steve Pelletier and George
Elliott), 62-65 (statement of Jonathan Asher), 70-71 (statement of
George Elliott), 72-73 (statement of Michael Maher); Transcript of May
18, 2016 Workshop at 13-14 (statement of Jonathan Asher). Panelists
discussed and questioned the value of obtaining prior approval for
regular purchases of supplies throughout the course of the year, in
contrast to obtaining prior approval for major purchases that they have
planned for. See Transcript of May 18, 2016 Workshop at 20-22
(statements of Shamim Huq and Steve Pelletier). One panelist calculated
the amount of time that would be required of his staff if LSC were to
implement a prior approval requirement for all purchases of personal
property at the current threshold of $10,000. He stated that based on
his organization's purchasing patterns, his staff would need to put in
an additional 105 work hours to comply with such a requirement. See
Transcript of April 20, 2016 Workshop at 59 (statement of Shamim Huq).
LSC understands recipients' need to react quickly to prevent or
mitigate damage caused by unexpected crises. To address that concern,
LSC proposes to allow recipients to purchase personal property or
contract for services without first seeking prior approval in limited
emergency circumstances. Proposed Sec. 1631.3(d)(1) permits a
recipient to use more than $25,000 in LSC funds to obtain personal
property or services when the purchase is necessary to avoid imminent
harm to, remediate, or mitigate damage to the recipient's personnel,
physical facilities, or systems. Under proposed Sec. 1631.3(d)(2), the
recipient would have to provide LSC with the information it normally
would submit as a request for prior approval within a reasonable time
after the situation requiring the emergency purchase or contract has
ended.
Regarding contracts for labor counsel, mediators, or other services
needed to address sensitive personnel issues, LSC observes that
recipients do not need to disclose in the prior approval request the
nature of the problems they are attempting to address. LSC proposes to
require only that recipients describe how the services will further
their legal service delivery. In these circumstances,
[[Page 75013]]
a statement that the service is necessary to ensure the efficient
functioning of the office may satisfy that requirement. Additionally,
LSC notes that at the current time, contracts for services are subject
to 45 CFR part 1630. Part 1630 requires that recipients document that
any costs charged to the LSC grant are incurred in the performance of
the grant, reasonable and necessary for the performance of the grant,
and allocable to the grant. 45 CFR 1630.3(a)(1)-(3). Requiring prior
approval for service contracts does nothing more than give LSC the
ability to oversee costs recipients intend to use LSC funds to pay
prior to the costs being incurred, rather than after. Prior approval
may prevent the funds from being misspent, whereas an after-the-fact
review of the cost could lead to sanctions, disallowed costs,
suspension, or termination, depending on the magnitude of the
wrongdoing. All of these after-the-fact proceedings are time consuming
for both LSC and the recipient and do not prevent the misuse of funds.
LSC believes that for large purchases or contracts, regardless of the
nature of the property or service involved, prior approval is a more
effective tool for preventing fraud, waste, and abuse than post hoc
review.
Finally, with respect to aggregate purchases of property, LSC
believes that the proposals to require recipients to adopt procurement
policies and to seek prior approval for purchases and contracts using
$25,000 or more of LSC funds will eliminate the ambiguities and burdens
identified by commenters. The proposed rule makes clear that recipients
must seek prior approval for any single purchase whose cost exceeds
$25,000 in LSC funds, regardless of whether that purchase is of a
single item of personal property, several unrelated items of personal
property, or a combination of personal property and services.
Additionally, the proposed increase of the threshold to $25,000 will
relieve recipients of the burden of seeking prior approval for
relatively small purchases of personal property.
LSC specifically requests comment on the number of purchases
recipients have made in the preceding five years for which they would
have had to seek prior approval under the new threshold, including
purchases of services. LSC believes that the proposed $25,000 threshold
is appropriate as it corresponds to inflation over the 30-year period
since LSC adopted the current $10,000 threshold. Recipients, however,
are in the best position to provide information regarding the impact
that LSC's proposals to both increase the prior approval threshold and
require recipients to seek prior approval of all purchases exceeding
the proposed threshold are likely to have.
LSC proposes to simplify the procedure described in current Sec.
1630.7 by committing to make a decision or inform the requester of the
date by which LSC expects to make a decision within a specific time
frame. For purchases or leases of personal property, contracts for
services, or capital improvements, LSC will make a decision or give
notice of the date by which it expects to make a decision within 30
days of receiving the request. For purchases of real estate, the time
frame for decision or notice is 60 days.
Finally, as LSC did in the revisions to part 1627, LSC is
eliminating language that suggests recipients may incur costs without
receiving prior approval if LSC has not made a decision within the
regulatory time frame. LSC does not believe that responsible grants
administration practices should permit the expenditure of large amounts
of LSC funds without LSC's prior approval. At the same time, LSC
commits itself to making a decision or communicating the anticipated
decision date to the requester within the time frames specified in
Sec. 1631.3(b).
Sec. 1631.4 Effective date and governing regulations. In this
section, LSC proposes to require that the provisions of part 1631 apply
to all purchases of real estate, purchases and leases of personal
property, and contracts for services occurring after the effective date
of part 1631. LSC also proposes to make Subparts A (General
Provisions), C (Personal Property Management), and E (Real Estate
Management) applicable to all personal property leased or purchased
with LSC funds and real estate leased or owned by recipients on the
effective date of part 1631. LSC recognizes that recipients will need
time to develop procurement policies and procedures, obtain insurance
for real property, and ensure that real estate leased or purchased with
LSC funds meets the new maintenance standards. LSC therefore proposes
to require that recipients comply no later than 90 days after the
effective date of part 1631. LSC specifically seeks comment on whether
90 days is the appropriate transition period to come into compliance.
Sec. 1631.5 Use of funds. Sections 6 and 7 of the PAMM require
recipients and former recipients of LSC funds to repay LSC for its
contributions to purchases of personal property or real estate in
certain circumstances. Both sections have paragraphs stating that LSC
will use funds repaid upon disposition of property purchased in whole
or in part with LSC funds to make emergency and special grants. Because
the provisions have the exact same language, LSC proposes to
consolidate them in Sec. 1631.5 with only minor changes to reflect the
consolidation.
Sec. 1631.6 Recipient policies, procedures, and recordkeeping. LSC
proposes to require recipients to adopt written policies and procedures
implementing part 1631. LSC also proposes to require that recipients
maintain documentation sufficient to demonstrate compliance with this
part. The documentation described in this section includes
documentation showing that the procedures followed for each lease or
purchase of personal property, purchase of real estate, or contract for
services complied with the recipients' policies.
Subpart B--Procurement Policies and Procedures
Sec. 1631.7 Characteristics of procurements. Concurrent with this
NPRM, LSC issued a final rule implementing revisions to 45 CFR part
1627 regarding subgrants. The primary purpose of that rulemaking was to
distinguish between awards from recipients to third parties to help
recipients carry out the delivery of legal assistance and awards to
provide property or services, such as janitorial services, to
recipients. In part 1627, LSC adopted the characteristics of subgrants
from the Office of Management and Budget's (OMB) Uniform Guidance, 2
CFR 200.330(a), to help recipients determine when their proposed awards
of LSC funds to third parties constitute subgrants that must comply
with LSC's governing statutes and regulations. LSC now proposes to
adopt a parallel list of characteristics of procurement contracts in
part 1631.
Like the characteristics of subgrants, the characteristics of
procurement contracts originated in OMB's Uniform Guidance, 2 CFR
200.330. The characteristics describe awards that recipients make to
obtain goods or services necessary to administer their programs, rather
than those that recipients give to other legal aid providers or bar
associations to help them achieve the goals of their grant awards. LSC
proposes to make only minor revisions to the characteristics to reflect
their use in the LSC grant context. As with the characteristics of a
subgrant in part 1627, not all of the characteristics of a contract
need be present for an award to be considered a contract, and
recipients must use judgment in evaluating whether a particular award
should be considered a
[[Page 75014]]
subgrant under part 1627 or a contract under part 1631.
Sec. 1631.8 Procurement policies and procedures. In the ANPRM, LSC
proposed to revise part 1630 and the PAMM ``to incorporate minimum
standards for recipient procurement policies.'' 80 FR 61142, 61146,
Oct. 9, 2015. LSC noted that unlike the Uniform Guidance, part 1630 and
the PAMM do not require LSC funding recipients to have procurement
policies and procedures. LSC sought comment on whether LSC should
revise part 1630 and the PAMM to incorporate contracting provisions
similar to those contained in the Uniform Guidance or to be consistent
with the policies and procedures required by recipients' other funders.
LSC also sought comment about whether the same or different standards
should apply to contracts for services.
