[Excerpt from Federal Register / Vol. 59, No. 170 / Friday, September 2, 1994 / 45815 (amendments to JTPA regulations)] Subpart D--Administrative Standards Grant Agreement and Funding. Section 627.405 establishes a new annual grant agreement process to facilitate the obligation, accounting, and closeout of JTPA funds by year of appropriation. No specific comments were received on this section and comments generally related to this section and other sections are responded to in other sections of this Preamble. No changes are made to this section. Reallotment and Reallocation. Section 627.410 implements the new section 109 of the Act, which requires the Governor to reallocate, among SDA's in the State, unobligated funds in excess of 15 percent of any SDA's program year title II allocation. A number of commenters responded on the provisions of this section. Almost all of them recommended basing reallocations on obligations rather than expenditures and questioned whether a State could adopt a more restrictive reallocation policy based on expenditures. Most of the other comments were requests that the regulations further clarify the reallotment and reallocation provisions of the Act including an interpretation of section 109(a)(3) of the Act concerning SDA's that have the highest rates of unemployment for an extended period of time and the highest poverty rates. One commenter pointed out a potential conflict between the provisions of section 109 of the Act, which bases reallocation on obligations, and section 161(b)(1) of the Act, which ties reallocation to expenditures. Another commenter raised the issue of whether Title II-B (summer) funds could be reallocated. Given the legislative history of the statutory provision, particularly the 1991 House Committee Report (H.R. Rep. No. 102-240, 63 and 64 (1991)), the Department believes that the intent of Congress was to ensure effective, timely use of the funds. The Department previously suggested that another interpretation, based upon the provisions of section 161(b) of the Act, might permit a more rigorous standard, such as expenditure. However, upon further review, the Department believes that the language in the statute is clear in providing that the basis for reallocation is to be the ``obligation'' of funds and the Department now believes that an interpretation that is more restrictive would be inconsistent with the Act. A new paragraph (a)(2) is added that prohibits the Governor from imposing reallocation requirements that are based on other than obligations. While it may be true, as some commenters suggested, that basing reallocation solely on obligations may lead to last minute obligations of funds which have little program purpose simply to avoid reallocation, the Department is constrained by the statutory language and cannot use that possibility as a basis for varying from a clear statutory requirement. In regard to further interpretation of section 109(a)(3) of the Act concerning SDA's that have the highest rates of unemployment for an extended period of time and the highest poverty rates, the Department is not expanding on this criterion and is leaving the interpretation of this section to each Governor, as provided in the Conference Committee Report on the Amendments. Insurance A few commenters responded to the provisions of Sec. 627.415. A few other commenters on Sec. 627.435, Allowable costs and cost principles, suggested that Sec. 627.435 should include provisions for allowing the costs of contributions to reserves for self-insurance to be specifically allowed in that section. After considering these comments, paragraph (c) of Sec. 627.415 of the interim final rule is removed and the substance of the second sentence concerning contributions to a reserve for a self-insurance program is moved to Sec. 627.435(h). The first sentence of this paragraph (c) basically repeated the provisions of Sec. 627.315(b), Benefits and working conditions, and is, therefore, unnecessary in this provision. A few commenters were concerned about the scope of insurance coverage required by the rule. Some asked whether the rule required them to provide insurance coverage for work-related activities or for all training. One thought that the regulation required ``no fault'' coverage that could be satisfied through an ordinary comprehensive liability policy. Section 627.415 does not address the scope of insurance coverage. Section 627.315(b) requires worker's compensation or similar insurance coverage for work-related training activities. States and SDA's/SSG's should provide such coverage as they deem prudent and as are in accordance with their normal insurance procedures, both in terms of the types of risks covered and the method of coverage (self-insurance or purchase of insurance policies). Procurement. Section 627.420 sets forth the procurement requirements for titles I, II, and III of JTPA. Some commenters thought that the procurement portion of the interim final regulations is an example of overregulation, while others believed that the regulations did not go far enough. In response to the comments concerning overregulation, the Department notes that section 164(a)(3) of the Act requires the Secretary to take into consideration the OMB circulars and that these regulations actually represent a pared-down version of the OMB Circulars. As such, they represent less federal regulation than is applied to other Federal grant programs. In response to the comments concerning underregulation, the Department does not agree. The requirements that are established should help maximize competition, ensure fiscal accountability, and prevent fraud and abuse in JTPA programs. The Department believes that the final regulation represents a reasonable balance between providing guidance on the issues on which the Secretary is required to set minimum requirements under section 164(a)(3) of the Act and recognizing the prerogatives of the Governors to develop their own procurement rules, which also is recognized in that provision. Although at the Federal level there are rules for when to use contracts, grants and cooperative agreements, these rules are not applicable to the JTPA. As a result, what one State calls a contract, another State might call a grant. In order to avoid confusion in these regulations, the following terms are being used: ``Award'' or ``agreement'' means a contract, grant, subcontract, subgrant or other type of legal instrument; ``awardee'' means any one of the entities receiving the award (e.g., contractors, grantees). There was concern expressed over whether buying certain supplies, like floppy disks, at office supply stores and other similar businesses constitutes an award. Through these regulations, an upper limit for small purchases (which can be lowered, but not raised, by the Governor's procurement standards) is established. No further breakdowns are delineated in the regulations. The Governor can, through the State procurement standards, establish other thresholds for the purchasing of consumable materials with credit cards and such, and not require a formalized award process (e.g., competition or cost/price analysis) or document. As an example, the current Federal ceiling is $2,500 per consumable item. Section 627.420(a) reiterates the requirement established through the Amendments that the Governor establish procurement standards to ensure fiscal accountability and prevent fraud and abuse in JTPA programs. This section further requires the State and local levels to follow procurement policies and procedures used for non-Federal funds, with some caveats, and reiterates the non-duplication requirement contained in section 107(b) of the Act. A small number of commenters were concerned that the requirement that the State and local levels follow their own procurement policies and procedures used for non- Federal funds would result in awards always being made to the lowest bidder without other considerations, such as performance. State and local rules are to be followed as long as they comply with the minimum requirements of the procurement section. One of the requirements for the selection of vendors and subrecipients (discussed below) is that the awarding agency make a determination of demonstrated performance prior to award. If, as a result of this determination, it is apparent that the lowest bidder cannot perform the work at an acceptable level of quality, SDA's should not make an award to that bidder. A few commenters were concerned that the nonduplication requirement of Sec. 627.420(a)(5) would make it difficult for SDA's to select service providers. This requirement reflects the provisions of section 107(b) of the Act and is necessary to maximize the use of JTPA funds. One of the initial steps in any JTPA procurement should be a determination concerning whether or not procuring such services (whether competitively or through sole source) would be a duplication. The determination of non-duplication need not be exhaustive; it may take into account such things as the cost of the existing services, waiting lists, the effectiveness of the services to be provided, and the likelihood of achieving performance goals. Although there may be entities in the geographic area which provide the required services, these entities may not provide the necessary customized training or may not be able to provide these services in a timely manner. A few commenters felt that the vendor/subrecipient distinction (see the definitions sections of the preamble and the regulations) found in other parts of the regulations was not clear in this section. This section is intended to apply to all awards and, for the purposes of this section, the same rules apply to the procurement of awards to both vendors and subrecipients. Thus, the vendor/subrecipient distinction is not treated in this section as it is in other provisions of the regulations. Section 107(e) of the Act requires that selection of service providers include documentation of compliance with procurement standards established by the Governor. Section 627.420(a) is expanded by adding a definition of procurement to mean the process which leads to any award of JTPA funds. Some commenters wondered if the requirements for a determination of demonstrated performance, contained in Sec. 627.422, Selection of Service Providers, applied to vendors. Based on the definition of service providers, this requirement does apply to vendors. On its surface it may appear that the requirement for a determination of demonstrated performance goes against the requirements for full and open competition. Since the overall goal of JTPA is to provide high quality services to eligible participants, the requirement of the determination of demonstrated performance leads to the meeting of this goal by requiring the selection of entities that can do the work effectively. This requirement further supports the fiscal accountability and prevention of fraud requirements of the Act, since demonstrated performance includes such things as a satisfactory record of integrity. Section 627.420(b) further delineates the Act's requirement of full and open competition. A few commenters asked for definitions of certain terms, such as ``arbitrary action'' and ``overly restrictive specification.'' Since each procurement action and system must be looked at on a case-by-case basis, the Department thinks that it would be inappropriate to define these terms. If further definition is required at the State level, the Governor may do so in the guidelines that he/she establishes. A few commenters were concerned that stricter State procurement codes could take precedence over Federal regulations. These commenters are correct; the Governor has the discretion to make the procurement rules more strict. However, the Governor does not have the authority, unless indicated in the law or regulations, to make a legislative and/or regulatory requirement less strict. One commenter felt that paragraph (b)(2)(i) should require an identification of quantities to be purchased. This change is made. Section 627.420(c) establishes conflict of interest requirements. Although there is a separate subsection that addresses PIC conflict of interest, PIC's were also included in the subsections that address recipient and subrecipient conflict of interest. A few commenters correctly pointed out that by inclusion in the latter, it would make it impossible for companies for which PIC members work to be awarded JTPA funds. This section is amended to remove the reference to PIC members in paragraph (c)(2) and is reorganized to increase clarity. Paragraph (c)(4), which deals with PIC conflict of interest is redesignated as paragraph (c)(3) but remains unchanged. Because of the separate treatment of PIC's and recipients/subrecipients, the portions of paragraph (c)(2), which provide information on when a conflict of interest would arise for either PIC's or recipients/subrecipients, are moved into a separate paragraph (c)(4). It should be noted that the phrase ``is about to employ'' in paragraph (c)(4)(iv) also applies to cases of negotiation for employment. The language is not changed in order to maintain consistency with the OMB Circulars. The original paragraph (c)(5) is combined with paragraph (c)(1), since both deal with standards of conduct. Several commenters submitted comments on Sec. 627.420(d). This section is based on OMB Circular A-102, and describes the four procurement methods that are available to JTPA entities. Language is added to Sec. 627.420(d)(1)(i), prohibiting awards from being broken down into several purchases merely to be able to use small purchase procedures. The Department does not intend that small purchase procedures be used improperly to avoid the more formal competitive processes. The majority of these comments concerned paragraph (d)(4) of the interim final rule (redesignated in the final rule as (d)(1)(iv)), which provides a listing of the circumstances under which recipients and subrecipients may use the sole-source method of procurement. One of the circumstances calls for awarding agency approval of noncompetitive proposals. The final regulations are changed to state that for SDA's, SSG's and subrecipients, the awarding agency provides authorization; for States, the noncompetitive proposal is approved through the State's normal sole source approval process. Without this change, States would have had to submit their proposed sole source awards that do not meet one of the circumstances to the Department of Labor, the awarding agency. The amendments require that all sole source awards be justified and documented in writing. When a State