U.S. DEPARTMENT OF LABOR
Employment and Training Administration
Washington, D. C. 20210

CLASSIFICATION

Admin. & Mgmt.

CORRESPONDENCE SYMBOL

TMCS

ISSUE DATE

Jan. 24, 1994

RESCISSIONS

None

EXPIRATION DATE

January 31, 1995

DIRECTIVE

:

GENERAL ADMINISTRATION LETTER NO. 05-94
 

TO

:

ALL STATE EMPLOYMENT SECURITY AGENCIES
 

FROM

:

Barbara Ann Farmer
Administrator
for Regional Management
 

SUBJECT

:

Acquisition, Use, and Disposition of SESA Real Property

 

  1. Purpose. To provide policy guidance, interpretations of existing regulations and other requirements applicable to the acquisition, use, and disposition of real property acquired or amortized with funds provided under Section 903 of the Social Security Act (Reed Act), Title III of the Social Security Act, or the Wagner-Peyser Act.

  2.  

  3. References. Sections 302(a) and 903(c)(2) (Reed Act) of the Social Security Act, 42 U.S.C. 502(a) and 1103(c)(2); 29 U.S.C. 49 et. seq.; Section 303(a)(4), 42 U.S.C. 503(a)(4); Section 3304 (a)(3), 26 U.S.C. 3304(a)(3); 20 CFR Part 652; 29 CFR Part 97; 41 CFR Part 29-70; Sections 3001-3040, Part IV, ES Manual; OMB Circular No. A-87 (46 FR 9548-9554, Jan. 28, 1981); Unemployment Insurance (UI) Program and Budget Plan (PBP) for FYs 1989, 1990, 1991, and 1992; UIPL 12-91 (56 FR 29719-29723) and Field Memorandum (FM) No. 108-86.

  4. Definitions. 

    1. UI and ES Grant Funds.  Grant funds provided to States under Title III of the Social Security Act for administration of State unemployment insurance (UI) programs and the Wagner-Peyser Act for administration of State employment service (ES) programs. (Note: The ES Manual refers to UI and ES grant funds as granted funds. The UI and ES programs are collectively known as the employment security program.)

    2. Administrative, Staff, and Technical (AS&T) funds.  Funds provided in a single award prior to 1983 under the authority of both acts for the use of both the UI and ES programs which cannot be specifically identified with either program, without disproportionate effort, are hereinafter referred to as AS&T funds.

    3. Contributions/Participation.  Contributions to or participation in the acquisition cost of real property by a grant, Reed Act funds, or other source is the amount provided by each source to acquire or make capital improvements to real property. Each such contribution or participation is deemed to be a share (see 29 CFR 97.3 for definition) and is expressed as a percentage of the acquisition cost of the property and its improvements.

    4. Adjusted Contributions.  Contributions as defined in Section 4.c. above plus (or minus) amounts provided by (or paid to) other sources of funds, by amortization or otherwise, to pay off or replace such contributions (see Section 7.b.(5)).

    5. Equity or Share.  The terms equity, DOL equity, Reed Act equity, share, DOL share and Reed Act share are used with the following meanings throughout this General Administration Letter (GAL):

        (i)  Equity means the net value of an interest in property (value after all obligations are paid off).;

        (ii)  Share means the contribution to the acquisition cost attributed to each source of funds, expressed as a percentage.;

        (iii)  DOL equity means the right of the U.S. Department of Labor (DOL), as the grantor agency, to a share of the fair market value of State-owned real property when it ceases to be used for UI and/or ES purposes. The value of DOL's equity interest is based on the adjusted contributions of UI and ES grant funds, including AS&T funds, to the acquisition cost of the property and any capital improvements that materially increase the value or useful life of real property (see Section 7.b.(5)). This definition is consistent with the meaning of equity in OMB Circular No. A-87 and is the basis for the Federal compensation formula in 29 CFR 97.31(c). In certain situations involving capital improvements, the DOL equity and share may be adjusted based on the fair market value of the property at the time the capital improvement is made (see Section 7.b.(8)).; and

        (iv)  Reed Act equity means the equity attributable to the State's unemployment fund's share of the fair market value of real property when it is no longer to be used for employment security purposes. Such equity is based on the adjusted contributions of Reed Act funds (see Section 7.b.(5)) to the acquisition cost of the property and any capital improvements.