NLADA recommended that LSC refrain from adopting the contracting
standards in the Uniform Guidance. They described the procurement
standards in the Uniform Guidance as ``one-size-fits-all'' and stated
that they ``would be quite burdensome for grantees and unnecessary for
recipients to be accountable for following reasonable and responsible
procurement standards.'' NLADA described the procurement requirements
and guidelines currently in the PAMM and LSC's Accounting Guide for
Recipients as ``procedures [that] maintain accountability, while
allowing programs necessary flexibility to meet their programs' needs
effectively and efficiently.'' NLADA continued to describe the unique
needs faced by some of LSC's statewide and rural recipients:
In many circumstances, it is simply not feasible or practical
for programs to obtain competitive bids, let alone use sealed
bidding processes referenced in the Uniform Guidance. For example,
programs that cover large rural and/or are located in remote areas,
have difficulty locating one vendor, let alone three. In these
situations, there is no one financial threshold or type of service
that would address when a bidding process should be used versus sole
source procurement. Sole source procurement is appropriate and
necessary for a service where a program needs unique expertise and/
or time is of the essence.
With respect to the proposal to regulate contracts for services,
NLADA stated that their members recommended that LSC ``not go beyond
requiring that grantees have policies and procedures covering service
contracts in place approved by their board.'' They observed that
recipients need the flexibility to make rapid decisions about how to
address, for example, a computer system crash. They also asserted that
whatever policy LSC adopted should allow recipients to enter into sole-
source contracts for reasons other than exigent circumstances, such as
when the vendor that a recipient purchased software or hardware from
offers maintenance coverage or when the service is a specialty service
for which only one vendor is available in the area. NLADA concluded
that ``[s]ound fiscal policies and internal controls will promote
clarity, efficiency, and accountability while not unduly burdening the
recipient.''
CLS provided similar comments in its response. Like NLADA, CLS
opined that recipients must have the ability to enter into contracts
for services quickly when they experience emergencies. CLS also
observed that all contracts for services must be reasonable and
necessary for carrying out the LSC grant if LSC funds are to be
expended on the contracts.
In December, 2015, LSC's Office of Inspector General issued a
compendium report of its audit findings regarding recipients' internal
controls over a two-year period. See Compendium of Internal Control
Audit Findings & Recommendations from Reports Issued October 1, 2013
through September 30, 2015, available at https://oig.lsc.gov/images/Final_Compendium_Report_-_ISSUED.pdf (``Compendium Report''). In the
report, the OIG stated that it had issued 18 internal control audit
reports containing a total of 166 recommendations for improvement. Of
those recommendations, 67 pertained to weaknesses in recipients'
written policies and procedures and 24 pertained to contracting. See
Compendium Report at 3. Of the 67 recommendations for improvement of
written policies and procedures, 13 pertained to weaknesses in
recipients' procurement policies. Id. All 18 reports contained
recommendations to improve recipients' written policies and procedures.
With respect to written policies and procedures, OIG found that
several recipients' policies lacked terms that complied with LSC's
Accounting Guide for Recipients. Specifically, OIG identified
``procedures for securing various types of contracts, competition
requirements, approval authorities, dollar thresholds for approvals,
documentation requirement to support contracting decisions and contract
oversight responsibilities [and documentation of] deviations from
approved contracting processes'' as missing from many procurement
policies. See Compendium Report at 6.
OIG grouped the findings of weaknesses in recipients' contracting
practices into six categories: Inadequate supporting documentation;
failure to ensure that a contract was valid and formalized; poor
adherence to written policies; failure to maintain a centralized filing
system for procurement-related documents; failure to periodically
evaluate long-term contracts and put them out for bids when
appropriate; and failure to cross-train employees on contracting
procedures. See Compendium Report at 7-12. Notably, OIG found that
``[i]n certain cases, the contracting process and payments made to
vendors conformed to LSC regulations and guidelines; however,
supporting documentation justifying the process used to obtain the
contracts, some of which were sole-sourced, did not exist or was not
adequate.'' Id. at 8. OIG also found that some recipients' ``current
practices were not in accordance with their current contracting policy
or LSC's Fundamental Criteria.'' Id. at 9.
In response to the Compendium Report, LSC issued Program Letter 16-
3, ``Procurement Policy Drafting Guidance for LSC Recipients.'' The
letter was accompanied by a document explaining in detail the elements
of an effective procurement policy and factors that recipients should
consider when developing their own policies. In the guidance document,
LSC identified four areas that it believes are critical to an effective
procurement policy:
1. Competition--How to identify, evaluate, and select vendors;
2. Negotiating terms--Identification of rights and
responsibilities of each party to the contract;
3. Documentation--How to verify best value in purchasing; and
4. Internal controls--How to increase opportunity for vendors
and reduce opportunities for fraud, waste, and abuse of LSC funds.
``Procurement Policy Drafting 101: Guidance for LSC Grantees'' at 1;
available at http://www.lsc.gov/procurement-policy-drafting-101-guidance-lsc-grantees.
Based on the feedback received in the comments to the ANPRM and the
rulemaking workshops and on the findings in OIG's Compendium Report,
LSC proposes a rule requiring recipients to develop policies and
procedures governing purchases of personal property and contracts for
services made with LSC funds. Rather than adopting the procurement
rules in OMB's Uniform Guidance, LSC proposes to create a rule based
substantially on the guidance provided in Program Letter 16-3 and the
accompanying guidance
[[Page 75015]]
documents. The rule will identify generally the elements that a
recipient's policy must have, but it will not prescribe the specific
procedures that recipients must follow when making purchases with LSC
funds. The proposed rule will replace the specific requirements
currently contained in Sections 3(a) and 3(d) (personal property) and
4(f) (capital expenditures) of the PAMM. LSC is also proposing to
revise the parts of Section 4 of the PAMM that govern the use of LSC
funds to acquire real property. Those changes will be discussed in more
detail below.
In Sec. 1631.8, LSC proposes to require that recipients develop
procurement policies that have the following elements:
Identification of competition thresholds that establish
the basis for the level of competition required at each threshold.
LSC expects recipients to consider the types of purchases and
contracts for services that they make using LSC funds and to develop
procedures for making each type of purchase. For example, a
recipient may determine that its purchasing patterns require
different levels of competition based on the type of purchase, such
as a lease of a copier or a contract for a management consultant,
while another may decide that the level of competition depends on
the amount that it intends to spend regardless of the type of
purchase.
Establish the grounds for sole-source purchases. During
the workshops, several panelists discussed various justifiable
reasons why LSC recipients may award contracts or make purchases on
a non-competitive basis. One reason was that in remote or rural
areas, there may be only one vendor for a particular service or type
of property. Another reason was that recipients sometimes require
experts or professionals with a particular skill type, such as
handwriting analysis, and award contracts for such services based on
recommendations from trusted colleagues rather than through
competition. LSC generally believes that competition among vendors
is the best way to ensure that recipients are getting best value in
their purchases. LSC understands, however, that there are times
outside of emergency situations when recipients may need to make
contracts on a non-competitive basis. LSC does not propose to limit
the situations in which recipients can make sole-source contracts to
exigent circumstances, but LSC does expect recipients to develop
procurement policies that establish standards for making sole-source
purchases and procedures for justifying the purchase, selecting the
vendor, and documenting the transaction.
Establish the level of documentation necessary to
justify procurements. Like the first element, this requirement
anticipates that recipients may tie the level of documentation
needed to justify a purchase to the nature of the purchase or to the
competition thresholds. LSC does not propose to require recipients
to maintain a particular form or type of documentation, but expects
recipients to determine a level of documentation that is appropriate
to the type of purchase and that will support a showing that the
purchase was reasonable and necessary for the purposes of the LSC
grant.
Establish internal controls that, at a minimum, provide
for segregation of duties in the procurement process; identify which
employees, officers, or directors have authority to make purchases
for the recipient; and identify procedures for approving purchases.
In its most recent annual compliance guidance, LSC identified
weaknesses in segregation of duties and approval of financial
transactions by an ``appropriate level of management'' as two of the
most common compliance issues identified through Office of
Compliance and Enforcement oversight visits to grantees. See Program
Letter 16-7, Compliance Guidance, Aug. 19, 2016; available at http://www.lsc.gov/program-letter-16-7. The Accounting Guide for LSC
Recipients currently requires recipients to have internal controls
to safeguard program resources that should include the authority
given to recipient employees to make and approve financial
transactions, including purchases. Accounting Guide for LSC
Recipients, Sec. 3-5.1, p. 28. LSC proposes to formalize this
requirement and expand upon it in part 1631. LSC does not propose to
prescribe the assignment of procurement responsibilities among
recipient staff, nor does it propose to require recipients to follow
certain procedures when making purchases. LSC simply proposes to
require that recipients establish procurement policies that address
each of these elements.