or other subrecipient identifies specific entities that may be sole-source awardees (e.g., the Employment Service for assessment services) by their subrecipients, the State or other subrecipient that identifies the specific entity is responsible for the justification and documentation that serves as the basis for that specific sole source selection. In regard to both the OJT and classroom training (CRT) sole source exceptions, there was some confusion concerning the requirement that not only does the procurement have to meet one of the criteria, but also has to be infeasible under small purchase procedures, sealed bids or competitive proposals. Clearly, OJT and individual CRT placements are unique in the procurement world. Neither is usually procured through a competitive Request for Proposal (RFP) process. Although both should be procurable under small purchase procedures, some State rules may not allow this. As a result, the regulations are revised to allow the sole source procurement of OJT (except awards to brokering contractors) and individual CRT without having to demonstrate that the three other methods of procurement are infeasible. This provision of the regulation may be used in the written justification for such sole source authority. In regard to the sole source exception for procurement of ``Enrollment of individual participants in classroom training,'' some commenters expressed a concern that this would be used to justify sole source awards for the referral of a number of individuals to the same classroom training. This exception may be used to justify a sole source award to place an individual participant in classroom training. If a recipient or subrecipient, over the course of a year, makes sufficient individual referrals to the point that the small purchase maximum is exceeded (either the level established through these regulations or the State established level, whichever is lower), they will be expected to compete the requirement the following year. If it is necessary to procure a class for JTPA participants only, it is not appropriate to use this sole source exception. It may, though, be appropriate to use small purchase procedures or to justify the sole source procurement of the class through other exceptions. Several commenters thought that setting up Labor Management Committees should be listed as one of the allowable sole source criteria. The expenses incurred in the formation of these committees promoted by the State's Dislocated Worker Units would be a rapid response expense (section 314(b)(1)(B)), subject to the financial management and procurement procedures of the States. In most cases, it is expected that the costs of setting up a Labor Management Committee would not be great and that small purchase procedures may apply. Therefore, the regulations are not changed. If a committee were to apply to be a service provider, procurement rules would apply. If a committee, as a service provider, were to use JTPA monies to procure services for participants, procurement rules also apply. Section 627.420(d) is reorganized by redesignating the subordinate paragraphs and including a new paragraph (d)(2), which authorizes units of State or local government or SDA and SSG administrative entities to pass through monies to like organizations, e.g., a public housing authority, and not have the procurement requirements apply. When monies are passed through, the receiving organization must either pass the monies through to a similar organization, or procure services in accordance with the procurement rules. The passing through of funds is a method of transferring monies to the actual entity doing the procuring which is practiced at the Federal, State, and local levels. The new language reflects this acceptable practice. The Department cautions that organizations which may receive pass throughs may also receive funds as service providers, in which case procurement rules will apply to awards to these entities. A number of commenters submitted comments on Sec. 627.420(e). Section 164(a)(3)(C) of the Act established the requirement that ``procurements shall include an appropriate analysis of the reasonableness of costs and prices.'' Several of the commenters disagreed with the use of the phrase ``cost or price analysis'' (as compared to ``cost and price analysis''). The Department interprets the requirement of ``an appropriate analysis'' to mean that recipients and subrecipients are required to do whatever analysis (price or both cost/ price) is appropriate to their situation. This is supported by OMB Circular A-102, which requires a price analysis alone under very limited circumstances, and requires a price analysis whenever a cost analysis is undertaken. Additionally, the commercial reality is that in many cases you either cannot do both a cost and price analysis (when there are no market prices or historical contract prices available) or it would be superfluous to do both (when what is being bought is available at catalogue prices). Concern was also expressed over the requirement that recipients and subrecipients perform a cost or price analysis in connection with every procurement, including modifications. Some commenters believed that the paragraph (e)(1) requirement for a cost or price analysis for all modifications should be changed to exclude non-monetary modifications. After consideration of this concern, paragraph (e)(2) is amended to reflect this exclusion. Care should be taken, though, in determining which modifications do not have monetary implications. For example, a modification to reduce the number of participants may, on its face, appear to be non-monetary. This is not the case. A modification to reduce the number of participants, without a corresponding reduction in funding, results in an increase in the cost per participant. Therefore, this type of modification is one which has monetary impact. Section 627.420(e)(2) describes cost or price analysis requirements. This paragraph is revised in order to make it easier to read, but the requirements are not changed. This paragraph requires recipients and subrecipients to make independent estimates before receiving bids or proposals. This requirement, which also comes from OMB Circular A-102, appears to have caused confusion. A number of commenters felt that SDA's would not be able to develop such estimates, due to the fact that they do not know which specific activities will be offered by a service provider until offers are received in response to RFP's. In those cases where it is not known what specific services will be provided, it will be appropriate for recipients and subrecipients to develop ``rough yardsticks,'' such as cost per placement or cost per enrollee, for specific types of training. These independent estimates are used, in part, as a tool to determine whether or not the proposals are correctly responding to the technical requirements of the RFP. The estimates are also used to determine the reasonableness of costs/prices which are offered. An offer which is priced too low may be indicative of, among other things, an offeror who does not understand the requirements of the RFP. An offer which is priced too high may contain more expensive interventions than are required. Only through the comparison of the costs and prices contained in each offer with the estimate can these potential problems be identified. It should be stressed, however, that the independent estimates are not absolute barriers to accepting higher or lower cost proposals; the estimates are merely meant for internal guidance. An awarding agency may select for award a proposal that is more or less costly than the estimates, if it determines that the costs and price(s) are reasonable and that the services offered meet program requirements. The level of detail that recipients and subrecipients need in developing these estimates may be specified by the Governor in the State standards. Several commenters indicated that awarding agencies should include the independent estimates in the RFP. Under no circumstances is this to be done. Since the purpose of developing the estimates is for internal control, publicizing them would defeat the purpose for which they are developed and might also skew the bidding. One of the Sec. 627.420(e)(2) requirements for cost analysis comes into play when the offeror is required to submit the elements of the estimated cost. This is clarified by indicating that this requirement applies in the case of subrecipient relationships. Subrecipients are required to allocate costs to the various JTPA cost categories; therefore, they are to submit the separate elements of their costs. Section 627.420(e)(3) reiterates the requirement of section 164(a)(3)(D) of the Act that ``procurements shall not provide excess program income * * * or excess profit.'' The Act lists some of the factors that shall be taken into consideration in determining whether program income or profit is excessive. Through the regulations, additional factors from OMB Circular A-102 have been added. Further, based on this Circular, the instances when profit or program income is negotiated are defined. A few commenters on this section, as well as Sec. 627.440, Classification of Costs, raised questions concerning fixed unit price, performance-based contracts (FUPC's), including whether FUPC's could continue to be used and, if so, whether costs could be allocated to the JTPA cost categories based on budgeted amounts or whether they must be charged based on actual costs incurred. Concern also was expressed both over the requirement that offerors certify their costs and the prohibition of excess program income or profit, in relation to fixed- price agreements. The Department continues to believe that the use of performance based awards may be of significant benefit in serving JTPA customers. In addition, the use of a total fixed price or ceiling price in making awards may also be an effective mechanism. The regulation does not prohibit reasonable profits in the context of a fixed-price agreement. Fixed-price agreements are instruments that place more risk on the awardee than do cost reimbursement agreements. The reason for this is that the awardee, under a fixed-price agreement must perform the work, regardless of the costs to the awardee. In the case of an awardee under a cost reimbursement type of agreement, the awarding agency will reimburse the awardee for its allowable costs. If the awardee under a fixed-price agreement is able to do the work at a lower cost, due to efficiencies in operations, and this increases the level of profit, the awardee is due that additional profit. If successful awardees who have increased profit due to efficient performance are required to reduce their earned profits to the budgeted levels, this would result in a disincentive for organizations to perform their work more efficiently, quickly, etc. If the additional profit results from cost data that was not accurate, complete or current, as certified, then the awarding agency may be able to recoup that excess from the awardee. Thus, the requirement that costs be certified provides a needed protection to awarding agencies. There has been skepticism that fixed price contracts, as utilized in JTPA, did not contain risks for the awardee or operate as performance/outcome based agreements. The system can expect continued high levels of scrutiny by the OIG in the case of fixed price agreements. In the case of awards to subrecipients, when: (1) The awarding agency has done a cost and price analysis; (2) this analysis has been documented; (3) the conclusions arrived at are reasonable; and (4) the offeror has certified in writing that to the best of its knowledge and belief, the cost and pricing data submitted are accurate, complete and current at the time of agreement on price, the awarding agency may find it appropriate to use a fixed-price type of agreement. The costs of such an agreement may be allocated among the benefitting cost categories based upon the ratios established in the cost analysis. One commenter did not believe that it was the Department's intent to require SDA's/SSG's to track profit earned by commercial organizations. In point of fact, section 165(g)(1) of the Act requires each State, SDA, and SSG to maintain records with respect to subrecipients, including commercial organizations, that identify any program income or profit earned. Section 627.420(e)(4) is amended to correct a miscitation from Sec. 627.435(e) to Sec. 627.435(i). Section 627.420(e)(5) prohibits the use of the cost-plus percentage of cost method. This prohibition comes from both OMB Circular A-102 and the FAR. A few commenters indicated that this was an advantageous procurement method. This Federal-wide prohibition is being maintained in the final regulations due to the fact that these types of agreements provide a disincentive to vendors/subrecipients to reduce costs, since the higher the overall cost of the agreement, the higher the profit. It is recommended that JTPA entities negotiate specific dollar levels of profit, or investigate the possible use of other types of agreements, such as cost-plus award fee. Further, there appears to be some misunderstanding concerning the allowability of using fixed-price agreements. Fixed-price agreements are the preferred type of agreement when using the sealed bid (Invitation for Bids) process. Fixed-price agreements may be performance-based and may be chargeable to a benefiting cost category based upon a documented cost analysis, as discussed above, the services provided, and whether the agreement is for tuition or for a commercially available training package, as discussed in connection with Sec. 627.440. Section 627.420(g) which reiterates the requirement found in section 164(a)(3)(I) of the Act that procurement transactions between units of State or local government or entities organized principally as the administrative entity for SDA's or SSG's, shall be on a cost- reimbursable basis. The final rule now clarifies that cost-plus types of agreements are not allowable (e.g., cost-plus fixed-fee). Based on one comment, language is added concerning the payment of tuition and/or entrance fees to schools that are part of a governmental entity. The specific instances under which tuition and entrance fees may be paid, without breaking them down to their specific cost elements, are listed. Several commenters addressed Sec. 627.420(h), which establishes the requirement that recipient and subrecipient procurements clearly specify deliverables and the basis for payment, and include specified clauses. A few comments were received questioning