    6. Proceeds.  The net dollar value received or due from the disposition of real property, as provided in 29 CFR 97.3(c)(1) and (2). Since 29 CFR 97.31(c) uses proceeds to refer to both cash and non-cash proceeds, proceeds, for purposes of this GAL, means the net dollar value of all cash and non-cash proceeds. Cash proceeds, for purposes of this GAL, means the net proceeds expressed in dollars, as provided in 29 CFR 97.31(c)(2).

  5. Background. In 1986, the Employment and Training Administration (ETA) issued FM 108-86 to provide guidance to ETA Regional Offices on the acquisition, use, and disposition of State Employment Security Agency (SESA) real property, with emphasis on the use and amortization of Reed Act funds. (1) The Regional Offices were asked to furnish information copies of the FM to the SESAs. FM 108-86 did not establish new requirements; but rather, restated existing requirements contained in statutes, the ES Manual, 41 CFR Part 29-70 and OMB Circular A-87, as well as agency policies that evolved over time.

    At the time the FM was issued, ETA prior approval was required for the use of UI grant funds to acquire real property, but not for the use of Wagner-Peyser (ES) funds for this purpose. Prior approval authority with regard to ES funds was delegated to the States in 20 CFR 652.8 (48 FR 50665, Nov. 2, 1983). ETA delegated its prior approval authority for the use of UI grant funds to acquire equipment and other capital expenditures to the State Administrators in the FY 1989 Program and Budget Plan (PBP) (ET Handbook 336, 5th Edition, Par. VI.C.2.d.). The same delegation appeared in the FY 1990 PBP (ET Handbook 336, 6th Edition, Par. VI.C.2.d.). The delegation in the FY 1991 and FY 1992 PBPs (ET Handbook 336, 7th and 8th Editions, Par. VI.C.2.d.) covers only equipment acquisitions.

    In 1988, DOL and 23 other Federal agencies adopted the 'common rule' (53 FR 8034-8103) containing uniform administrative requirements for State, local, and Indian tribal government grantees. For DOL grant programs, the 'common rule' is codified at 29 CFR Part 97. These regulations superseded 41 CFR Part 29-70. SESAs agreed to apply 29 CFR Part 97 to real property acquired prior to the effective date of Part 97 through assurances in the FY 1989 ES Reimbursable Grant agreement and the FY 1990 and FY 1991 UI PBPs. The adoption of 29 CFR Part 97 and the PBP changes rendered FM 108-86 and previous delegations of prior approval obsolete.

    In 1989, DOL's Office of Inspector General (OIG) reviewed DOL equity in SESA real property. OIG found instances of inadequate State property records and instances where States had reduced or terminated employment security use of real property without compensating DOL for its equity where the property had been acquired or amortized with UI and/or ES grant funds, or the State's unemployment fund for the Reed Act equity where the property had an unamortized balance of Reed Act funds.

    This GAL updates previous ETA policies and guidance on the subject of real property acquired by States using UI and ES grant funds. Since the use of Reed Act funds to acquire real property is an integral part of the subject, Reed Act requirements are also dealt with at length. An appendix at the end of the GAL provides four illustrations showing how to calculate DOL, Reed Act, and other equity in real property being disposed of or replaced by other property, or where there is a significant reduction in UI (or ES) use.

  6. Applicable Requirements. The acquisition, use, disposition, and amortization of real property acquired with UI and/or ES grant funds are subject to:

    The preceding requirements provide that if real property is acquired or amortized with UI and/or ES grant funds, the State must comply with the real property and procurement regulations at 29 CFR Sections 97.31 and 97.36, respectively.