Establish procedures to ensure quality and cost control
in purchasing. LSC intends to address two issues through this
requirement: Evaluating purchases in the first instance, and review
and evaluation of existing contracts. In order to ensure best value
for all purchases, recipients should develop fair and objective
criteria for evaluating sources and procedures for selecting among
sources. The rigor of the selection procedures at each competition
threshold should be commensurate with the level of competition and
documentation required. During the workshops, several panelists
stated that they had longstanding, non-competitive contracts with
service providers. LSC has also learned of this practice through its
regular oversight activities. LSC believes that the efficient,
responsible administration of appropriated funds requires recipients
to evaluate their long-term and multi-year contracts regularly for
continued quality of services or products and for best price. LSC
does not propose to require recipients to evaluate their
longstanding contracts or open them up for bids on a prescribed
schedule. LSC expects recipients to establish policies for regularly
evaluating the value and quality of each of their contracts and for
establishing standards to determine when continuing versus
recompeting each contract is appropriate.
Establish procedures for identifying and preventing
conflicts of interest in the purchasing process. For several years,
LSC has required recipients of TIG and Pro Bono Innovation Fund
grants to adhere to an LSC-created ``Policy on Disclosure of
Interests for Determination of Conflicts.'' LSC did not require
recipients of Basic Field Grants to develop or follow conflicts of
interest policies until grant year 2016. Beginning in 2016, the
grant assurances for the Basic Field Grant program required
recipients to develop conflicts of interest policies, to distribute
the policies to their staff, and to train all covered staff on the
policies. LSC now proposes to formalize in a rule the requirement to
develop conflicts of interest policies applicable to the purchasing
process. As with all of the other elements proposed in this section,
LSC does not propose to dictate the terms of recipients' conflicts
of interest policies. LSC merely expects recipients to adopt, comply
with, and document compliance with the policies they develop.
LSC strongly encourages recipients to look to Program Letter 16-3
and its accompanying documents, as well as the Accounting Guide, for
guidance when drafting their procurement policies. In particular, LSC
recommends that recipients consider establishing annual purchasing
plans and contract management procedures if they have not done so
already. In addition to thoughtful procurement policies, well-
considered purchasing plans and effective contract management
procedures can reduce the risk of fraud, waste, and abuse of LSC funds.
Sec. 1631.9 Prior approval. In this section, LSC proposes to
prescribe the contents of a request for prior approval. A request must
include a statement explaining how the personal property or services
will further the delivery of legal services to eligible clients and
documentation showing that the recipient followed the procurement
policy and procedures it developed under Sec. 1631.8. This language is
adopted from Sec. Sec. 3(d) and 4(f) of the PAMM, but has been revised
to reflect LSC's proposal to require general procurement policies,
rather than to incorporate the current purchase-specific procedures.
Sec. 1631.10 Applicability of part 1630. Because LSC is proposing
to limit the prior approval requirement to all purchases of real
property, purchases and leases of personal property costing more than
$25,000 in LSC funds, and contracts for services exceeding $25,000 in
LSC funds, LSC also proposes to include a section restating the
applicability of part 1630 to all leases, purchases, and contracts made
using LSC funds.
Subpart C--Personal Property Management
Sec. 1631.11 Use of property in compliance with LSC's statutes and
regulations. LSC proposes to adopt Sec. 5(a), (d), and (e) of the PAMM
in this
[[Page 75016]]
section with only minor technical changes.
Sec. 1631.12 Intellectual property. In this section, LSC proposes
to adopt Sec. 5(g) of the PAMM without change.
Sec. 1631.13 Disposing of personal property purchased with LSC
funds. In this section, LSC proposes to adopt Sec. 6(d), (e), (f), and
(g) of the PAMM with one substantive change. In proposed paragraph
(a)(2), LSC proposes to explicitly authorize recipients to determine
the appropriate method to dispose of personal property that has little
or no fair market value at the time of disposal. The recipient does not
have to notify LSC of its intent to dispose of such property, nor does
it have to compensate LSC out of the proceeds from any sale of the
property. LSC proposes to include this provision in response to
feedback it received from panelists during the rulemaking workshops
that prior approval to dispose of personal property with nominal or no
monetary value is unnecessary. See, e.g., Transcript of April 20, 2016
Rulemaking Workshop at 94 (Statement of Jonathan Asher); Transcript of
May 18, 2016 Rulemaking Workshop at 101 (Statements of Steve Pelletier
and Diana White). Additionally, LSC proposes to reorganize the
paragraphs taken from the PAMM for ease of reference.
Sec. 1631.14 Use of derivative income from sale of personal
property purchased with LSC funds. In Sec. 1631.14(a), LSC proposes to
adopt Sec. 6(e) of the PAMM without change. LSC also proposes to
include paragraph (b), which requires recipients to account for income
earned from the sale, rent, or lease of personal property purchased
with LSC funds as required by Sec. 1630.16--Applicability to
derivative income.
Subpart D--Real Estate Acquisition and Capital Improvements
Sec. 1631.15 Purchasing real property with LSC funds. LSC proposes
to adopt in significant part the requirements of Sec. 4 of the PAMM.
In paragraph (a), LSC proposes to consolidate and restructure existing
paragraphs (a)-(c) of Sec. 4 of the PAMM. LSC also proposes to
introduce paragraph (a)(3), which allows a recipient who cannot
evaluate three properties to explain why such an evaluation is not
possible. For example, a recipient may not be able to compare three
properties if the inventory of commercial properties suitable for the
recipient's activities is extremely limited.
LSC proposes to adopt Sec. 4(d) of the PAMM in significant part in
paragraph (b). LSC proposes to revise two specific provisions to allow
recipients additional flexibility when purchasing real property. In
Sec. 1631.15(b)(6), LSC proposes to allow a recipient to provide
documentation that the recipient's governing body approves of the
purchase, even if the governing body's approval is contingent upon
LSC's approval. LSC understands that some recipient governing bodies
may be reluctant to authorize a real estate purchase if they are not
assured that one of the proposed funding sources consents to the
purchase. As a funder, LSC similarly wants to know that a recipient's
governing body has been informed about a proposed purchase and agrees
that the purchase is in the recipient's interest. Consequently, LSC
proposes to revise existing Sec. 4(d)(4) of the PAMM to allow for
contingent approvals.
Additionally, LSC proposes to revise existing Sec. 4(d)(5) of the
PAMM and promulgate it as Sec. 1631.15(b)(8). Currently, Sec. 4(d)(5)
requires a recipient to include in its request for prior approval a
``statement of handicapped accessibility sufficient to meet the
requirements of 45 CFR 1624.5(c)[.]'' On several occasions, LSC has
received simultaneous requests to purchase real estate and to make
capital improvements to the property for the purpose of making it
accessible to persons with disabilities. For this reason, LSC proposes
to revise this requirement to allow the recipient to provide a
statement that the property will be accessible once the requested
capital improvements have been completed. LSC expects the recipient to
act expeditiously to make the requested improvements if LSC approves
both the purchase and the capital expenditures. Consequently, LSC
proposes to require that any capital improvements authorized under this
section be completed within 60 days of the date the real estate
purchase is completed.
LSC proposes to add three additional elements to the list of
requested information currently contained in Sec. 4(d) of the PAMM and
proposed for inclusion in Sec. 1631.15(b). First, LSC proposes to
require that recipients provide the information described in paragraph
(a) as part of the prior approval request. Second, LSC proposes to
require recipients to provide a breakdown of the sources of funds it
intends to use toward the purchase. In other words, recipients would
provide an estimate of the amount of LSC funds and non-LSC funds,
respectively, that it intends to put toward the acquisition costs of
the building and subsequent mortgage payments for the life of the
financing arrangement. Third, LSC proposes to require recipients to
provide a comparison of available loan terms considered by the
recipient. LSC proposes this requirement to encourage recipients to
investigate various options for financing a building purchase to obtain
the best value.
In Sec. 1631.15(c), LSC proposes to adopt Sec. 4(e) of the PAMM
with only a minor conforming change. LSC does, however, propose to add
subparagraph (c)(4), which will require a recipient to agree not to
dispose of real estate purchased with LSC funds without prior approval.
Sec. 1631.16 Capital improvements. In this section, LSC proposes
to adopt Sec. 4(f) of the PAMM in substantial part. LSC proposes to
replace existing Sec. 4(1)(ii) of the PAMM, which requires a recipient
to provide a description of the contractor selection process, with a
requirement to provide documentation showing that the recipient
complied with the procurement process it developed under Sec. 1631.8.
LSC also proposes to add language requiring a recipient to maintain
adequate supporting documentation to identify and account for any LSC
funds used to make capital improvements.
Subpart E--Real Estate Management
Sec. 1631.17 Using real estate purchased with LSC funds. LSC
proposes to adopt Sec. 5(a), (d), and (f) of the PAMM with only minor
technical changes.
Sec. 1631.18 Maintenance. LSC proposes to introduce a section
requiring recipients to maintain real estate purchased with LSC funds
in efficient operating condition and in compliance with state and local
property standards and building codes. From previous requests to
dispose of real estate, LSC has learned of recipient facilities falling
into disrepair. LSC believes that it is essential that recipients
maintain assets purchased with appropriated funds in compliance with
state and local standards and building codes. LSC also believes it is
critical to the delivery of legal services for recipients to provide
services in space that is clean, in good repair, and welcoming to
clients. For these reasons, LSC proposes to prescribe the facilities
standards that recipients must meet if they use LSC funds to purchase
real estate.