the example that was given in the preamble to the interim final regulations of withholding final payment to an OJT contractor until the participant has been retained on the job for a specified period of time after the completion of training. The commenters wondered if the Department has predetermined deliverables for OJT. The discussion was intended merely as an example and does not set a hard and fast rule for OJT contracts, although the Department sees that such a contract provision might facilitate retention upon completion of OJT. In the final regulations, paragraph (h)(2) on required clauses is revised, to break it into three paragraphs: clauses required for subrecipient awards; vendor awards; and vendor and subrecipient awards. In response to concerns expressed, the applicability of clauses such as copyright and rights in data is narrowed. Several commenters correctly pointed out that the regulations did not specify what the patent, copyright and rights and data clauses should be. The final rule is amended to remove the requirement for patent rights (since it is not expected that many patentable items will be developed using JTPA funds) and to include additional information on copyright and rights in data clauses. In the case of the copyrights clause requirement, the application of this clause is limited to those awards which involve the use or development of copyrighted materials. Also, the breach of award and termination clauses are expanded to cover all awards. In the newly designated paragraph (h)(4)(i), which relates to breach of agreements, this clause is now required to be included in all agreements, rather than be limited to those which exceed the small purchase limit. The rationale for this change is that a breach in a small purchase situation can be as damaging to the JTPA program as those in large dollar awards. Section 627.420(i) establishes the requirement that recipients and subrecipients have written protest procedures. A few comments were submitted on this section. One wondered how paragraph (i)(2), the referral of violations of law, related to TEGL 6-84 and the incident reporting system. This section of the regulations is amended to reference Sec. 627.500(b) of the regulations, which establishes the referral requirements. Selection of Service Providers Section 627.422 establishes the requirements for the selection of service providers. One commenter felt that the selection of service providers should be essentially a blind process, in which the specific sector of the provider is secondary to the provider's demonstrated ability. This is an accurate statement of the general intent of the Amendments and of the Department in developing this section of the regulations. Given the large amount of funds that are budgeted for JTPA titles II and III, it is important to ensure that procurements are done in a manner that will not only promote the integrity of the process and the efficient expenditure of the monies but will also allow organizations an opportunity to fairly compete to provide these services. Although it may be administratively easier to sole source the bulk of the JTPA monies, this not only is unfair to the other potential service providers in a specific geographic area, but it also could result in a diminution of the number of organizations that are able to provide services to the JTPA system as well as in an increase of costs due to the lack of competition. One commenter correctly pointed out that the first sentence of Sec. 627.422(b) was missing a reference to recipients and subrecipients. The final rule is amended accordingly. A small number of commenters wondered why the regulations call for the Governor to establish guidelines on the selection of service providers, when the Act calls for the Secretary to establish guidelines. The Secretary has established minimum guidelines through these regulations. The Governor is given the authority to expand on these guidelines. Section 627.422(c) establishes the requirement that when a State, SDA, SSG, or administrative entity determines that it will provide services, it must first make a determination, in writing, under the standards of Sec. 627.422(d), of the demonstrated performance of its staff. A number of commenters expressed concern that this section went beyond the intent of the Congress. A number of commenters argued that the ``self-determination'' requirement is inappropriate because it infringes on the rights of PIC's or SDA's to make their own decisions on the mix of services according to local considerations. The self-determination requirement implements the requirements of sections 107 (a) and (e) and 164(a)(3)(A) of the Act for competitive selection of service providers. These requirements do reduce local discretion to the extent that they prevent any SDA/SSG from selecting its service providers without adherence to the rules of a competitive selection process. An SDA/SSG may not select an ``independent'' service provider without adhering to the competitive procurement rules which is as much an intrusion on its discretion as is the requirement that it justify its selection of an in-house service provider. The purpose of the Act's new emphasis on competition in the procurement process is to ensure that the JTPA program provides the best available services at the most advantageous price. This rationale is equally applicable no matter what the identity of the service provider. Obtaining services through a competitive selection process enables decisionmakers to periodically review the quality of, necessity for, and cost of the services that are being used. It would defeat the purpose of the competitive selection process if one kind of service or one kind of service provider were exempted from this periodic review. Thus, it is critical to the integrity of the competitive selection process that the selection of all service providers, including in-house providers, be subject to periodic review and to regular redetermination of the quality and cost effectiveness of the services provided as well as their responsiveness to the needs of the participants. For this reason, the Department has decided to retain the self-determination requirement in the final rule. Other commenters thought that this requirement was not needed since the sanctions that occur for failure to meet performance standards provide all the protection needed against arbitrary decisions to perform services in-house. It is true that these available sanctions will help lead to a better program, but the earliest that they will lead to the increased full and open competition required by the Amendments is after two or three years when performance standards are not met and the sanctions are imposed. Since it is the Department's intent to increase competition immediately, it is appropriate to impose the self-determination requirement. The comments revealed some confusion over the types of services that would be covered by the requirement of paragraph (c). Several commenters indicated that intake and assessment should not be included as services that should be competitively procured. Covered services, in the final regulations, are defined to exclude intake and eligibility determination, which are services that are the basic responsibility of SDA's/SSG's. Another concern expressed was that a vote by a PIC to provide an activity in-house will require the PIC to vote on a matter that will directly benefit the JTPA agency. Since the enactment of JTPA and the formation of PIC's, PIC's have had to make decisions and vote on the provision of services internally. This may well be an apparent conflict of interest, but the conflict is inherent in the role of the PIC, and it is a conflict whether or not the SDA is required to justify the decision. Further, if the requirement for self-determination had not been established in the regulations, States, SDA's, SSG's, and administrative entities for SDA's and SSG's would be required to compete all of the services. It is not the Department's intent to require recipients and subrecipients to go through a full fledged competitive process or to impose onerous procedural requirements, but merely to assure that they periodically consider whether the methods by which the services are provided meet the Act's standards for cost and quality. For States, SDA's and SSG's that have already been running programs in-house, the determination to keep services in-house will be relatively easy. The determination will be more involved for SDA's and SSG's that propose to conduct services and activities which have traditionally been contracted out and should have a rationale for so doing. Some commenters provided reasons why they provided services in- house. These reasons included avoiding brokerage fees for OJT development and providing backup capacity if contractors fail. Both these reasons for performing these services in-house are legitimate ones, which should suffice as part of the justification required by this requirement. Some commenters wondered where the self-determination of demonstrated performance should be documented. Since it is not expected that the documentation be voluminous, the Department believes that it would be appropriate for recipient and subrecipient administrators to address the criteria listed in paragraph (d) in writing, in the JTP, GCSSP or EDWAA plan. In the case of the requirement of paragraph (d)(2) that the service provider possess, ``[t]he ability to meet the program design specifications at a reasonable cost,'' recipients and subrecipients need not undertake extensive cost comparisons. Section 627.422(d) implements the requirement in section 107(a) of the Act that the Secretary develop guidelines on determining demonstrated performance. Concern was also expressed that use of CBO's might be restricted by the requirement in paragraph (d)(1) that service providers have adequate financial resources or the ability to obtain them. Comments indicated that many CBO's only support is JTPA programs and their financial stability rests with their ability to win JTPA contracts. Where the reimbursement method is used, the entity must either have the financial resources to cover expenses until reimbursed, or must be able to obtain the financial resources through loans, etc. In the case of CBO's, many will be placed on an advance method of payment. As a result, the financial resources test is considerably less stringent. Awarding agencies should, however, check the financial stability of all organizations in order to determine that they possess the financial wherewithal to adequately undertake a JTPA program and whether they are on the verge of bankruptcy. Section 627.422 (e) and (f) reiterate the language of section 107 (a) and (c) of the Act concerning CBO's and educational institutions. These provisions must be interpreted in conjunction with the goal of the regulations to establish an ``even playing field.'' CBO's and educational institutions are to be provided copies of any RFP's, etc. Any proposals that are received from CBO's and educational institutions are to be reviewed and rated in the same manner as proposals from any other organizations. It must be noted that the 90/10 arrangements authorized for use with CBO's or non-profits are not to be taken into consideration in the rating criteria. Based on the special mention in the Act of CBO's, it would be appropriate in instances where competing proposals are rated the same, to use as a tie-breaker the status of the organization submitting the proposal (i.e., CBO). In the case of educational institutions that are providing education services, the language in the Act is more prescriptive. Therefore, in the case of a tie, the award must go to the educational institution, unless the organization does not pass the demonstrated performance test. Further, paragraph (e) is clarified in the final rule so that it is easier to read. Some questions were raised concerning instances where Statewide procurement policies call for awarding extra points to proposals received from such organizations as minority-business enterprises and women-owned businesses. If this is a State, SDA or SSG-wide policy, applicable to not only JTPA funds but other funds, the State, SDA or SSG may continue applying these policies to JTPA funds. If these policies apply only to JTPA funds, States, SDA's or SSG's may not continue applying these policies to JTPA funds. This is discussed in a new paragraph (l). Section 627.422(h) is redesignated as Sec. 627.422(k) and reiterates the Act's requirement that awards include appropriate amounts necessary for administration and supportive services (section 108(b)(5)). Several commenters felt that SDA's/SSG's should be allowed to continue making awards that do not include administrative funds. It is because of this practice that new language was included in the Amendments. In the past SDA's have indicated that, given the 15 percent limitation on administrative costs, they do not receive sufficient administrative funds to operate JTPA programs. It is equally difficult for other service providers to provide these same services when they are provided either an even lower level of or no administrative funds. Some commenters thought that the regulations, as written, will give service deliverers the right to claim whatever administrative costs they want. This is not the intent of the regulation. While the regulation does prevent an SDA from arbitrarily refusing to fund a service provider's administrative costs or from arbitrarily underfunding them, it creates no right in the service provider to demand any particular level or amount of administrative funding. The level of administrative funding to be covered by the agreement should be determined through negotiations. If either party is dissatisfied with the results of the negotiations, they should not sign the agreement. Such disagreements may be handled under State and local grievance procedures. Some commenters were concerned that awardees that fail to perform would argue that insufficient administrative funds were provided and, thus, were the cause of the failure. Because the agreement should be mutual, it should be difficult for an awardee to use this argument to excuse lack of performance. The Department does wish to note that it is inappropriate for the SDA to pre-determine that it will not provide administrative costs for awardees except in the payment of tuition or off-the-shelf prices. Others requested that guidance be given on how to determine appropriate amounts of administrative funds. The Department thinks this type of clarification is more appropriately provided at the