    The acquisition, use, and amortization of real property acquired with Reed Act funds are subject to Section 903(c)(2) of the Social Security Act and Sections 3001-3040, Part IV, ES Manual and not subject to 29 CFR Part 97. Dispositions of real property acquired with Reed Act funds shall be conducted in accordance with this GAL.

    Where both Reed Act funds have been used to acquire real property and UI and/or ES grant funds have been used to acquire or amortize real property, the appropriate set of requirements are applicable to the adjusted contributions of each fund source.

    Regardless of the sources of funds used to acquire or improve real property, States are expected to exercise good business judgment in discharging their procurement and property management responsibilities. When real property is no longer suitable for employment security purposes, it should be sold, refurbished or exchanged for space of suitable size and quality.

  7. Acquisition of SESA Real Property. 

    1. Reed Act Funds.

        (1)  General.  Reed Act funds are funds transferred to the accounts of the States in the Unemployment Trust Fund (UTF) pursuant to Section 903 of the Social Security Act. Under Section 903(c)(2) of the Act, a State legislature may appropriate Reed Act funds for employment security administration expenses including acquiring real property for employment security purposes (see Section 3020, Pt. IV, ES Manual). When used in conjunction with the amortization arrangements described in Section 7.b.(5) below, Reed Act funds act as revolving funds that may be used to acquire SESA real property.

        (2)  Appropriation.  Reed Act funds used to acquire real property must be appropriated by the State's legislature. The State appropriation act must satisfy the requirements of Section 903(c)(2) of the Social Security Act, Sections 3001-3040, Part IV, ES Manual, and UIPL 12-91, which supersedes parts of the ES Manual and contains current recommended draft language for Reed Act appropriations. The designation 'Reed Act funds' refers to funds transferred to the State pursuant to Section 903(a) including previously amortized Reed Act funds, and amounts restored to Reed Act status, pursuant to paragraph (c)(3) of Section 903. Other funds in a State's UTF account, are not available for appropriation. No DOL approval is needed for the appropriation and use of Reed Act funds. Also see Sections 9.d.(1) (replacement of Reed Act real property) and 9.e.(1).

    2. UI and ES Grant Funds.

        (1)  Total Spending Limitation.  Under the space costs provision of OMB Circular No. A-87 (Attachment B, Para. C.2.), the annual amount that may be charged to UI or ES grant funds for occupying a publicly- or privately-owned building may not exceed the annual rental cost of comparable space and facilities in a privately-owned building in the same locality. This limitation applies to any one or combination of the following:

          (a)  Maintenance and operation costs.  Costs of maintenance and operations not otherwise included in rental or other charges for space and allowable under OMB Circular A-87, Attachment B, Para. C.2.b.

          (b)  Rearrangements and alterations/Capital improvements.  Costs of rearrangements and alterations required specifically for UI and/or ES purposes or which materially increase the value or useful life of property;

          (c)  Rental rate systems.  Costs of space newly occupied in publicly-owned buildings on or after October 1, 1980, under rental rate or equivalent systems (see paragraph (3) below);

          (d)  Cash purchase.  Payments for the cash purchase of real property exclusive of interest (capital expenditure provision of OMB Circular No. A-87, Attachment B, Para. C.3.));

          (e)  Reed Act amortization.  Repayments (amortization) of Reed Act funds used to acquire real property as authorized under 20 CFR 652.8(d)(7) and the PBP (1992 PBP, Para. VI.C.2.c.) (see paragraph (5) below);

          (f)  Amortization of other funds.  Repayments of other non-Federal funds, exclusive of interest, used to acquire real property, such as the amortization of the principal portion of State bonds or of other funds borrowed from public or private sources (2);

          (g)  Lease-purchase.  Allowable costs under lease-purchase, lease with option to purchase, or other commercial capital lease arrangements which create a material equity in real property; (3) and

          (h)  Depreciation or use allowance.  Depreciation or use allowance for space occupied in publicly-owned buildings (see paragraph (6) below). (4)

        (2)  Allocation of Charges Between UI and ES.  The amount of UI and ES grant funds used in any fiscal year for the acquisition or amortization of a particular unit of real property shall be proportionate to the use of the property by each program.