Sec. 1631.19 Insurance. LSC proposes to introduce minimum
standards for the insurance of real estate acquired or improved with
LSC funds. Similar to the rationale for prescribing minimum maintenance
standards, LSC believes it is essential for recipients to provide the
same level of insurance for real estate acquired or improved with
appropriated
[[Page 75017]]
funds as they do for non-LSC funded real estate and in a manner that
protects LSC's interest in the event of a title failure or physical
destruction of the property. LSC proposes to adopt the insurance
standard from the regulations governing facilities purchases under the
Head Start program, 45 CFR 1309.23.
Sec. 1631.20 Accounting and reporting to LSC. LSC proposes to
require recipients to maintain records showing, for each piece of real
estate purchased in whole or in part with LSC funds, the amount of LSC
funds it spends each year on the property. Costs that recipients should
account for include, but are not limited to, acquisition costs in the
year of purchase; mortgage payments; insurance, maintenance, and taxes;
and costs associated with capital improvements made using LSC funds.
LSC also proposes to require recipients to provide LSC with the
accounting in one of two ways. The first is by submitting the
accounting to LSC no later than April 30 of the calendar year following
the calendar year in which the recipient incurred the costs. In other
words, if a recipient uses LSC funds to purchase a new office building
in March, 2017, it must provide LSC with an accounting of all LSC funds
used in 2017 to support the purchase and maintenance for the building
by April 30, 2018. The second method is to provide LSC with the
required accounting in the audited financial statements that recipients
must submit to LSC annually.
Sec. 1631.21 Disposing of real estate purchased with LSC funds. In
this section, LSC proposes to adopt Sec. 7 of the PAMM in substantial
part. In a change from the PAMM, LSC proposes to require that all
proposed dispositions of real estate acquired using LSC funds be
subject to LSC's prior approval. This approach is consistent with the
federal government's policy regarding grantee disposal of property
purchased with federal funds. See 2 CFR 200.311(c). LSC believes that
the federal government's policy on the disposition of real property
purchased with federal funds is more appropriate to its oversight role
than the policy that currently exists in the PAMM. Under the PAMM,
organizations must seek LSC's approval prior to disposing of property
purchased with LSC funds only when they are no longer receiving LSC
funds. In LSC's experience, it is far more common for LSC recipients to
sell real estate acquired with LSC funds while they are still receiving
LSC funds. At the present time, the PAMM does not require recipients to
seek LSC's approval before selling such property, although LSC's
property interest agreements generally contain terms requiring
recipients to seek approval before encumbering or selling the property.
LSC believes it is appropriate for the requirement to be formalized in
a rule.
LSC proposes to establish the prior approval process for
disposition of real estate in Sec. 1631.21(c). LSC proposes to require
a recipient or former recipient to seek prior approval at least 60 days
before the recipient proposes to dispose of the property. In its
request, the recipient or former recipient should tell LSC how it
proposes to dispose of the property and why; provide documentation of
the fair market value of the property; if selling, describe its process
for advertising the property and receiving offers; account for all LSC
funds used in the acquisition and capital improvement of the property;
and identify the proposed transferee. The requester should also provide
a document describing the terms of transfer or sale. LSC also proposes
to clarify that LSC's percentage interest in the proceeds of a real
estate sale is equal to the percentage of the costs of the original
acquisition and any capital improvements made to the real estate over
the life of the property that were paid using LSC funds.
Sec. 1631.22 Retaining income from sale of real property purchased
with LSC funds. LSC proposes to consolidate Sec. Sec. 6(e) and 8(c) of
the PAMM in this section. LSC proposes to make only technical edits to
reflect the redesignation of Sec. 1630.12 as Sec. 1630.16.
List of Subjects
45 CFR Part 1600
Legal services.
45 CFR Part 1630
Accounting, Government contracts, Grant programs--law, Hearing and
appeal procedures, Legal services, Questioned costs.
45 CFR Part 1631
Legal services, Government contracts, Grant programs--law, Real
property acquisition.
For the reasons stated in the preamble, the Legal Services
Corporation proposes to amend 45 CFR Chapter XVI as follows:
PART 1600--DEFINITIONS
0
1. The authority citation for part 1600 is revised to read as follows:
Authority: 42 U.S.C. 2996g(e).
0
2. Amend Sec. 1600.1by adding, in alphabetical order, the definitions
for ``Corporation funds'' and ``Non-LSC funds'' to read as follows:
Sec. 1600.1 Definitions.
* * * * *
Corporation funds or LSC funds means any funds appropriated by
Congress to carry out the purposes of the Legal Services Corporation
Act of 1974, 42 U.S.C. 2996 et seq., as amended.
* * * * *
Non-LSC funds means any funds that are not Corporation funds or LSC
funds.
0
3. Revise part 1630 to read as follows:
PART 1630--COST STANDARDS AND PROCEDURES
Subpart A--General Provisions
Sec.
1630.1 Purpose.
1630.2 Definitions.
1630.3 Time.
1630.4 Burden of proof.
Subpart B--Cost Standards and Prior Approval
1630.5 Standards governing allowability of costs under LSC grants or
contracts.
1630.6 Prior approval.
1630.7 Membership fees or dues.
1630.8 Contributions.
1630.9 Tax-sheltered annuities, retirement accounts, and penalties.
Subpart C--Questioned Cost Proceedings
1630.10 Review of questioned costs.
1630.11 Appeals to the president.
1630.12 Recovery of disallowed costs and other corrective action.
1630.13 Other remedies; effect on other parts.
1630.14 Applicability to subgrants.
1630.15 Applicability to non-LSC funds.
1630.16 Applicability to derivative income.
Subpart D--Closeout Procedures
1630.17 Applicability.
1630.18 Closeout plan; Timing.
1630.19 Closeout costs.
1630.20 Returning funds to LSC.
Authority: 42 U.S.C. 2996g(e).
Subpart A--General Provisions
Sec. 1630.1 Purpose.
This part is intended to provide uniform standards for allowability
of costs and to provide a comprehensive, fair, timely, and flexible
process for the resolution of questioned costs.
Sec. 1630.2 Definitions.
(a) Corrective action means action taken by a recipient that:
(1) Corrects identified deficiencies;
(2) Produces recommended improvements; or
(3) Demonstrates that audit or other findings are either invalid or
do not warrant recipient action.
[[Page 75018]]
(b) Derivative income means income earned by a recipient from LSC-
supported activities during the term of an LSC grant or contract, and
includes, but is not limited to, income from fees for services
(including attorney fee awards and reimbursed costs), sales and rentals
of real or personal property, and interest earned on LSC grant or
contract advances.
(c) Disallowed cost means those charges to an LSC award that LSC
determines to be unallowable, in accordance with the applicable
statutes, regulations, or terms and conditions of the grant award.
(d) Final written decision means either:
(1) The decision issued by the Vice President for Grants Management
after reviewing all information provided by a recipient in response to
a notice of questioned costs; or
(2) the notice of questioned costs if a recipient does not respond
to the notice within 30 days of receipt.
(e) Membership fees or dues means payments to an organization on
behalf of a program or individual to be a member thereof, or to acquire
voting or participatory rights therein. Membership fees or dues
include, but are not limited to, fees or dues paid to a state supreme
court or to a bar organization acting as an administrative arm of the
court or in some other governmental capacity if such fees or dues are
required for an attorney to practice law in that jurisdiction.
(f) Questioned cost means a cost that LSC has questioned because of
an audit or other finding that:
(1) There may have been a violation of a provision of a law,
regulation, contract, grant, or other agreement or document governing
the use of LSC funds;
(2) The cost is not supported by adequate documentation; or
(3) The cost incurred appears unnecessary or unreasonable and does
not reflect the actions a prudent person would take in the
circumstances.
Sec. 1630.3 Time.
(a) Computation. Time limits specified in this part shall be
computed in accordance with Rules 6(a) and 6(e) of the Federal Rules of
Civil Procedure.
(b) Extensions. LSC may, on a recipient's written request for good
cause, grant an extension of time and shall so notify the recipient in
writing.
Sec. 1630.4 Burden of proof.
The recipient shall have the burden of proof under this part.
Subpart B--Cost Standards and Prior Approval
Sec. 1630.5 Standards governing allowability of costs under LSC
grants or contracts.
(a) General criteria. Expenditures are allowable under an LSC grant
or contract only if the recipient can demonstrate that the cost was:
(1) Actually incurred in the performance of the grant or contract
and the recipient was liable for payment;
(2) Reasonable and necessary for the performance of the grant or
contract as approved by LSC;
(3) Allocable to the grant or contract;
(4) In compliance with the Act, applicable appropriations law, LSC
rules, regulations, guidelines, and instructions, the Accounting Guide
for LSC Recipients, the terms and conditions of the grant or contract,
and other applicable law;
(5) Consistent with accounting policies and procedures that apply
uniformly to both LSC-funded and non-LSC-funded activities;
(6) Accorded consistent treatment over time;
(7) Determined in accordance with generally accepted accounting
principles; and
(8) Adequately and contemporaneously documented in business records
accessible during normal business hours to LSC management, the Office
of Inspector General, the General Accounting Office, and independent
auditors or other audit organizations authorized to conduct audits of
recipients.