State level. No comments were received on paragraphs 627.422 (i) and (k). These two paragraphs are redesignated as (h) and (j), respectively. The redesignated Sec. 627.422(j) (now Sec. 627.422(i)), which references back to section 204(d)(2)(B) of the Act, deals with the selection of subrecipients for the provision of services to older workers. One commenter thought that this section provides the justification for sole-sourcing older worker programs at the State level. This is not the Department's intent. These programs are to be competed just like any other program. Others thought that only the Governor has the responsibility for selecting service providers. With the addition of the pass-through provision (at Sec. 627.420(d)(2)), this does not have to be the case since the Governor can delegate his/ her authority for selection through the pass-through process. Funding Restrictions for ``High-Risk'' Recipients and Subrecipients A number of comments were submitted on Sec. 627.423. Several of the commenters thought that this section was in conflict with Sec. 627.422(d), which requires a determination of demonstrated performance. The intent of this section is not to give preferential status to high-risk recipients and subrecipients, but to provide JTPA entities with the authority to impose funding restrictions should it be necessary to contract with such an entity. There may be instances when awarding agencies have to make subrecipient awards to high-risk organizations because they are the only entity providing the required service. By including this section, awarding entities may do so, but are authorized to include restrictions on the award in order to protect the Federal funds. Other commenters thought that the regulations, as written, would give high-risk grantees an argument that they have a right to be considered and selected. This is not the case. This section does not confer a right of selection to high-risk organizations. Given the choice of comparable proposals from an offeror who has demonstrated performance and a high-risk recipient/subrecipient, the award should be made to the former, unless other factors indicate otherwise. Additional language is added to Sec. 627.422(d) to clarify these points. Finally, editorial changes are made to clarify that this section applies to all awards, not just grants or subgrants. Prohibition of Subawards to Debarred and Suspended Parties Section 627.424 applies the Federal government-wide requirements on awards to debarred or suspended parties contained in Executive Orders 12549 and 12689 and implemented for all Department of Labor grant programs in regulations codified at 29 CFR part 98. These requirements were previously issued to JTPA Liaisons in a Grant Officer Notice dated April 30, 1992. As provided in 29 CFR part 98, certifications are not required for the State legislatively required ``pass-through'' of JTPA funds to SDA's/SSG's since these are considered ``mandatory awards'' and are, therefore, exempt from the 29 CFR part 98 requirements. However, any other subaward over $25,000, such as an SDA award with a service provider, must meet the ``lower-tier'' certification. These ``lower-tier'' certifications are to remain with the respective awarding agency. One commenter requested that language be added to this section that tells States and subtier grantees that they may elect to subscribe to the List of Parties Excluded from Procurement or Non-Procurement Programs. This has not been done, since nothing in these regulations prohibits JTPA entities from subscribing to this publication, and using it as a resource. Financial Management Systems and Generally Accepted Accounting Principles (GAAP) Section 627.425(b) of the interim final rule requires financial systems and procedures of recipients and subrecipients to be in accordance with GAAP and Sec. 627.435(a) requires costs charged to the JTPA program to also be in accordance with GAAP. Several commenters raised questions or issues about GAAP, including requesting that the Department be more specific about how GAAP must be applied by States and SDAs, requesting specification of which GAAP to use, and, if GAAP is to be determined by the Governor, if the Governor can waive GAAP provisions. A few commenters requested that the statutory language of section 164(a)(1) of the Act pertaining to GAAP applicable in each State be included in Sec. 627.425(b). Language is added to Sec. 627.425(b) to provide for the applicability of GAAP in each State. The Department recognizes that GAAP vary by type of organization or entity and that, while there is great similarity among them, multiple versions of GAAP exist for each type of entity. It is the Department's intent, by adding this language, in addition to the language in paragraph (a) of Sec. 627.435, to allow the Governor to determine which specific versions of GAAP are to be used in each State and by which types of entities, should this be at issue in any State. It is not intended to give the Governor authority to waive GAAP provisions since the Act requires the use of GAAP. The word ``liabilities'' is added to the list of financial information that financial systems must include at Sec. 627.425(b)(1)(i). The inclusion of this term is to make the listed items parallel. A few commenters indicated that revised financial reporting requirements need to be issued by the Department, consistent with Sec. 627.455, so that changes to accounting and other financial systems could be made that also meet the reporting requirements. Revised financial reporting requirements for JTPA title II programs were issued by the Department in Training and Employment Information Notice (TEIN) No. 6-93 dated July 30, 1993 (OMB No. 1205-0323). Revised financial reporting requirements for title III programs were issued by the Department in TEIN's Nos. 14-93 and 12-93, dated August 30, 1993, and September 8, 1993, respectively (OMB Nos. 1205-0326 and 1205-0318). In regard to participant data systems, a few commenters sought clarification regarding eligible applicants for whom information must be maintained under Sec. 627.425(c). As used in the regulation, a ``formal'' determination of eligibility refers to a situation in which sufficient information has been obtained by the program for a staff person to make a determination of eligibility. The Department expects that such a determination will be made within a reasonable time after the information is obtained. Grant Payments Section 627.430 establishes standards by which the Department will make payments to States as well as standards for States, SDA's, SSG's, and other subrecipients for making payments to lower tier subrecipients. Included within this section are standards for when advances to subrecipients are appropriate, when the reimbursement method is appropriate, and provision is made for using the working capital advance payment method. A number of commenters addressed the provisions of this section. A few commenters raised concerns related to the Cash Management Improvement Act (CMIA) and primarily suggested that the Department should delay CMIA requirements since SDA's/SSG's are waiting on the Department to publish CMIA standards. One commenter pointed out that at the current time, the Treasury Department regulations at 31 CFR part 205 do not go beyond the State level. CMIA applies only to States and does not carry through to subrecipients that are not a part of the State government. The Treasury Department published final regulations to implement CMIA at 31 CFR Part 205 on September 24, 1992. The Department does not plan to publish any additional CMIA standards applicable to grant funds. The Department recognizes that the September 24, 1992, Treasury Department regulations dropped the requirements that previously existed pertaining to subrecipients of States as well as non-State recipients. Therefore, the basic cash management standard of paragraph (b) of this section is revised to incorporate the standard that is generally applicable to other Federal grant programs. That standard is also generally consistent with the standard applicable to the JTPA program prior to the publication of the interim final rule. In addition, the requirement to maintain procedures as a part of the standard is deleted so that the standard is based only on the demonstration of effective cash management results. A few commenters raised questions of whether subrecipients other than CBO's and non-profit entities could receive advances or working capital advances. A few commenters wanted clarification on the specific requirements for payments to contractors. It is the intent of this section to provide for advances to any subrecipient as long as the subrecipient is in compliance with the basic cash management requirement that cash on hand shall be limited to actual immediate disbursement needs for program purposes. A subrecipient that does not meet that standard may be paid by either of the other two payment methods outlined in this section. The Department recognizes that, given the definitions in Sec. 626.5 for subrecipient and contractor and the procurement requirements of the Act and these regulations, there is no need to establish separate payment requirements applicable to contractors. Therefore, paragraph (b)(2) of the interim final rule is removed from the final rule and corresponding language adjustments are made throughout the remainder of this section. A few commenters requested clarification of the requirement, in paragraph (f) of this section, which requires disbursement of cash received as a result of program income, rebates, refunds, contract settlements, audit recoveries, and interest earned on such funds before requesting additional cash payments in light of the time frame for the use of program income at Sec. 627.450, Program income. The requirement in Sec. 627.430(f) is a cash management requirement to ensure that cash attributable to JTPA does not remain in a bank account while at the same time the entity is drawing additional cash from the Treasury Department to meet immediate JTPA disbursement needs. Any cash attributable to JTPA should be immediately disbursed for whatever JTPA disbursement need exists. That need does not have to be the same as the entity's planned use of program income earnings nor does it relieve the entity of its liability to provide, within the funding period, an amount of program services equivalent to the amount of program income earned. At the time cash is needed for disbursement for the purposes for which the program income was planned to be used, it can be accessed through normal JTPA grant payment processes. Language is added to paragraph (f) of Sec. 627.430 to more clearly apply this requirement to cash proceeds. Cost Principles and Selected Items of Cost Section 627.435 provides generic cost principles applicable to the JTPA program in paragraphs (a) through (d) and provides specific treatment for selected items of cost in paragraphs (e) through (h). A few commenters stated that the Department should adopt the Circulars for cost principles, thereby replacing this section. Section 164(a)(2) of the Act requires the Secretary to prescribe regulations establishing uniform cost principles substantially equivalent to those generally applicable to recipients of Federal grant funds. The generic cost principles in this section are intended to be substantially the same as the provisions of Attachment A of the OMB Circulars that contain cost principles and should generally be interpreted the same as the Circulars. The Department has chosen not to simply adopt the Circulars because they contain some restrictive requirements in areas where the Department thinks that recipients and subrecipients should retain operational flexibility. A number of commenters recommended that the prohibition on the shifting of funds in Sec. 627.435(c) should be changed to clarify that it does not cover accounting errors. The Department agrees with this comment and language is added to limit this prohibition to costs ``allocable'' to another Federal grant, program, or category. Adjustments should be made for costs inappropriately charged because of accounting errors or misclassification so that the costs ultimately charged to a cost objective are those properly allocable to that objective. A few commenters requested revision of the prohibition on contributions to contingency reserves at Sec. 627.435(e)(6), particularly that they should be allowable if such contributions are not made with Federal funds. The language on contingency reserves is not changed since only those costs charged to the JTPA program are regulated by this section and it does not extend to non-JTPA funds. Amended Sec. 627.435(f) provides additional guidance on legal costs. A number of commenters recommended changes in this area, with most commenters opposed to the specific prohibition on the allowability of costs for appeals to an Administrative Law Judge. Several commenters suggested that the Department should review the Conference Report language on this issue. A few commenters requested more specificity on legal expenses, particularly settlement costs. In response to the comments received on the specific prohibition on the allowability of legal costs for appeals to an Administrative Law Judge, the Department has reviewed the Conference Report (H.R. Conf. Rep. No. 102-811, 102d Cong., 2d Sess., p. 137 (1992)) and engaged in further dialogue on this subject. The discussion in section 221 of the Conference Report pertained to title IV special programs for Migrants and Seasonal Farmworkers and the Department does not view that language as carrying through to the other titles of JTPA. The Department is also aware that some Federal agencies are permitting the costs of appeals to an ALJ as an allowable grant cost. The Department notes that, unlike the process of the Department of Health and Human Services that is referred to in the Conference Report, there are several opportunities for informal resolution of disputes prior to the issuance of the Department of Labor grant officer's final determination. In addition, if the grant officer's decision is found, upon appeal, to be substantially in error, there may be an opportunity for a grantee to recover its legal costs under the provisions of the Equal Access to Justice Act. Congress, in passing the Equal Access to Justice Act, has set forth the conditions under which it is appropriate for parties in contested administrative proceedings to recover their costs from the federal government. The rule that is adopted in these regulations maintains those conditions. Finally, it is the Department's