Definitions; Cost Standards and Procedures; Purchasing and Property Management, 75006-75024 [2016-25831]

Agencies

• LEGAL SERVICES CORPORATION

[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: lscrulemaking@lsc.gov. 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), sdavis@lsc.gov.

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, https://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.

[[Page 75008]]

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 
https://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 https://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 https://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