(b) Reasonable costs. A cost is reasonable if, in its nature or
amount, it does not exceed that which would be incurred by a prudent
person under the same or similar circumstances prevailing at the time
the decision was made to incur the cost. In determining the
reasonableness of a given cost, consideration shall be given to:
(1) Whether the cost is of a type generally recognized as ordinary
and necessary for the operation of the recipient or the performance of
the grant or contract;
(2) The restraints or requirements imposed by such factors as
generally accepted sound business practices, arms-length bargaining,
Federal and State laws and regulations, and the terms and conditions of
the grant or contract;
(3) Whether the recipient acted with prudence under the
circumstances, considering its responsibilities to its clients and
employees, the public at large, the Corporation, and the Federal
government; and
(4) Significant deviations from the recipient's established
practices, which may unjustifiably increase the grant or contract
costs.
(c) Allocable costs. (1) A cost is allocable to a particular cost
objective, such as a grant, project, service, or other activity, in
accordance with the relative benefits received. Costs may be allocated
to LSC funds either as direct or indirect costs according to the
provisions of this section.
(2) A cost is allocable to an LSC grant or contract if it is
treated consistently with other costs incurred for the same purpose in
like circumstances and if it:
(i) Is incurred specifically for the grant or contract;
(ii) Benefits both the grant or contract and other work and can be
distributed in reasonable proportion to the benefits received; or
(iii) Is necessary to the recipient's overall operation, although a
direct relationship to any particular cost objective cannot be shown.
(3) Recipients must maintain accounting systems sufficient to
demonstrate the proper allocation of costs to each of their funding
sources.
(d) Direct costs. Direct costs are those that can be identified
specifically with a particular grant award, project, service, or other
direct activity of an organization. Costs identified specifically with
grant awards are direct costs of the awards and are to be assigned
directly thereto. Direct costs include, but are not limited to, the
salaries and wages of recipient staff who are working on cases or
matters that are identified with specific grants or contracts. Salary
and wages charged directly to LSC grants and contracts must be
supported by personnel activity reports.
(e) Indirect costs. Indirect costs are those that have been
incurred for common or joint objectives and cannot be readily
identified with a particular final cost objective. A recipient may
treat any direct cost of a minor amount as an indirect cost for reasons
of practicality where the accounting treatment for such cost is
consistently applied to all final cost objectives. Indirect costs
include, but are not limited to, the costs of operating and maintaining
facilities, and the costs of general program administration, such as
the salaries and wages of program staff whose time is not directly
attributable to a particular grant or contract. Such staff may include,
but are not limited to, executive officers and personnel, accounting,
secretarial and clerical staff.
(f) Allocation of indirect costs. Where a recipient has only one
major function, i.e., the delivery of legal services to low-income
clients, allocation of indirect costs may be by a simplified allocation
[[Page 75019]]
method, whereby total allowable indirect costs (net of applicable
credits) are divided by an equitable distribution base and distributed
to individual grant awards accordingly. The distribution base may be
total direct costs, direct salaries and wages, attorney hours, numbers
of cases, numbers of employees, or another base which results in an
equitable distribution of indirect costs among funding sources.
(g) Exception for certain indirect costs. Some funding sources may
refuse to allow the allocation of certain indirect costs to an award.
In such instances, a recipient may allocate a proportional share of
another funding source's share of an indirect cost to LSC funds,
provided that the activity associated with the indirect cost is
permissible under the LSC Act, LSC appropriations statutes, and
regulations.
(h) Applicable credits. Applicable credits are those receipts or
reductions of expenditures which operate to offset or reduce expense
items that are allocable to grant awards as direct or indirect costs.
Applicable credits include, but are not limited to, purchase discounts,
rebates or allowances, recoveries or indemnities on losses, insurance
refunds, and adjustments of overpayments or erroneous charges. To the
extent that such credits relate to allowable costs, they shall be
credited as a cost reduction or cash refund in the same fund to which
the related costs are charged.
(i) Guidance. The regulations and circulars of the Office of
Management and Budget shall provide guidance for all allowable cost
questions arising under this part when relevant policies or criteria
therein are not inconsistent with the provisions of the Act, applicable
appropriations law, this part, the Accounting Guide for LSC Recipients,
LSC rules, regulations, guidelines, instructions, and other applicable
law.
Sec. 1630.6 Prior approval.
(a) Advance understandings. Under any given grant award, the
reasonableness and allocability of certain cost items may be difficult
to determine. In order to avoid subsequent disallowance or dispute
based on unreasonableness or nonallocability, a recipient may seek a
written understanding from LSC in advance of incurring special or
unusual costs. If a recipient elects not to seek an advance
understanding from LSC, the absence of an advance understanding on any
element of a cost will not affect the reasonableness or allocability of
the cost.
(b) Costs requiring prior approval. (1) A recipient must obtain
LSC's prior approval before charging costs attributable to any of the
transactions below to its LSC grant when the cost of the transaction
exceeds $25,000 of LSC funds:
(i) Purchases or leases of personal property;
(ii) Contracts for services;
(iii) Purchases of real estate; and
(iv) Capital improvements.
(2) The process and substantive requirements for requests for prior
approval are located in 45 CFR part 1631--Purchasing and Property
Management.
(c) Duration. LSC's advance understanding or approval shall be
valid for one year, or for a greater period of time which LSC may
specify in its approval or advance understanding.
Sec. 1630.7 Membership fees or dues.
(a) LSC funds may not be used to pay membership fees or dues to any
private or nonprofit organization, whether on behalf of the recipient
or an individual.
(b) Paragraph (a) of this section does not apply to the payment of
membership fees or dues mandated by a governmental organization to
engage in a profession, or to the payment of membership fees or dues
from non-LSC funds.
Sec. 1630.8 Contributions.
Any contributions or gifts of LSC funds to another organization or
to an individual are prohibited.
Sec. 1630.9 Tax-sheltered annuities, retirement accounts, and
penalties.
No provision contained in this part shall be construed to affect
any payment by a recipient on behalf of its employees for the purpose
of contributing to or funding a tax-sheltered annuity, retirement
account, or pension fund.
Subpart C--Questioned Cost Proceedings
Sec. 1630.10 Review of questioned costs.
(a) LSC may identify questioned costs:
(1) When the Office of Inspector General, the General Accounting
Office, or an independent auditor or other audit organization
authorized to conduct an audit of a recipient has identified and
referred a questioned cost to LSC;
(2) In the course of its oversight of recipients; or
(3) As a result of complaints filed with LSC.
(b) If LSC determines that there is a basis for disallowing a
questioned cost, LSC must provide the recipient with written notice of
its intent to disallow the cost. The notice of questioned costs must
state the amount of the cost and the factual and legal basis for
disallowing it.
(c) If a questioned cost is disallowed solely on the ground that it
is excessive, only the amount that is larger than reasonable shall be
disallowed.
(d)(1) Within 30 days of receiving the notice of questioned costs,
the recipient may respond with written evidence and argument to show
that the cost was allowable, or that LSC, for equitable, practical, or
other reasons, should not recover all or part of the amount, or that
the recovery should be made in installments.
(2) If the recipient does not respond to LSC's written notice
within 30 days, the written notice shall become LSC's final written
decision.
(e) Within 60 days of receiving the recipient's written response to
the notice of questioned costs, LSC management must issue a final
written decision stating whether or not the cost has been disallowed
and the reasons for the decision.
(f) If LSC has determined that the questioned cost should be
disallowed, the final written decision must:
(1) State that the recipient may appeal the decision as provided in
Sec. 1630.11 and describe the process for seeking an appeal;
(2) Describe how it expects the recipient to repay the cost,
including the method and schedule for collection of the amount of the
cost;
(3) State whether LSC is requiring the recipient to make financial
adjustments or take other corrective action to prevent a recurrence of
the circumstances giving rise to the disallowed cost.
Sec. 1630.11 Appeals to the president.
(a)(1) If the amount of a disallowed cost exceeds $2,500, the
recipient may appeal in writing to LSC's President within 30 days of
receiving LSC's final written decision to disallow the cost. The
recipient should state in detail the reasons why LSC should not
disallow part or all of the questioned cost.
(2) If the recipient did not respond to LSC's notice of questioned
costs and the notice became LSC's final written decision pursuant to
Sec. 1630.11(d)(2), the recipient may not appeal the final written
decision.