        Changes in the proportion of UI and/or ES use from one period to the next shall be reflected in the allocation of space charges. Where individuals work on more than one program, the related space charges shall be allocated to the benefitting programs in proportion to use. For example, personnel activity distributions, such as those produced by the FARS time distribution subsystem, may be used as the basis for allocation.

        (3)  Rental Rate or Equivalent Systems.  Rental rate or equivalent systems referred to in Section C.2.a., Attachment B of OMB Circular No. A-87 are mechanisms for allocating actual, allowable occupancy costs of publicly-owned real property acquired after October 1, 1980 among the occupants. Allowable costs include operation and maintenance costs, interest, and depreciation based on the useful life of the buildings and/or other improvements.

        DOL acquires no equity from the use of UI and or ES grant funds for depreciation or use allowance that are charged over the physical life of a property (usually 50 years for new commercial properties). It is DOL's position that a "rental rate or equivalent system" may include amortization of principal and interest associated with an acquisition -- provided the total amount charged under the rental rate or equivalent system does not exceed the total spending limitation in OMB Circular, Attachment B, Para. C.2.

        However, DOL acquires an equity in property (see Section 7.b.(6) in the GAL) to the extent that amortization of acquisition costs, including principal and interest, are charged as part of a rental rate or equivalent system.

        (4)  Acquisitions by Cash Purchase.  Because of the total expenditure limitation in (1), States will normally be unable to use UI and ES grant funds for cash purchases of land and buildings.

        (5)  Amortization.  States may acquire real property with Reed Act or other non-Federal funds under arrangements in which the original fund source used to purchase the property is amortized (or repaid) with UI and/or ES grant funds. A Reed Act amortization arrangement is a repayment arrangement in which a SESA, instead of paying bondholders or other creditors, makes periodic payments of UI and/or ES grant funds to the State's account in the Unemployment Trust Fund (UTF). Interest costs incurred under real property amortization arrangements are unallowable except under certain rental rate or equivalent systems (see paragraph (3) above).

        UI and ES granted funds may not be used to amortize real property whose costs are charged to grant programs under an OMB Circular No. A-87 rental rate system (see paragraph (3) above).

        Amortization payments shall be reflected on the State's books as adjustments to the original contributions to the cost of the property. Each payment reduces the book balance of contributions by Reed Act or other non-Federal funds and correspondingly increases contributions by UI and ES granted funds; thereby creating DOL's share of equity.

        Use of UI and/or ES grant funds to amortize Reed Act or other fund sources to acquire the real property creates a Federal share or equity in the property except under certain conditions under rental rate or equivalent systems (see paragraph (3) above). Since the costs charged to each grant program creates a DOL share attributable to that program's funds, the DOL share must be accounted for separately for each program.

        In the amortization of Reed Act funds with Federal grant funds, equity in real property shifts from Reed Act to UI and ES grant funds. Once a Reed Act-funded property is completely amortized, Reed Act equity in the property no longer exists; but rather, equity belonging to the Federal grantor agency has been created.

        (6)  Depreciation.  Depreciation (and use allowances) should not be confused with amortization. Amortization, for purposes of this GAL, is the scheduled repayment of a debt or original fund source used in the acquisition of real property. Depreciation and use charges represent the consumption of an asset over time. Depreciation or use allowance may not be charged to UI and/or ES grant funds for real property whose cost is being or has been amortized with Federal funds. If depreciation costs of property not acquired with Federally granted funds are to be charged to UI and/or ES grant funds, the computation must reflect the expected useful life of the building(s) and the property's acquisition cost.