position that, absent any specific statutory direction, Federal taxpayers should not bear the costs of both sides of a matter appealed to an ALJ. To do so may increase the incidence of such costs and provides no incentive for assuring that only matters of substantive merit are appealed. With regard to the language on settlement costs, paragraph (f)(1) of this section is changed to clarify that settlement costs are allowable to the extent that the costs included in the settlement would have been allowable if charged to the JTPA program at the time they were incurred, e.g., if the settlement costs are for back pay then the provisions of Sec. 627.435(e)(2) would control the allowability of the settlement costs. Section 627.435(h) of the interim final rule basically continued the language on construction costs that has existed since the inception of JTPA. However, a few commenters recommended changes to this paragraph including that construction costs for alterations, maintenance, and repairs should be allowable and that there is now a conflict with amended Sec. 627.210(a)(3) concerning physical accessibility, as required by section 504 of the Rehabilitation Act of 1973, as amended, and the Americans with Disabilities Act of 1990. The Department agrees with these comments and the language on construction costs is eliminated. The effect of this change is to allow construction costs to the extent that such costs are necessary and allocable to JTPA. Paragraph (h) of the final rule now contains language on contributions to a reserve for self-insurance, as discussed above in the discussion of Sec. 627.415(c), Insurance. Governor's Guidelines on Allowable Costs Section 627.435(i) requires the Governor to prescribe and implement guidelines on allowable costs not otherwise treated in Sec. 627.435 and contains a listing of selected items of costs in paragraph (i) for which the Governor's allowable cost guidelines must, at a minimum, prescribe treatment. Many commenters responded to the provisions of this subsection. Most of them saw it as a requirement for Governors to set actual amounts for salaries and other commonly incurred JTPA costs and opposed this subsection. One commenter recommended that the Department should clarify the intent of this provision and a few commenters asked whether the requirements of the regulation would be met if the OMB Circulars on cost principles were adopted. This provision is not basically different from the requirement, in existence since the beginning of JTPA in 1983, that ``[t]he Governor shall issue guidelines on allowable costs for * * *.'' Such guidelines should set parameters and guidance, rather than actual amounts. The Department's intent is simply to ensure that the Governor's guidelines cover at least the items included in the list, since issues have been raised on each of these items during the past 10 years of JTPA. Recognizing that SDA's retain some flexibility, within the Governor's guidelines, to establish amounts for allowable costs such as personnel compensation and travel, the final rule is changed by replacing the words ``and amounts'' with ``or the extent of allowability.'' In addition, since other sections of the final rule now provide guidelines on item No. 11, the extent of allowability for supportive services costs and payments to participants, that item is removed from the list in this section of the final rule. For most States, the existing allowable cost guidelines of the Governor already meet the requirements of this paragraph and few, if any, changes are necessary. All States should review their current allowable cost guidelines and ensure that each of the 16 listed cost items are treated consistently, as well as any other cost items for which the Governor thinks consistent treatment is necessary. A commenter raised the question about whether the regulatory requirement would be met if the OMB Circulars on Cost Principles were adopted. The Department agrees that all 16 cost items would be covered if the Circulars were adopted. The Department cautions, however, that: (1) It does not intend to approve or disapprove any prior approval requests, as required by the Circulars, and (2) the OMB Circulars contain restrictive requirements in areas in which States, SDA's, and SSG's may desire greater flexibility, e.g., staff compensation, fees/profits, fund-raising. Administrative Cost Pools Section 627.440(a) is amended in the final rule to add language on cost pools. Section 627.440(f) of the interim final rule required that costs charged initially to a JTPA administrative cost pool (ACP) be allocated, for JTPA Federal reporting purposes, to the benefitting programs based on the benefits received by each program. The Department recognized that this language represented a departure from previously established policy on the manner in which pooled administrative costs could be reported. Commenters were requested to identify the impact, if any, of the revised requirement to allocate pooled administrative costs solely on the basis of ``benefits received''. Many commenters responded to the provisions of this paragraph. Most of the responses fell into one of three groups. One group viewed the ACP language as effectively prohibiting ACP's by requiring detailed time distribution or some type of cost allocation process for each item of joint administrative cost. These commenters thought the new requirements involved too much recordkeeping, were an unreasonable burden, inefficient, illogical, and went beyond the requirements of OMB Circular A-87. A second group expressed concerns about the effect of the ACP requirement on the administrative cost limitations for each program and that they would lose their ability to ensure cost limits are not exceeded. They were also concerned programs would be overexpended. A few commenters stated that there are not enough administrative funds available for EDWAA at the State level to absorb its share of costs. The third group of commenters made suggestions that included going back to the old regulatory language, which allowed ``true cost pools'', specifying that using direct expenditures was an acceptable methodology, and requiring application of A-87 principles. One commenter suggested eliminating any mention of ACP's in the regulations and, instead, requiring JTPA entities to follow GAAP and section 108(a) of the Act. In addition, a few commenters requested guidance on the use of intake cost pools. Several commenters raised questions about the proper charging of title II-B administrative costs at the State level. Several commenters also raised questions about the ``benefits received'' language of paragraph (a) in Sec. 627.440, which requires all JTPA costs to be charged to the benefitting programs and cost categories based on benefits received. That language has been a part of the JTPA regulations since the inception of the program. A few commenters recommended that this paragraph should specifically allow cost pools. The ACP language contained in Sec. 627.440(f) of the interim final rule was not intended to eliminate the use of ``true cost pools'' in accounting for the costs of JTPA programs. It was also not intended to go beyond the requirements of section 108(a) of the Act, GAAP, paragraph (a) of this section or similar provisions in OMB Circular A- 87. The final rule removes the specific ACP provisions in paragraph (f) and adds a new sentence on cost pools within paragraph (a). The new sentence is intended to be consistent with the A-87 meaning and treatment of cost pools. JTPA entities may continue to use ACP's. They may also continue to use indirect cost pools, training cost pools, intake cost pools, pools for supplies expense, and any other pool they find beneficial to have in their accounting system, including intermediate cost pools for the recording and temporary accumulation of joint or similar types of costs, pending distribution (allocation) at a later date to the benefitting cost objectives, e.g., programs and/or JTPA cost categories. Having, or using, a JTPA ACP has never been an issue and is not one now. The issue is how to distribute or allocate those accumulated costs back to the benefitting programs and whether allocation methodologies other than ``benefits received'' by each of the benefitting programs can be used. The ``old'' JTPA regulations did not address this issue. Since the 1992 Amendments directly incorporate the requirement to follow GAAP, and GAAP requires costs to be charged based on ``benefits received,'' the basic issue is whether the Department can waive a specific statutory requirement, especially when it affects up to 20 percent of the funds. It is the Department's experience that allocation based on ``benefits received'' has not added much workload burden and alternative methodologies have been developed by most JTPA entities. For many JTPA entities, allocating administrative costs based on each program's share of total direct costs, salaries and fringe benefits, or total program costs compared to the total direct costs, total salaries and fringe benefits, or total costs of all programs administered by an entity are acceptable methodologies. The Department cautions, however, that some of these methodologies may not be acceptable for particular JTPA entities. Each organization is different and costs, particularly direct costs, are charged differently. It will require a self- examination by each entity to determine the best approach. Assistance can also be obtained from the State's or SDA's auditor. The use of financial-based methodologies is encouraged; however, the Department will accept any treatment of pooled costs and allocation methodologies that are consistent with GAAP applicable in each State. The Department cautions that a methodology that is based solely on contribution to the pool may be questioned in audits. Finally, in response to the questions about the proper charging of title II-B administrative costs at the State level, Sec. 627.440(b) establishes the JTPA cost objectives for State-administered programs and the State's overall administration of title II activities. To clarify this issue, however, Sec. 627.440(b)(10) is revised in the final rule to specifically include State administrative costs associated with title II-B. Classification of Costs Section 627.440 establishes the minimum levels of accountability for JTPA funds, provides the Secretary's definitions of the cost categories, and provides specific treatment for the classification of certain types of costs that have frequently been at issue in the JTPA system. At Sec. 627.440(c)(2), the regulations provide that incentive funds, both title II-A and II-C, received by an SDA may be combined and used without regard to cost categories or cost limitations. A number of commenters on this provision were pleased with the treatment accorded incentive funds, however, several commenters appeared to have missed or misread this provision. No change is made to the final rule. Within the definitions of the JTPA cost categories, at Sec. 627.440(d), a number of comments expressed concern about the treatment of tuition, work experience wages, insurance, and the difference between public information costs and the costs of outreach. Another frequent comment concerned the treatment of project directors and other positions that perform both administrative and program functions. Commenters on this subject fell into two groups. One group, which appeared to have missed the provisions of paragraph (e)(1), argued that the costs of such positions should not all be charged to administration. Some requested that such positions be charged entirely to training. The other group, focusing on paragraph (e)(1), commented on the burden and mechanics of time distribution. The Department agrees that the language in the preamble of the interim final rule concerning tuition was somewhat inconsistent and more restrictive than this section of the regulations. The Department's intent is to permit costs frequently associated with tuition costs, such as entrance fees, to also be charged to the direct training category. The Department believes that the regulation adequately expresses this intent. In addition, tuition, entrance fees, and other usual and customary fees of other educational institutions, such as postsecondary vocational institutions specified at section 481(c) of the Higher Education Act, are another example of payments to vendors that are appropriately charged to the direct training category. The final rule removes the reference to section 141(d)(3)(B) of the Act to clarify that such payments to any educational institution in a vendor relationship that also satisfies the other criteria of paragraph (d)(1)(vi)(B), are direct training costs. Where tuition is part of a subrecipient agreement, rather than a vendor relationship, and the agreement also includes other components, the costs of tuition are chargeable to the direct training category. A new paragraph (d)(1)(vii) is added to the final rule specifying that payments to participants that represent hours spent in a direct training activity (such as work experience) are direct training costs. In addition, the word ``insurance'' is removed from the definition of administration since this is a type of cost that should be charged or allocated to each of the benefitting categories. Some commenters raised the question of how the costs of curriculum development or training materials should be charged. The Department believes that these costs are properly charged to the direct training cost category. A few comments were received on public relations costs versus the costs of outreach. These comments tended to view public relations as an outreach cost and recommended that it be charged to the training related and supportive services category. The Department agrees that public relations can be an effective tool that enhances outreach activity, but also believes that the costs of general public relations is more appropriately a part of the overall costs of administration. No change is made in the final rule. The Department also agrees with commenters that time distribution should be reasonable and not burdensome and that alternative distribution bases should be allowable. Language is added to paragraphs (d)(1)(i), (d)(3)(i), and (e)(1) to provide that other equitable cost allocation methods may be used. Other equitable cost allocation methods may be either financial based or non-financial based methods. Limitations on Certain Costs Section 627.445(d) of the interim final rule clarified the provision made in section 141(d)(3)(C) of the Act for excluding administrative