(b) If the President has had prior involvement in the consideration
of the disallowed cost, the President shall designate another senior
LSC employee who has not had prior involvement to review the
recipient's appeal. In circumstances where the President has not had
prior involvement in the disallowed cost proceeding, the President has
discretion to designate
[[Page 75020]]
another senior LSC employee who also has not had prior involvement in
the proceeding to review the appeal.
(c) Within 30 days of receiving the recipient's written appeal, the
President or designee will adopt, modify, or reverse LSC's final
written decision.
(d) The decision of the President or designee shall be final and
shall be based on the written record, consisting of LSC's notice of
questioned costs, the recipient's response, LSC's final written
decision, the recipient's written appeal, any additional response or
analysis provided to the President or designee by LSC staff, and the
relevant findings, if any, of the Office of Inspector General, General
Accounting Office, or other authorized auditor or audit organization.
Upon request, LSC shall provide the recipient with a copy of the
written record.
Sec. 1630.12 Recovery of disallowed costs and other corrective
action.
(a) LSC will recover any disallowed costs from the recipient within
the time limits and conditions set forth in either LSC's final written
decision or the President's decision on an appeal. Recovery of the
disallowed costs may be in the form of a reduction in the amount of
future grant checks or in the form of direct payment from you to LSC.
(b) LSC shall ensure that a recipient who has incurred a disallowed
cost takes any additional necessary corrective action within the time
limits and conditions set forth in LSC's final written decision or the
President's decision.
Sec. 1630.13 Other remedies; effect on other parts.
(a) In cases of serious financial mismanagement, fraud, or
defalcation of funds, LSC shall refer the matter to the Office of
Inspector General and may take appropriate action pursuant to parts
1606, 1623, and 1640 of this chapter.
(b) The recovery of a disallowed cost according to the procedures
of this part does not constitute a permanent reduction in a recipient's
annualized funding level, nor does it constitute a limited reduction of
funding or termination of financial assistance under part 1606, or a
suspension of funding under part 1623.
Sec. 1630.14 Applicability to subgrants.
When disallowed costs arise from expenditures incurred under a
subgrant of LSC funds, the recipient and the subrecipient will be
jointly and severally responsible for the actions of the subrecipient,
as provided by 45 CFR part 1627, and will be subject to all remedies
available under this part. Both the recipient and the subrecipient
shall have access to the review and appeal procedures of this part.
Sec. 1630.15 Applicability to non-LSC funds.
(a) No costs attributable to a purpose prohibited by the LSC Act,
as defined by 45 CFR 1610.2(a), may be charged to private funds, except
for tribal funds used for the specific purposes for which they were
provided.
(b) No cost attributable to an activity prohibited by or
inconsistent with Public Law 103-134, tit. V, Sec. 504, as defined by
Sec. 1610.2(b), may be charged to non-LSC funds, except for tribal
funds used for the specific purposes for which they were provided.
(c) LSC may recover from a recipient's LSC funds an amount not to
exceed the amount improperly charged to non-LSC funds. A decision to
recover under this paragraph is subject to the review and appeal
procedures of Sec. Sec. 1630.11 and 1630.12.
Sec. 1630.16 Applicability to derivative income.
(a) Derivative income resulting from an activity supported in whole
or in part with LSC funds shall be allocated to the fund in which the
recipient's LSC grant is recorded in the same proportion that the
amount of LSC funds expended bears to the total amount expended by the
recipient to support the activity.
(b) Derivative income allocated to the LSC fund in accordance with
paragraph (a) of this section is subject to the requirements of this
part.
Subpart D--Closeout Procedures
Sec. 1630.17 Applicability.
This subpart applies when a recipient of LSC funds:
(a) Merges or consolidates functions with another LSC recipient;
(b) Changes its current identity or status as a legal entity; or
(c) Otherwise ceases to receive funds directly from LSC. This may
include voluntary termination by the recipient or involuntary
termination by LSC of the recipient's LSC grant, and may occur at the
end of a grant term or during the grant term.
Sec. 1630.18 Closeout plan; timing.
(a) A recipient must provide LSC with a plan for the orderly
conclusion of the recipient's role and responsibilities. LSC will
maintain a list of the required elements for the closeout plan on its
Web site. LSC will provide recipients with a link to the list in the
grant award documents.
(b)(1) A recipient must notify LSC no less than 60 days prior to
any of the above events, except for an involuntary termination of its
LSC grant by LSC. The recipient must submit the closeout plan described
in Sec. 1630.19 at the same time.
(2) If LSC terminates a recipient's grant, the recipient must
submit the closeout plan described in Sec. 1630.19 within 15 days of
being notified by LSC that it is terminating the recipient's grant.
Sec. 1630.19 Closeout costs.
(a) The recipient must submit to LSC a detailed budget and timeline
for all closeout procedures described in the closeout plan. LSC must
approve the budget, either as presented or after negotiations with the
recipient, before the recipient may proceed with implementing the
budget, timeline, and plan.
(b) LSC will withhold funds for all closeout expenditures,
including costs for the closing audit, all staff and consultant
services needed to perform closeout activities, and file storage and
retention.
(c) LSC will release any funding installments that the recipient
has not received as of the date it notified LSC of a merger, change in
status, or voluntary termination or that LSC notified the recipient of
an involuntary termination of funding only upon the recipient's
satisfactory completion of all closeout obligations.
Sec. 1630.20 Returning funds to LSC.
(a) Excess fund balance. If the recipient has an LSC fund balance
after the termination of funding and closeout, the recipient must
return the full amount of the fund balance to LSC at the time it
submits the closing audit to LSC.
(b) Derivative income. Any attorneys' fees claimed or collected and
retained by the recipient after funding ceases that result from LSC-
funded work performed during the grant term are derivative income
attributable to the LSC grant. Such derivative income must be returned
to LSC within 15 days of the date on which the recipient receives the
income.
0
4. Add part 1631 to read as follows:
PART 1631--PURCHASING AND PROPERTY MANAGEMENT
Subpart A--General Provisions
Sec
1631.1 Purpose.
1631.2 Definitions.
1631.3 Prior approval process.
1631.4 Effective dates.
1631.5 Use of funds.
1631.6 Recipient policies, procedures, and recordkeeping.
[[Page 75021]]
Subpart B--Procurement Policies and Procedures
1631.7 Characteristics of procurements.
1631.8 Procurement policies and procedures.
1631.9 Requests for prior approval.
1631.10 Applicability of part 1630.
Subpart C--Personal Property Management
1631.11 Use of property in compliance with LSC's statutes and
regulations.
1631.12 Intellectual property.
1631.13 Disposing of personal property purchased with LSC funds.
1631.14 Use of derivative income from sale of personal property
purchased with LSC funds.
Subpart D--Real Estate Acquisition and Capital Improvements
1631.15 Purchasing real property with LSC funds.
1631.16 Capital improvements.
Subpart E--Real Estate Management
1631.17 Using real estate purchased with LSC funds.
1631.18 Maintenance.
1631.19 Insurance.
1631.20 Accounting and reporting to LSC.
1631.21 Disposing of real estate purchased with LSC funds.
1631.22 Retaining income from sale of real property purchased with
LSC funds.
Authority: 42 U.S.C. 2996g(e).
Subpart A--General Provisions
Sec. 1631.1 Purpose.
The purpose of this part is to set standards for purchasing,
leasing, using, and disposing of LSC-funded personal property and real
estate and using LSC funds to contract for services.
Sec. 1631.2 Definitions.
(a) Capital improvement means spending more than $25,000 of LSC
funds to improve real estate through construction or the addition of
fixtures that become an integral part of real estate.
(b) LSC property interest agreement means a formal written
agreement between the recipient and LSC establishing the terms of LSC's
legal interest in real estate purchased with LSC funds.
(c) Personal property means property other than real estate.
(d) Purchase means buying personal property or real estate or
contracting for services with LSC funds.
(e) Quote means a quotation or bid from a potential source
interested in selling or leasing property or providing services to a
recipient.
(f) Real estate means land, buildings (including capital
improvements), and property interests in land and buildings (e.g.,
tenancies, life estates, remainders, reversions, easements), excluding
moveable personal property.
(g) Services means professional and consultant services rendered by
persons who are members of a particular profession or possess a special
skill and who are not officers or employees of an LSC recipient.
Services includes, but is not limited to intangible products such as
accounting, banking, cleaning, consultants, training, expert services,
maintenance of equipment, and transportation. For purposes of this
section, services do not include services provided by recipients to
their employees as compensation in addition to regular salaries and
wages, including but not limited to employee insurance, pensions, and
unemployment benefit plans.
(h) Source means a seller, supplier, vendor, or contractor who has
agreed:
(1) To sell or lease property to the recipient through a purchase
or lease agreement; or
(2) to provide services to the recipient through a contract.
Sec. 1631.3 Prior approval process.
(a) LSC shall grant prior approval of a cost listed in Sec.
1630.6(b) if the recipient has provided sufficient written information
to demonstrate that the cost would be consistent with the standards and
policies of this part. LSC may request additional information if
necessary to make a decision on the recipient's request.