        Charges to UI or ES grants based on scheduled amortization of debt associated with original property acquisition or subsequent capital improvements is not depreciation. Rather, such charges constitute acquisition cost, no matter how they are identified, and DOL accrues an equity in property proportionate to its share of the principal and interest serviced during the amortization period.

        No DOL equity accrues from the use of UI and/or ES grant funds for depreciation costs properly charged to the respective grants.

        (7)  Prior Approval Requirements.  DOL's regulation at 20 CFR 652.8(d)(2), issued in 1983, delegated all DOL prior approval authority under OMB Circular No. A-87 and 41 CFR Part 29-70 for Wagner-Peyser grants to the States. A similar but narrower delegation of authority, covering equipment and other capital expenditures, was made to the States for UI activities in the FY 1989 and FY 1990 UI Program and Budget Plan (PBP).

        Both the 1989 and 1990 UI PBP and Wagner-Peyser regulations authorized the use of UI and ES grant funds for Reed Act amortization but did not require prior DOL approval of such expenditures. These provisions only applied to Federal actions designated as prior approvals and not to Federal actions designated as disposition instructions.

        On October 1, 1988, 41 CFR Part 29-70 was replaced by the 'common rule' (codified for DOL at 29 CFR Part 97) for grants to governmental entities. As specified at 29 CFR 97.5, the 'common rule' superseded existing regulations and other issuances that were inconsistent with its provisions. As a result, the 1983 delegation of prior approval authority for Wagner-Peyser activities was superseded as of October 1, 1988. An acquisition of real property after September 30, 1988, currently being amortized or to be amortized with Federally granted funds which did not receive the prior approval of DOL, should be brought to the attention of the appropriate DOL Regional Office for approval of continued amortization arrangements.

        Requests for DOL prior approval for the use of UI and/or ES funds for the acquisition or amortization of real property shall be accompanied by an acknowledgement that there will be DOL equity in the property to the extent that UI and/or ES funds are used for its acquisition or amortization. If the need for the property for UI and/or ES purposes ceases or is significantly and permanently reduced, the State also acknowledges that it will request DOL disposition instructions in accordance with 29 CFR 97.31(c). The acknowledgement shall be signed by a State official(s) with the authority to legally commit the State with regard to the contents of the acknowledgement.

        (8)  Capital Improvements.  For any capital improvement that materially increases the value or useful life of real property (whether paid by grant funds or otherwise) and that significantly alters the existing Federal share, DOL reserves the right to require the grantee to obtain one or more independent appraisals to determine the fair market value at the time of and as a result of the capital improvement. The fair market value as determined by such appraisals may be used to establish the revised shares. A significant alteration of the Federal share, for purposes of this GAL, is defined as any capital improvement where the cost of the improvement would either reduce the Federal share by 10% or more or estimated to affect the current Federal equity by $100,000 or more.

  8. Use of SESA Real Property. 

    1. Reduction in Utilization.  Reed Act funds and UI and ES granted funds may be used for office space to the extent that it is used for authorized program purposes (See Section 7.b.(2)). Therefore, if a significant and permanent reduction occurs in UI utilization of space acquired with UI funds, the State must dispose of the excess space or replace it with property whose size is appropriate to the program's needs or take other appropriate corrective actions to bring DOL equity, attributable to UI grants, and UI occupancy into balance (See Section 9.c., Disposition Instructions). The same is true for significant and permanent reductions in ES use of space acquired with ES funds.

      A SESA must request disposition instructions when the UI-funded share of the cost of real property significantly and permanently exceeds the UI share of the property's utilization, regardless of whether the SESA plans to use the excess space for ES or for non-employment security activities. The same is true for excess ES-funded space used for UI or for non-employment security purposes. Equity shares attributable to Reed Act or AS&T funds may be used for employment security purposes without regard to UI and ES distinctions. A State is not required to request disposition instructions if the reduction of UI (or ES) use is offset by a corresponding increase in ES (or UI) use and the shift in use involves space which was either acquired with Reed Act funds which have not been amortized with UI or ES funds or acquired before 1983 with AS&T funds.