costs incurred by CBO's or non-profit organizations from the SDA's administrative cost limitation under certain criteria and conditions specified in the Amendments. A number of commenters responded to that provision and regulatory clarification. Most of these commenters incorrectly perceived the 10-percent limitation as an absolute ceiling on administrative costs for CBO's and other non-profit service providers and requested relief from that ceiling. Other commenters raised questions of whether the 90/10 provisions were based on budget or actual expenditures and the effect on the 90/10 provision if more than 10 percent is expended by the CBO or other non-profit service provider for administrative costs. The Department emphasizes that the provisions of section 141(d)(3)(C) of the Act and paragraph (d) of the regulations do not constitute a mandatory ceiling on administrative costs for CBO's and other non-profit service providers. The relief provisions apply to the SDA's administrative cost limitation and are only applicable for those situations in which the SDA and the CBO or other non-profit service provider agree to the 90/10 arrangement. Where such agreement is reached, the SDA may avail itself of the relief to total administrative costs only if the actual expenditures of the CBO or other non-profit service provider conforms to the 90/10 provisions. Costs charged to the JTPA program for the costs of a CBO or other non-profit service provider that are for less than 90 percent for direct training and training-related and supportive services costs or for more than 10 percent for administrative costs negate the applicability of this provision. No changes other than grammar and deletion of the word ``private'' are made to this section. Program Income Section 627.450 contains a definition of what is and what is not program income for JTPA purposes, including the incorporation of the new provisions of section 141(m) of the Act, and establishes timeframes and requirements for the treatment and use of program income. The JTPA cost categories and the administrative cost limitations are also made applicable to program income. A number of commenters responded to the provisions of this section. The comments contained a number of suggestions, including: That the Department should adopt the OMB Circular A-102 definition of program income; that program income should not be subject to the cost categories or administrative cost limitation; and that the regulations should eliminate the presumption that a contractor is entitled to the earned revenues by law, especially a contractor with whom the State or SDA is no longer contracting. Other commenters raised the question of whether earned program income must be used for the same program or subtitle that earned it and still others requested clarification of the time frame for use of program income. It is the Department's intent to adopt the basic A-102 definition of program income and to add to that definition the specific provisions of section 141(m) of the Act. In addition, the Department recognizes that the potential to earn significant amounts of program income exists within the Act and these regulations. To avoid the possibility of creating windfalls of administrative funds available to entities that choose to use the new provisions in such a manner, the Department is imposing the administrative cost limitation on program income. Section 141(m) of the Act specifies that program income may be retained by the entity that earned it and used for program purposes. The Department believes that the regulations, as written, are consistent with the statutory provision and that there is no authority to empower any other entity to use the funds, as long as the entity that earned the program income uses the funds for program purposes. In response to the questions about whether program income must be used for the same program or subtitle that earned it, or if it may be used for any JTPA program or title, the Department agrees that clarification is needed. While the interim final regulations limited the use of program income to the particular JTPA grant or subgrant under which it was earned, it is recognized that particular grants or subgrants may provide funds for multiple programs or subtitles. Therefore, paragraph (c) of this section of the final rule is amended to also limit its use to the JTPA title under which it was earned. In addition, language is added to paragraph (c)(3) to clarify that the time period for the use of program income is the funding period, usually up to three years. It was brought to the Department's attention that section 141(m) of the Act does not exempt interest earnings by States from the provisions applicable to income under the Act and, therefore, the regulations could not either. The Department agrees, however, the State is required by the CMIA, codified at 31 U.S.C. 6503(c), to pay interest on advanced funds from the time that the funds are deposited by the United States to the State's account until the time that the funds are paid out by the State for program purposes. The Department believes that it is equitable that the State be able to use the interest it may earn on these funds towards satisfying the interest debt created by the CMIA and does not desire to cause States to both meet any interest liability under the CMIA and provide additional JTPA program services with the same interest earnings. Therefore, paragraph (a)(v) is revised in the final rule to eliminate the exception for interest earnings by States and paragraph (c), Use of program income, is revised to permit the State's use of such income to meet its CMIA liability. In addition, the application of the administrative cost limitations in paragraph (c) is also revised to exempt program income used by States to meet its CMIA liability from the administrative cost limitation. Reports Required Section 627.455 requires financial reporting to be on a quarterly basis and costs to be reported on an accrual basis by year of appropriation. A few commenters asked whether participants must also be reported by year of appropriation and several commenters asked whether costs may be charged to the oldest available appropriation, i.e., first-in, first-out (FIFO) basis. As specified in Sec. 627.455(a), reporting instructions are to be issued by the Secretary. The statutory requirement to report by year of appropriation is limited to financial data. With regard to FIFOing of costs, the Department has no objections to an entity FIFOing costs it incurs itself as long as obligational authority exists for multiple years and the costs are for the same purposes and under the same terms and conditions that accompanied each year's obligational authority. This approach limits FIFOing to each individual JTPA entity and does not include one entity FIFOing costs incurred by another entity, even if the other entity is a subrecipient of the original one. Restated, once a JTPA cost is recorded by any subrecipient, it must be recorded against a given year of funds and remains a cost charged to that year of funds. It may not be recorded or reported by another entity against a different year of funds. No changes are made to the final rule. Requirements for Records Section 627.460(a) imposes the record retention requirements of section 165(e) of the Act on State records and provides the State two options for subrecipient records. A few commenters encouraged the Department to drop the option for subrecipient records and require all subrecipients to comply with the record retention provisions imposed on subrecipients by the Act. Since the Act is unclear about its effect on subrecipient records, it is the Department's intent, by providing an option for retention of subrecipient records, to allow each State to determine if subrecipients of the State should each have its own clock for the starting point for record retention, rather than having all records of all subrecipients throughout a State controlled by the one State clock. This option avoids requiring all subrecipients in a State to maintain records beyond the prescribed period just because a claim, audit, or litigation has started that affects only one or a few subrecipients. It also enables JTPA subrecipients to maintain and dispose of JTPA records in the same timeframes that apply to other records of the subrecipient that are covered by applicable OMB Circulars. It is expected that either approach will result in most JTPA records, other than property records, being maintained for the same total 5-year period of time. Subrecipients that are opposed to this approach should encourage their State to not adopt the option provided. Paragraph (a)(2) of this section is changed in the final rule to add the statutory requirement for property records to be retained for three years after final disposition. Section 627.460(d) of the interim final regulations authorizes the substitution of copies made by microfilming for original records. A few commenters raised questions about the allowability of retaining records in forms other than microfilming, such as computer imaging or scanning, and other types of computer generated data and electronic files. In response to these comments, the Department has revised this provision. Instead of authorizing a particular medium for record retention, the revised provision sets a standard that the method of retention must be sufficient to assure that the record is useable as evidence in an audit or any other JTPA proceeding. As before, the substitution of microfilmed or photocopied records can continue to be used since these media are generally accepted as admissible for evidentiary purposes. The Department takes no position on the use of records stored on electronic media and the revised regulation neither authorizes nor specifically forbids their use. If electronic storage media were to be considered for use, the user would have to be certain that there are sufficient security safeguards and protections against tampering so that a court would accept the record as evidence in a proceeding. As in any case where a record is maintained, the burden of producing and authenticating it is on the custodian of the record and the failure to authenticate the record will lead to the custodian's being unable to use the record for any evidentiary purpose. Thus, if an SDA maintains its participant eligibility records on computer files and is unable to show that the records were secure or were tamperproof, the records could not be used to prove that participants were eligible for JTPA services. Public Access to Records Section 165(a)(4) of the Act requires recipients to make available to the public upon request certain records which are maintained by the recipients pursuant to section 165(a)(1) of the Act. Section 637.463 of the interim final rule was intended to merely reflect the statutory requirement. A number of comments were received expressing concerns that such disclosure would result in the invasion of personal privacy and would breach basic notions of customer confidentiality. In this same regard, some comments contended that this requirement conflicts with State privacy laws and that the statement in the regulation with this requirement applied ``notwithstanding the provisions of state or local law'' goes beyond the plain meaning of section 165(a)(4) of the Act. Another comment asked for a definition of the word ``clearly'' in the term ``clearly unwarranted invasion of privacy''. One comment questioned the provision in the regulation ``excepting'' recipient and subrecipient records from the Freedom of Information Act (5 U.S.C. 552). Several comments requested that the regulations place reasonable time and place restrictions on the right of access. Section 627.463 is revised to follow more closely the statutory language. There is no intent to modify or expand on the plain meaning of the statute. It is clear that reasonable conditions can be placed on the mechanics of providing access, including time and place restrictions. It is preferable that such management details be developed at the State and local levels and not in these regulations. The statute and the regulations permit customer confidentiality by excluding from mandatory disclosure information which would constitute a clearly unwarranted invasion of personal privacy. A Federal definition of that phrase is unnecessary since it is a term best defined in local situations by State or local law. A State or local privacy law or requirement which prohibits or restricts the disclosure of information which constitutes an unwarranted invasion of personal privacy would not be in conflict with the JTPA public access requirement. On the other hand, the Act's requirement of public access is a statutory condition to the receipt of grant funds and a conflicting State requirement does not excuse a failure to comply. In other words, if a State or local law applicable to all records exempts certain specific kinds of identifying information (e.g., name, address, social security number or other personal identifying information), it could be applied to restrict the disclosure of some of the information in a JTPA applicant's or participant's file. On the other hand, a State or local law which prohibited disclosure of all employment and training records would sweep so broadly that it would conflict with the Act's disclosure requirement. In order to emphasize that requirement, the informational provision in the regulation that the public access requirement applies ``notwithstanding the provision of the State or local law'' is retained in the final regulation. The ``informational'' statement regarding the Freedom of Information Act produced some confusion and is removed from the final regulation. The only reason this statement was put into the interim final regulation was that the coverage, or non-coverage, of the Federal Freedom of Information Act has been a recurring subject of inquiry. The Freedom of Information Act applies to the disclosure of records in the custody of Federal agencies. In like manner, the Privacy Act (5 U.S.C. 552a) applies to records described in section 165 of the Act. Section 627.460 records are not Federal records until submitted to the Secretary. Until then, they are not covered by federal ``freedom of information'' or ``privacy'' requirements. Property Management Standards Section 627.465 reflects the requirements of section 141(r) of the Act, which provides that the Federal requirements generally applicable to Federal grants to States and local governments are the requirements governing the title, use, and disposition of real