(b)(1) For purchases or leases of personal property, contracts for
services, and capital improvements, LSC will make a decision to approve
or deny a request for prior approval within 30 days of receiving the
request.
(2) For purchases of real estate, LSC will make a decision within
60 days of receiving the request.
(3) If LSC cannot make a decision whether to approve the request
within the allotted time, it will provide the requester with a date by
which it expects to make a decision.
(c) If LSC denies a request for prior approval, LSC shall provide
the recipient with a written explanation of the grounds for denying the
request.
(d) Exigent circumstances. (1) A recipient may use more than
$25,000 of LSC funds to purchase personal property or award a contract
for services without seeking LSC's prior approval if the purchase or
contract is necessary;
(i) to avoid imminent harm to the recipient's personnel, physical
facilities, or systems; or
(ii) to remediate or mitigate damage to the recipient's personnel,
physical facilities or systems.
(2) The recipient must provide LSC with a description of the
exigent circumstances and the information described in paragraph (b)
within a reasonable time after the circumstances necessitating the
purchase or contract have ended.
Sec. 1631.4 Effective dates.
(a) All provisions of this part apply to purchases and leases of
personal property, contracts for services, and purchases of real estate
made 90 days after the effective date of this rule.
(b) Subparts A, C, and E become effective 90 days after the
effective date for all personal property and real property leased or
purchased by recipients using LSC funds prior to the effective date of
this part.
Sec. 1631.5 Use of funds.
When LSC receives funds from a disposition of property under this
section, LSC will use those funds to make emergency and other special
grants to recipients. LSC generally will make such grants to the same
service area as the returned funds originally supported.
Sec. 1631.6 Recipient policies, procedures, and recordkeeping.
Each recipient shall adopt written policies and procedures to guide
its staff in complying with this part and shall maintain records
sufficient to document the recipient's compliance with this part.
Subpart B--Procurement Policies and Procedures
Sec. 1631.7 Characteristics of procurements.
(a) Characteristics indicative of a procurement relationship
between a recipient and another entity are when the other entity:
(1) Provides the goods and services within its normal business
operations;
(2) Provides similar goods or services to many different
purchasers;
(3) Normally operates in a competitive environment;
(4) Provides goods or services that are ancillary to the operation
of the LSC grant; and
(5) Is not subject to LSC's compliance requirements as a result of
the agreement, though similar requirements may apply for other reasons.
(b) In determining whether an agreement between a recipient and
another entity constitutes a contract under this part or a subgrant
under part 1627, the substance of the relationship is more important
than the form of the agreement. All of the characteristics above may
not be present in all cases, and a recipient must use judgment in
classifying each agreement as a subgrant or a contract.
[[Page 75022]]
Sec. 1631.8 Procurement policies and procedures.
Recipients must have written procurement policies and procedures.
These policies must:
(a) Identify competition thresholds that establish the basis (for
example, price, risk level, or type of purchase) for the level of
competition required at each threshold (for example, certification that
a purchase reflects the best value to the recipient; a price comparison
for alternatives that the recipient considered; or requests for
information, quotes, or proposals);
(b) Establish the grounds for non-competitive purchases;
(c) Establish the level of documentation necessary to justify
procurements. The level of documentation needed may be proportional to
the nature of the purchase or tied to competition thresholds;
(d) Establish internal controls that, at a minimum, provide for
segregation of duties in the procurement process, identify which
employees, officers, or directors who have authority to make purchases
for the recipient, and identify procedures for approving purchases;
(e) Establish procedures to ensure quality and cost control in
purchasing, including procedures for selecting sources, fair and
objective criteria for selecting sources; and
(f) Establish procedures for identifying and preventing conflicts
of interest in the purchasing process.
Sec. 1631.9 Requests for prior approval.
(a) As required by Sec. 1630.6 of this chapter and Sec. 1631.3, a
recipient using more than $25,000 of LSC funds to purchase or lease
personal property or contract for services must request and receive
LSC's prior approval.
(b) A request for prior approval must include:
(1) A statement explaining how the personal property or services
will further the delivery of legal services to eligible clients; and
(2) Documentation showing that the recipient followed its
procurement policies and procedures in soliciting, reviewing, and
approving the purchase, lease, or contract for services.
Sec. 1631.10 Applicability of part 1630.
All purchases and leases of personal property and contracts for
services made with LSC funds must comply with the provisions of 45 CFR
part 1630 (Cost Standards and Procedures).
Subpart C--Personal Property Management
Sec. 1631.11 Use of property in compliance with LSC's statutes and
regulations.
(a) A recipient may use personal property purchased or leased, in
whole or in part, with LSC funds primarily to deliver legal services to
eligible clients under the requirements of the LSC Act, applicable
appropriations acts, and LSC regulations.
(b) A recipient may use personal property purchased or leased, in
whole or in part, with LSC funds for the performance of an LSC grant or
contract for other activities, if such other activities do not
interfere with the performance of the LSC grant or contract.
(c) If a recipient uses personal property purchased or leased, in
whole or in part, with LSC funds to provide services to an organization
that engages in activity restricted by the LSC Act, LSC regulations, or
other applicable law, the recipient must charge the organization a fee
no less than that which private nonprofit organizations in the same
area charge for the same services under similar conditions.
Sec. 1631.12 Intellectual property.
Recipients may copyright any work that is subject to copyright and
was developed, or for which ownership was obtained, under an LSC grant
or contract, provided that LSC reserves a royalty-free, nonexclusive,
and irrevocable license to reproduce, publish, or otherwise use work
copyrighted by recipients, when the work is obtained in whole or in
part with LSC funds.
Sec. 1631.13 Disposing of personal property purchased with LSC funds.
(a) Disposal by LSC recipients. During the term of an LSC grant or
contract, a recipient may dispose of personal property purchased with
LSC funds by:
(1) Trading in the personal property when it acquires replacement
property;
(2) Selling or otherwise disposing of the personal property with no
further obligation to LSC when the fair market value of the personal
property is negligible;
(3) Selling the property at a reasonable negotiated price, without
advertising for quotes, where the current fair market value of the
personal property is $15,000 or less;
(4) Selling the property after having advertised for and received
quotes, where the current fair market value of the personal property
exceeds $15,000;
(5) Transferring the property to another recipient of LSC funds; or
(6) With the approval of LSC, transferring the personal property to
another nonprofit organization serving the poor in the same service
area.
(b) Disposal when no longer a recipient. When a recipient stops
receiving LSC funds, it must obtain LSC's approval to dispose of
personal property purchased with LSC funds in one of the following
ways:
(1) Transferring the property to another recipient of LSC funds, in
which case the former recipient will be entitled to compensation in the
amount of the percentage of the property's current fair market value
that is equal to the percentage of the property's purchase cost borne
by non-LSC funds;
(2) Transferring the property to another nonprofit organization
serving the poor in the same service area, in which case LSC will be
entitled to compensation from the recipient for the percentage of the
property's current fair market value that is equal to the percentage of
the property's purchase cost borne by LSC funds;
(3) Selling the property and retaining the proceeds from the sale
after compensating LSC for the percentage of the property's current
fair market value that is equal to the percentage of the property's
purchase cost borne by LSC funds; or
(4) Retaining the property, in which case LSC will be entitled to
compensation from the recipient for the percentage of the property's
current fair market value that is equal to that percentage of the
property's purchase cost borne by LSC funds.
(c) Disposal upon merger with or succession by another LSC
recipient. When a recipient stops receiving LSC funds because it merged
with or is succeeded by another grantee, the recipient may transfer the
property to the new recipient, if the two entities execute an LSC-
approved successor in interest agreement that requires the new
recipient to use the property primarily to provide legal services to
eligible clients under the requirements of the LSC Act, applicable
appropriations acts, and LSC regulations.
(d) Prohibition. A recipient may not dispose of personal property
by sale, donation, or other transfer of the property to its board
members or employees.
Sec. 1631.14 Use of derivative income from sale of personal property
purchased with LSC funds.
(a) During the term of an LSC grant or contract, a recipient may
retain and use income from any sale of personal property purchased with
LSC funds according to 45 CFR 1630.16 (Cost
[[Page 75023]]
Standards and Procedures: Applicability to derivative income.) and 45
CFR 1628.3 (Recipient Fund Balances: Policy.).
(b) The recipient must account for income earned from the sale,
rent, or lease of personal property purchased with LSC funds according
to the requirements of 45 CFR 1630.16.
Subpart D--Real Estate Acquisition and Capital Improvements
Sec. 1631.15 Purchasing real property with LSC funds.
(a) Pre-purchase planning requirements. (1) Before purchasing real
property with LSC funds, a recipient must conduct an informal market
survey and evaluate at least three potential equivalent properties.