      If, however, the proceeds from the disposition of such property is to be used to obtain replacement property, the State must declare, at the time of replacement, how the equity attributable to AS&T funds is to be apportioned between the two programs.

    2. Comparison with 41 CFR Part 29-70.  Under 41 CFR 29-70.215-2(b) and the first paragraph of 41 CFR 29-70.215-2(c), DOL could permit SESA grant-funded real property to be used for non-employment security purposes without compensation. Since this option is not available under 29 CFR Part 97, all real property acquired with UI and/or ES grant funds, including property acquired before the effective date of 29 CFR Part 97, should be used and disposed of in accordance with 97.31(b) and (c). Clauses to this effect were inserted into the UI PBP and the ES Reimbursable Grant Agreements. SESAs should review the use of all grant-funded real property to determine what properties, if any, are not being used in accordance with 29 CFR Part 97 and to request disposition instructions where appropriate.

    3. Income.  There are no limitations on the amount of rent that can be charged commercial tenants occupying excess SESA space. The State, however, must exhibit sound judgment in its decisions to rent to the commercial market. If the excess space is used by other Federally-supported programs, the costs the other Federally-supported programs may charge to their grants is limited to those allowed by the applicable cost principles. For example, if the space is used by the State in administering a grant that is subject to OMB Circular No. A-87, then Attachment B. Para. C.2.a. (Rental Cost) of that Circular is applicable. If the space is used for the JTPA program, the JTPA cost principles determined by the Governor pursuant to 20 CFR 627.435 are applicable.

      Rental income must be allocated among the fund sources used to acquire the rented property in proportion with the original fund sources' adjusted participation in the property's acquisition cost. Rental income allocable to Reed Act funds must be immediately deposited in the State's UTF account. Rental income allocable to UI and/or ES grant funds shall be used as provided at 29 CFR 97.25(g)(2).

  9. Disposition of SESA Real Property. 

    1. Allocation of Proceeds.  When real property acquired or amortized with UI and/or ES granted funds ceases to be used for its respective program purposes, it must be sold, exchanged for replacement property, or otherwise disposed of as directed by DOL disposition instructions issued in accordance with 29 CFR 97.31(c). Under Section 97.31(c), each grant fund source's share of the proceeds from the sale or other disposition of the property is determined on the basis of its proportional participation in the cost of the property. Comparable treatment is accorded the Reed Act share of the proceeds (See Section 7.b.(5) on adjusting contributions to cost).

      If the real property includes a building that was constructed pursuant to an arrangement under which the land was provided without charge to grant funds, the fair market value of the land at the time of contribution will be considered a contribution toward the total cost of the real property (5) for purposes of determining the respective shares in the property, unless there is clear written evidence of agreement between DOL and the State that the land or structure is not intended to be included in any settlement of equities at such time as the real property ceases to be used for applicable grant purposes.

    2. Equity.  DOL equity in State-owned real property is created through the use of Federal grant funds to acquire real property or under DOL-approved amortization arrangements. OMB Circular No. A-87 requires grantees (States) to reimburse the Federal government for its equity interests when capital assets acquired with Federally granted funds cease to be used for the programs for which they were acquired. In DOL programs, such reimbursement is accomplished with the disposition procedures of 29 CFR 97.31(c).

      Prior to the issuance of OMB Circular No. A-87 in 1968, DOL would approve an amortization arrangement only if the State assured that the SESA could occupy that space or space of equivalent quality and quantity 'rent free' when amortization was completed, paying only for operation and maintenance costs. Since the Circular did not authorize continued use of the rent-free space requirement, DOL stopped using such an assurance and now relies exclusively on 29 CFR 97.31(c) to protect its equity interests in SESA real property.