property, equipment, and supplies purchased with JTPA funds. The Federal requirements generally applicable to Federal grants to States and local governments are codified for Department of Labor grant programs at 29 CFR part 97. Therefore, the provisions of those regulations applicable to property requirements are incorporated into this section for governmental recipients and subrecipients. The Federal requirements generally applicable to Federal grants to States and local governments provide that subrecipients that are institutions of higher education, hospitals, and other nonprofit organizations will follow the Federal agency regulations that implement OMB Circular A-110, as codified in DOL regulations at 29 CFR part 95 (59 FR 38270 (July 27, 1994), therefore, those requirements are also incorporated into this section for those types of entities. It is expected that this approach will provide administrative relief for such subrecipients since it will prevent an organization administering other Federal grants or subgrants from having to follow two different sets of requirements. In addition, the Federal requirements applicable to intangible personal property have been incorporated into this section. There are no Federal requirements generally applicable to commercial subrecipients; therefore, Sec. 627.465(c) provides specific JTPA requirements for these organizations. A small number of commenters raised the question of whether prior approval by the Department of Labor is necessary for property acquisitions. Language is added to paragraphs (a) and (b) of this section to waive any Department of Labor prior approvals relative to property acquisitions. Section 627.465 specifically provides that the new rules apply only to property acquired after July 1, 1993. Several commenters inquired about the rules applicable to property acquired prior to July 1, 1993. It was the Department's intent in the interim final rule that such property would continue to be governed by the rules in effect at the time the property was acquired. To ensure that this intent is explicit, the previous JTPA regulations on property are added as a new paragraph (e) in the final rule. The only change is the citation for records retention requirements. The JTPA regulations in effect prior to July 1, 1993, provided that the Governor was to maintain accountability for property in accordance with State procedures, but applied three specific Federal requirements: (1) A reservation of the Secretary's rights to such property; (2) record retention requirements; and (3) either reimbursement to the JTPA program of the fair-market value for any unneeded JTPA acquired property retained for use in a non-JTPA program or the use of proceeds from the sale of such property used for JTPA purposes. It is recognized that the Department has no rights in property acquired with title II or III funds awarded to States from the inception of JTPA in 1983 through July 1, 1993, but that the Department does have rights in property transferred to JTPA from CETA. Therefore, as long as the proceeds from the sale of JTPA acquired property or the fair-market value of such property transferred to other uses are expended for JTPA purposes and records maintained accordingly, the Department views any further requirements governing such property to be the responsibility of the Governor. For CETA-acquired property transferred to JTPA, the Department's rights in such property are specified in the current Department regulations implementing the applicable OMB Circulars. Recipients and subrecipients are expected to follow those regulations in disposing of CETA-acquired property. Performance Standards In addition to adult and youth programs under title II-A and II-C and dislocated workers under title III, Sec. 627.470 provides for the establishment of performance standards for older worker programs under section 204(d) of the Act. The standards for both adults and youth may include standards for employment competencies which are to be based on such factors as entry-level skills and other hiring requirements. The purpose of the performance standards guidance set forth in these regulations is to establish the general requirements for implementing title II-A, title II-C, and title III performance standards. Specific policy requirements will be developed in consultation with the JTPA system and will be subject to a formal public comment process. Several commenters asked when the new performance standards requirements would take effect. Current performance standards measures and implementing provisions, as specified in TEGL's 10-89, 7-91, and 11-92, will remain in effect through Program Year (PY) 1993. In accordance with the transition provision of section 701(b) of the JTPA Amendments, revised performance standards were published July 11, 1994 (59 FR 35381 (July 11, 1994); standards pertaining to 6-month retention in unsubsidized employment shall not take effect before July 1, 1995. In regard to setting 6-month retention standards, several commenters advised the Department to conduct a study to identify and address technical issues related to using Unemployment Insurance (UI) wage records to document placement and retention of participants. In preparation for developing and implementing policy in this regard, the Department of Labor has already undertaken a study to examine the technical and operational issues associated with the use of UI wage records for the purpose of implementing performance standards related to employment retention. The study was conducted in 16 States and focused on such issues as quality of data, timing for incentives, and out-of-State and uncovered employment. The results of the study will be available in the fall of 1994 and will provide important input into the decisionmaking process and guidelines for implementing the 6-month retention standard. The Department recognizes that there will be a variety of issues to be addressed in developing and implementing a retention standard. When the results of the study are available, the Department will work with State and local staff to introduce, wherever feasible, alternative post-program measures. In addition, it is important to note that interim credit, which a few commenters believed should be incorporated in the performance standards, will be considered in the development process. The Department emphasizes, however, that there is no maximum participation limit and no Department-imposed requirement that everyone be terminated at the end of a given program year. Performance standards are based only on those individuals who do, in fact, terminate. A number of commenters provided advice on implementing the performance standards required under section 204(d) of the Act, which implies that these standards are to parallel those developed for title II programs. While the specifics of older worker performance standards will not be addressed in the regulations, the process for developing these standards began in the summer of 1993. Program experts and advocate groups for older workers were consulted in developing performance standards for older workers programs. In addition, in response to other comments recommending adoption of performance standards for adults based on competency attainment, it is important to note that skill acquisition for adults is included among several possible performance standards factors identified in section 106(b)(3)(E) of the Act. In order to insure that any standards established for skill acquisition are fair and practical, the Department has begun to collect relevant administrative data and also to examine experience with youth employment competencies and initiatives, such as the Secretary's Commission on Achieving Necessary Skills (SCANS) and apprenticeship programs. In addition, beginning in 1994 the Department will consult with academics and program practitioners to determine practical approaches to defining adult competencies. Performance standards for adult skill acquisition will be issued in PY 1996, at the earliest. With the exception of the older worker program, the Governor is responsible for establishing an incentive policy that rewards performance in title II programs and for: (1) Establishing a process for adjusting performance standards to account for local conditions, and (2) providing technical assistance to SDA's which fail to meet performance standards for a given program year. Several commenters voiced concern that a performance standard relating to costs might be required. Accordingly, Sec. 627.470(c)(2) is amended to clarify that Governors may not tie standards relating gross program expenditures to performance measures in making incentive awards. Governors are encouraged to make full use of available expenditure and participant data in monitoring SDA fiscal practices; at the same time, SDA's should closely monitor local service providers. States and SDA's are encouraged to explore ways of relating overall costs of job training to long-term employment, earnings and reductions in welfare. The final regulation also incorporates the requirement, in section 106(j) of the Act, for the imposition of a reorganization plan on SDA's failing for 2 consecutive years to meet an appropriate proportion of the performance standards, with the exception of the older worker programs. The Governor is to notify the Secretary and the SDA of the continued failure and to impose a reorganization plan within 90 days of the end of the second program year; otherwise, the Secretary will develop and impose the reorganization plan. As mentioned before, with regard to the 90-day deadline for imposing sanctions, a few commenters believed that 90 days was insufficient time for States to evaluate and implement an effective reorganization plan. In addition, a few commenters sought clarification of what might constitute the imposition of a reorganization plan. The Department acknowledges that there may be some difficulty in timing but points to the language in section 106(j)(5)(A) of the Act. In response to the latter comments and in an attempt to alleviate the level of concern about the imposition of a reorganization plan, the final rule is amended by adding a new paragraph (c)(4)(iv) to Sec. 627.470 which provides the minimum requirements for the imposition of a reorganization plan. The Secretary will give the Governor and the SDA 30 days in which to comment to the Secretary on the proposed reorganization plan prior to its imposition. Further, the Secretary will recapture or withhold up to one-fifth of the State's administration set-aside to provide technical assistance to an SDA where the Secretary has imposed the reorganization plan or where the Governor has not provided appropriate technical assistance. Reorganization Plan Appeals No comments were received on the provisions of this section and no changes are made in the final rule. Oversight and Monitoring Several comments were received on oversight and monitoring. Section 627.475 summarizes the roles of each administrative level in a comprehensive monitoring and oversight system. The monitoring provisions are expanded to require the Governor to develop a monitoring plan which requires that each SDA and SSG be monitored at least once annually. The plan must also require the collection and review of sufficient information to enable the Governor to determine whether substate entities have demonstrated substantial compliance with the oversight requirement to permit a waiver of the imposition of sanctions authorized under section 164(e) of the Act, or to determine whether a job training plan should be disapproved pursuant to section 105 of the Act. The regulations also require the Governor to be responsible for issuing standards to SDA's and SSG's for the development of a local monitoring plan. Additionally, the regulations require the Governor to develop general standards for PIC oversight responsibility for inclusion in the Governor's coordination and special services plans. One commenter requested that the Department of Labor provide greater details regarding its own monitoring responsibilities as well as those of the States. The Department is in the process of developing guidance in this area and, when completed, will provide more detailed information on monitoring and oversight through administrative issuances. One commenter observed that the emphasis in paragraph (b)(3) was unnecessarily on criteria for disapproval of the plan when, in fact, the Act called for the Governor to approve a plan unless it did not meet certain criteria. The commenter suggested that paragraph (b)(3) be revised to read ``Determines that a job training plan shall be disapproved if the plan does not meet the criteria established in section 105(b)(1) of the Act which states in part, the Governor shall approve the job training plan or modification thereof unless he finds that the plan does meet the criteria found in section 105(b)(1)''. The Department concurs with this comment and, although the Department did not adopt the suggestion in toto, paragraph (b)(3) is revised to better reflect the statutory criteria for disapproval of the job training plan. A few commenters requested clarification of what elements of an SDA's and SSG's operation must be monitored not less than once annually. The Department believes that an effective monitoring program is important to improving or maintaining high levels of program performance. The Department wishes to provide states with flexibility in designing the nature and extent of their monitoring programs while assuring that monitoring is thorough. Paragraph (b)(5) is revised to indicate that all aspects of the SDA and SSG program must be reviewed annually, although the Department wishes to clarify that the degree of emphasis placed upon the review of each area of a program may vary from year to year. A few commenters expressed concern with the PIC responsibility for oversight as it relates to the Governor and the chief elected official. The commenters suggested that the PIC should be allowed flexibility to determine the type and amount of PIC oversight. Section 103(a) of the Act states that it shall be the responsibility of the PIC to provide policy guidance for, and exercise oversight with respect to, activities under the job training plan for its SDA in partnership with the unit or units of local government within its SDA. The Department agrees that it is primarily the responsibility of the PIC to determine its monitoring and oversight role. While the regulations give the Governor a role in PIC oversight in an overall context, the Department does not expect any guidelines issued by the Governor