(2) When a recipient evaluates potential properties, it must
consider:
(i) The average annual cost of the purchase, including the costs of
a down payment, interest and principal payments on a mortgage financing
the purchase; closing costs; renovation costs; and the costs of
utilities, maintenance, and taxes, if any;
(ii) The estimated total costs of buying and using the property
throughout the mortgage term compared to the estimated total costs of
leasing and using a similar property over the same period of time;
(iii) The property's quality; and
(iv) Whether the property is conducive to delivering legal services
(e.g. property is accessible to the client population (ADA compliant)
and near public transportation, courts, and other government or social
services agencies).
(3) If a recipient cannot evaluate three potential properties, it
must be able to explain why such evaluation was not possible.
(b) Prior approval. Before a recipient may purchase real property
with LSC funds, LSC must approve the purchase as required by 45 CFR
1630.6 and 1631.3. The request for approval must be in writing and
include:
(1) A statement of need explaining how the purchase will further
the delivery of legal services to eligible clients, including:
(i) The information obtained and considered in paragraph (a);
(ii) Trends in funding and program staffing levels in relation to
space needs;
(iii) Why the recipient needs to purchase real property; and
(iv) Why purchasing real estate is reasonable and necessary to
performing the LSC grant.
(2) A brief analysis comparing:
(i) The estimated average annual cost of the purchase including the
costs of a down payment, interest and principal payments on a mortgage
financing the purchase; closing costs; renovation costs; and the costs
of utilities, maintenance, and taxes, if any; and
(ii) The estimated average annual cost of leasing or purchasing
similar property over the same period of time;
(3) Anticipated financing of the purchase, including:
(i) The estimated total acquisition costs, including capital
improvements, taxes, recordation fees, maintenance costs, insurance
costs, and closing costs;
(ii) The anticipated breakdown of LSC funds and non-LSC funds to be
applied toward the total costs of the purchase;
(iii) The monthly amount of principal and interest payments on debt
secured to finance the purchase, if any;
(4) A current, independent appraisal sufficient to secure a
mortgage;
(5) A comparison of available loan terms considered by the
recipient before selecting the chosen financing method;
(6) Board approval of the purchase in either a board resolution or
board minutes, including Board approvals that are contingent on LSC's
approval;
(7) Whether the property will replace or supplement existing
program offices;
(8) A statement of handicapped accessibility for the disabled
sufficient to meet the requirements of 45 CFR 1624.5 or a statement
that the property will be accessible upon the completion of any
necessary capital improvements. Such improvements must be completed
within 60 days of the date of purchase; and
(9) A copy of a purchase agreement, contract, or other document
containing a description of the property and the terms of the purchase.
(c) Property interest agreement. Once LSC approves the purchase,
the recipient must enter into a written property interest agreement
with LSC. The agreement must include:
(1) The recipient's agreement to use the property consistent with
Sec. 1631.16;
(2) The recipient's agreement to record, under appropriate state
law, LSC's interest in the property;
(3) The recipient's agreement not to encumber the property without
prior LSC approval; and
(4) The recipient's agreement not to dispose of the property
without prior LSC approval.
Sec. 1631.16 Capital improvements.
(a) As required by Sec. 1630.6 of this chapter and Sec. 1631.3, a
recipient must obtain LSC's prior written approval before using more
than $25,000 LSC funds to make capital improvements to real estate.
(b) The written request must include:
(1) A statement of need explaining how the improvement will further
the delivery of legal services to eligible clients;
(2) A brief description of the nature of the work to be done, the
name of the sources performing the work, and the total expected cost of
the improvement; and
(3) Documentation showing that the recipient followed its
procurement policies and procedures in competing, selecting, and
awarding contracts to perform the work.
(c) A recipient must maintain supporting documentation to
accurately identify and account for any use of LSC funds to make
capital improvements to real estate owned by the recipient.
Subpart E--Real Estate Management
Sec. 1631.17 Using real estate purchased with LSC funds.
(a) A recipient must use real estate purchased or leased, in whole
or part, with LSC funds primarily to deliver legal services to eligible
clients consistent with the requirements of the LSC Act, applicable
appropriations acts, and LSC regulations.
(b) A recipient may use real estate purchased or leased, in whole
or part, with LSC funds for the performance of an LSC grant or contract
for other activities, if they do not interfere with the performance of
the LSC grant or contract.
(c) If a recipient uses real estate purchased or leased, in whole
or part, with LSC funds to provide space to an organization that
engages in activity restricted by the LSC Act, applicable
appropriations acts, LSC regulations, or other applicable law, the
recipient must charge the organization rent no less than that which
private nonprofit organizations in the same area charge for the same
amount of space under similar conditions.
Sec. 1631.18 Maintenance.
A recipient must maintain real estate acquired with LSC funds:
(a) In an efficient operating condition; and
(b) In compliance with state and local government property
standards and building codes.
Sec. 1631.19 Insurance.
At the time of purchase, a recipient must obtain insurance coverage
for real estate purchased with LSC funds which is not lower in value
than coverage it has obtained for other real property it owns and which
provides at least the following coverage:
(a) Title insurance that:
[[Page 75024]]
(1) Insures the fee interest in the property for an amount not less
than the full appraised value as approved by LSC, or the amount of the
purchase price, whichever is greater; and
(2) Contains an endorsement identifying LSC as a loss payee to be
reimbursed if the title fails.
(3) If no endorsement naming LSC as loss payee is made, the
recipient must pay LSC the title insurance proceeds it receives in the
event of a failure.
(b) A physical destruction insurance policy, including flood
insurance where appropriate, which insures the full replacement value
of the facility from risk of partial and total physical destructions.
The recipient must maintain this policy for the period of time that the
recipient owns the real estate.
Sec. 1631.20 Accounting and reporting to LSC.
A recipient must maintain an accounting of the amount of LSC funds
relating to the purchase or maintenance of real estate purchased with
LSC funds. The accounting must include the amount of LSC funds used to
pay for acquisition costs, financing, and capital improvements. The
recipient must provide the accounting for each year to LSC no later
than April 30 of the following year or in its annual audited financial
statements submitted to LSC.
Sec. 1631.21 Disposing of real estate purchased with LSC funds.
(a) Disposal by LSC recipients. During the term of an LSC grant or
contract, a recipient must seek LSC's prior written approval to dispose
of real estate purchased with LSC funds by:
(1) Selling the property after having advertised for and received
offers; or
(2) Transferring the property to another recipient of LSC funds, in
which case the recipient may be compensated by the recipient receiving
the property for the percentage of the property's current fair market
value that is equal to the percentage of the costs of the original
acquisition and costs of any capital improvements borne by non-LSC
funds.
(b) Disposal after a recipient no longer receives LSC funding. When
a recipient who owns real estate purchased with LSC funds stops
receiving LSC funds, it must seek LSC's prior written approval to
dispose of the property in one of the following ways:
(1) Transfer the property title to another grantee of LSC funds, in
which case the recipient may be compensated the percentage of the
property's current fair market value that is equal to the percentage of
the costs of the original acquisition and costs of any capital
improvements by non-LSC funds;
(2) Buyout LSC's interest in the property (i.e., pay LSC the
percentage of the property's current fair market value proportional to
its percent interest in the property); or
(3) Sell the property to a third party and pay LSC a share of the
sale proceeds proportional to its interest in the property, after
deducting actual and reasonable closing costs, if any.
(4) When a recipient stops receiving LSC funds because it merged
with or is succeeded by another recipient, it may transfer the property
to the new recipient. The two entities must execute an LSC-approved
successor in interest agreement that requires the transferee to use the
property primarily to provide legal services to eligible clients under
the requirements of the LSC Act, applicable appropriations acts, and
LSC regulations.
(c) Prior approval process. No later than 60 days before a
recipient or former recipient proposes to dispose of real estate
purchased with LSC funds, the recipient or former recipients must
submit a written request for prior approval to dispose of the property
to LSC. The request must include:
(1) The proposed method of disposition and an explanation of why
the proposed method is in the best interests of LSC and the recipient;
(2) Documentation showing the fair market value of the property at
the time of transfer or sale, including, but not limited to, an
independent appraisal of the property and competing bona fide offers to
purchase the property;
(3) A description of the recipient's process for advertising the
property for sale and receiving offers;
(4) An accounting of all LSC funds used in the acquisition and any
capital improvements of the property. The accounting must include the
amount of LSC funds used to pay for acquisition costs, financing, and
capital improvements; and
(5) Information on the proposed transferee or buyer of the property
and a document evidencing the terms of transfer or sale.
Sec. 1631.22 Retaining income from sale of real property purchased
with LSC funds.
(a) During the term of an LSC grant or contract, a recipient may
retain and use income from any sale of real property purchased with LSC
funds according to Sec. Sec. 1630.16 and 1628.3 of this chapter.
(b) The recipient must account for income earned from the sale,
rent, or lease of real or personal property purchased with LSC funds
according to the requirements of Sec. 1630.16 of this chapter.
Dated: October 20, 2016.
Stefanie K. Davis,
Assistant General Counsel.
[FR Doc. 2016-25831 Filed 10-27-16; 8:45 am]
BILLING CODE 7050-01-P