to be overly prescriptive. Therefore, the PIC should have a great deal of flexibility in setting its monitoring role. No change is made to the final regulation. Governor's Authority to Remedy Violations In reviewing the interim final regulations, the Department realized that it had not fully implemented section 164(b) of the Act in the regulations. Sections 627.477 and 627.607 are added to complete the regulatory implementation of section 164(b) regarding the Governor's actions where there are substantial violations of the Act or the regulations and corrective actions have not been taken. Conforming changes have been made in Secs. 627.601(b), 627.471(a) and 627.702. These added provisions and changes are not intended to modify or expand on the plain meaning of the statute. Audits and Audit Resolution Because there are both non-profit and commercial organizations which are direct recipients of JTPA Title III program funds, the language at Sec. 627.480(a)(2) and (3) is modified by the addition of the term ``recipients'', as well as by substituting the term ``organizations'' for ``subrecipient'' in paragraph (a)(2). The interim final regulations implied that non-profit and commercial organizations can only be subrecipients. Audits of Commercial Organizations Several commenters raised questions concerning the audit requirement for ``commercial organizations''. A few commenters wanted clarification concerning whether or not the audits of proprietary schools, which are required by the U.S. Department of Education because of their involvement with Pell grants and other subsidies, would satisfy the JTPA audit requirement. One commenter was concerned that the regulation did not provide a timeframe within which these audits were to be completed, and another expressed concern that the requirement for an annual audit was more frequent than that for non-profit institutions. The regulation, at Sec. 627.480(a)(3), is amended to provide for audit timeframes and frequencies that are consistent with the OMB Circular A-133 requirements for non-profit organizations. This provision also provides the option of either a Federal funds audit or an organization-wide audit as long as the audit includes financial and compliance coverage of the JTPA program within its scope. The option of a Federal funds audit should be satisfied by the audit required by the U.S. Department of Education so long as it includes financial and compliance coverage of the JTPA program within its scope. A few commenters requested clarification concerning the audit requirement for OJT employers, commercial off-the-shelf training packages, tuition-based individual referral contracts, and other ``vendor'' type arrangements. The regulation imposes an audit requirement only on organizations that are ``subrecipients'' and not on those that are ``vendors''. A few commenters asked if the regulation prohibited a Governor (this would also apply to any awarding agency) from procuring a program specific audit for commercial organizations and directing them to exclude JTPA from their organization-wide audit. The regulation only talks to the requirement to have an audit done, not to who will procure and/or conduct the audit. If the awarding agency and its subrecipient agree that the awarding agency will procure and/or conduct the audit, the requirement of the regulation would be satisfied. Responsibility for Subrecipient Audits A few commenters had difficulty with the language at Sec. 627.480(d). One of these commenters thought that the regulation went beyond OMB Circular A-128 and required that debt collection be completed within the 6-month resolution period. This is not the case. When costs are disallowed and debt collection is the appropriate sanction, those efforts should be initiated or started within the 6 month period. This often is accomplished by including appropriate language in a final determination. However, the actual repayment most often occurs after the 6-month resolution period. Also, debt collection efforts are often put on hold when a final determination is appealed. To address these concerns, the parenthetical reference in paragraph (d)(2) is moved to the end, and the phrase ``where appropriate,'' is inserted. Paragraph (d)(3) is divided into two sentences. Waivers of Liability One commenter pointed out a conflict between Sec. 627.480(f) and Sec. 627.704(a). Paragraph (f) is removed from this section and added to Sec. 627.704. The remaining paragraphs of Sec. 627.480 are redesignated. Stand-in Costs There were a number of commenters who raised concerns and questions about Sec. 627.480(g), which is now redesignated as paragraph (f). Several of these commenters were among those who commented on the definition of ``stand-in costs''. A few commenters indicated that stand-in costs should not have to be from the same cost category as the unallowable costs. Others pointed out the discrepancy between the definition and this regulation concerning the time when such costs were incurred. As a result, the last sentence of redesignated paragraph (f) is revised so that both it and the definition at Sec. 626.5 state that the costs are to be from the same program year and that the substitution cannot result in a violation of the applicable cost limitations. Several commenters stated that ``stand-in costs'' should be allowed as substitutes regardless of the year or program/title that generates them. Such an interpretation runs counter to the intuitive concept of substituting to make whole the program that bore the cost of the misexpenditures. It is also contrary to ETA's interpretation of the General Accounting Office (GAO) Comptroller General decision which is the basis for the position on ``stand-in'' costs. The GAO-decision indicates that, when an audit reveals total allowable program costs which exceed the total amount authorized and paid with program funds, the resolving agency is obligated to accept those program costs as substitutes for disallowed costs. This is true because funds which become available due to the disallowance of costs should be treated as funds never expended by the auditee. Thus, the stand-in process constitutes a part of the totality of allowed and disallowed costs which occurs at the audit resolution stage before a collectible debt is established. The regulation, at Sec. 627.480(f), is written to incorporate this concept of substitution for unallowable costs incurred by the auditee when the stand-in costs are reported (on the JTPA quarterly financial report form) and accounted for in the auditee's financial system, and are included within the scope of the auditee's audit report. Although potential stand-in costs are aggregated for reporting purposes only, this does not create a pool of stand-in costs at the higher tier when funds are merely passed through from one level to the next (e.g., State to SDA or other government entity). When ``stand-in'' costs are reported on the JTPA quarterly financial report and included within the scope of an entity's audit, they are readily identifiable and available to substitute for unallowable costs identified in the same report. This is important because by the time an audit report is finally resolved, the three-year availability period for the costs disallowed has often lapsed or is nearing its end. By having contemporaneous allowable JTPA costs incurred (but paid for with local resources) during the same period as the unallowable costs, there is no question about the propriety of the substitution. A few commenters raised questions concerning the requirement to report ``stand-in costs''. A few asked if they needed to be reported on the quarterly reports required by the Department. One asked if these costs could be reported after the fact only when needed, instead of being reported whether or not an SDA is permitted to and/or needs use them. Others suggested that they should be allowed even if not reported. One suggested that the requirement to report exceeded the statutory requirement that they be recorded. As explained above, it is ETA's position that ``stand-in costs'' must be subjected to audit coverage in order to be accepted. Imposing the requirement that the costs be reported and providing a line for these costs on the JTPA quarterly financial report(s), insures that these costs are included within the scope of the audit report. A few commenters suggested that the JTPA compliance supplements for OMB Circulars A-128 and A-133 audits be revised to require that such audits include a separate schedule for ``stand-in costs'' and to specify the documentation requirements for same. The documentation requirements, including retention requirements, are the same as for all JTPA costs incurred. While the Department is not in a position to dictate whether A-128 and A-133 audits include an additional schedule, when the compliance supplements are revised, it may be possible to suggest how ``stand-in costs'' should be treated in such audits. Direct Appeals by SDA's Several commenters suggested that Sec. 627.480(h) should be revised to provide the right of a direct appeal by an SDA, especially in those instances when a State chooses not to appeal. However, the initial and final determination process utilized by the ETA Grant Officer imposes a sanction on the direct recipient of funds from ETA, and it is that recipient that ETA holds liable for the sanction. If the entity upon whom the sanction is imposed chooses not to appeal, there is no dispute between that entity and ETA. If an appeal of a Grant Officer's final determination is taken, affected subrecipients are permitted to intervene in the proceedings. An SDA has the right to appeal any adverse determination against it within the State appeal system. Audit Resolution Section 627.481 is not changed from the interim final regulations. One commenter suggested that Sec. 627.481(a)(1) should permit direct recipients to have 6 months within which to submit their resolution report. The Department believes that to do so would mean that the recipient's audit would not be resolved with its awarding agency within the 6 months required by the OMB Circulars. Another commenter suggested that the title for the paragraph at Sec. 627.481(c) should be State level audit resolution. However, this paragraph also applies to resolution beyond the State level (e.g., the resolution of a service provider audit by an SDA). A third commenter suggested that the regulation at Sec. 627.481(c) should mandate that audit work papers be accessible to the auditee. Since these audits are procured by the auditee, it is within their purview, and not the Department's, to include requirements concerning work papers in their agreement with the auditors. Closeout One commenter suggested that waiting 3 years (the full period during which funds are available for expenditure) to close out a grant that can be closed in 1 to 1\1/2\ years is confusing and unnecessary. It was also stated that this provision should allow closeout to occur as soon as all of the funds are expended or within 90 days after the end of the funding period. A second commenter suggested that the word ``timely'' is a subjective term and that the provision should require closeout to occur within 90 days after the end of the funding period, unless the deadline is extended. This same commenter indicated that the regulation should be clear that closeouts are based on year of appropriation. Several of the comments indicated an apparent misunderstanding that Sec. 627.485 applies to subrecipient awards. In fact, this provision is intended to inform the direct recipients of the Department's intention to close out each annual grant agreement within a short period after the availability of the funds has lapsed. The Department has determined that it is much more appropriate and less confusing to close out all of the annual JTPA grant agreements (described at Sec. 627.405 as the funding document for an individual program year's funds) at the same time. One commenter suggested that the language in the last sentence of paragraph (b) should allow for additional revisions, as long as there is a good reason that is adequately documented; further, the commenter suggested such revisions could be handled through an increase or decrease in the ``carryover'' amount. The first sentence of the paragraph allows for a 90-day period within which revisions may be made without a requirement for justification. The second sentence allows the Grant Officer to extend the period for revisions if the recipient requests an extension and provides a justification for same. The Department sees no need for any change to this provision. Also, at the end of the three-year funding period, there are no ``carryover'' funds, only funds for which the three-year availability has lapsed. These funds must be returned in accordance with paragraph (c) if they have been drawn down, and will be deobligated by ETA. Later Disallowances and Adjustments One commenter stated that the final rule should identify the period within which the Grant Officer has the authority to disallow costs. Such an action is not necessary. If an audit or review is conducted while the records are still available in accordance with the requirements of Sec. 627.460 (i.e., 3 years after submittal of the final expenditure report for the funding period) and there are unallowable costs, then the Grant Officer can disallow those costs. Collection of Amounts Due One commenter indicated that this provision must acknowledge that there are processes at the local level which impede collection of disallowed costs and which prohibit collection efforts by the Federal Government (or State) during the time when the State (or local) collection actions are in process. Other sections of these regulations (e.g., Sec. 627.485) contain provisions which allow recipients to request additional time to complete such a process. However, once a Federal debt is established against a recipient, it is that direct recipient which the Department holds liable. The provision is not changed. Grievances and Sanctions The interim final rule revised, redesignated, and reordered the regulatory provisions formerly found at 20 CFR part 29, Subpart D-- ``Grievances, Investigations, and Hearings'' in a new part 627, subparts E, F, G, and H. The interim final regulations more clearly defined the various JTPA grievance procedures required to be established by section 144 of the Act. The procedures applicable to a particular grievance process level were consolidated into discrete subparts. [click on ''Back'' to return to Index; then click on ''Continuation of discussion of comments (III)'' to continue]