    3. Disposition Instructions.

        (1)  General.  When SESA real property is no longer needed for the originally authorized purposes and Federal grant funds have been used toward the acquisition costs of the property, the grantee must request disposition instructions from the DOL Regional Office in accordance with 29 CFR 97.31(c). This requirement includes situations where there is a significant and permanent reduction in UI or ES utilization of the property. The request for disposition instructions should be made as soon as it is determined that a reduction of program use is expected. If a reduction was not anticipated, the request for disposition instructions must be made within a reasonable time after the need for the property ends. The request should include factors and conditions to be reflected in the DOL disposition instructions, such as planned leasing of the property pending its sale by the State. Since the 29 CFR 97.31(c) requirement only applies to property acquired with grant funds, disposition instructions are not required for Reed Act equity in SESA real property.

        (2)  Options.  In response to a request for disposition instructions, the DOL Regional Office may direct the State to:

          (a)  retain title to the property and compensate DOL for its equity, in accordance with 29 CFR 97.31(c)(1);

          (b)  replace the property with other property, using the proceeds from the disposition of the vacated property (6) as an offset to the cost of the replacement property, in accordance with 29 CFR 97.31(c)(1), with respective equities transferred to the replacement property;

          (c)  sell the property and compensate DOL for its equity in accordance with 29 CFR 97.31(c)(2); or

          (d)  transfer the property to DOL or its designee, in which case the State will be paid by DOL to compensate it for any State equity in the property in accordance with 29 CFR 97.31(c)(3).

        (3)  DOL Action.  DOL, generally, will honor a State's request for any of the first three options in the previous section as long as DOL is adequately compensated for its equity. Non-compliance with the requirement to request disposition instructions when SESA real property ceases to be needed for UI or ES purposes will result in a disallowance, as provided in 29 CFR 97.43. DOL may issue a Finding and Determination, establish a debt, and/or pursue other actions as appropriate.

        (4)  Appraisal and Other Instructions.  In addition to directing the grantee to use one of the 29 CFR 97.31(c) disposition options, DOL instructions may require certain other actions. As provided in 29 CFR 97.31(c)(2), if the property is to be sold, the State is required to use procedures that provide for competition to the extent practicable and which will result in the highest possible return. DOL will permit actual and reasonable selling and fix-up expenses to be deducted from the proceeds. If a method other than sale is to be used to dispose of the property, DOL will require the use of appropriate procedures to establish its current fair market value.

        Accordingly, DOL disposition instructions may require the grantee to obtain one or more independent appraisals of the property, regardless of the disposition option requested by the State or chosen by DOL, and may also require independent appraisal of the fair market value of any contribution to the original acquisition cost of the property. DOL may also require the grantee to obtain DOL approval of the appraiser selected and/or the contract for appraisal. Additionally, DOL may obtain its own appraisal of the property at DOL expense. Appraisal costs incurred by the grantee in connection with a disposition of property under 29 CFR 97.31(c) may be charged to current UI or ES grants as allowable costs or may be paid from the proceeds generated by the DOL approved transaction.

    4. Replacement.

        (1)  Reed Act.  Reed Act share in SESA real property is the ratio of the adjusted contribution of Reed Act funds to the original cost of the property to be disposed. In a replacement transaction, proceeds from the disposed property may be used as an offset to the purchase price of replacement property without another appropriation of Reed Act funds for the replacement property, provided that use of such funds conforms in all respects to the original appropriation of Reed Act funds authorizing the acquisition of the disposed property and is permissible under State law. In the interpretation of State Reed Act appropriations, the State is the final arbiter of its State law. Such transactions may not result in a new obligation of Reed Act funds.

        (2)  UI and ES Grant Funds.  A State may use the proceeds from the disposition of SESA real property that was acquired or amortized with UI and/or ES grant funds as an offset to the purchase price of replacement property subject to the following:

          (a)  DOL disposition instructions.  The replacement must be in accordance with DOL disposition instructions. (7) The grantee's request to DOL for disposition instructions should be accompanied by a plan for the disposition of the property to be replaced and the acquisition of the replacement property. The disposition-acquisition plan should cover the principal elements of the replacement, including location, projected cost, projected use by program of the replacement property, value of the equity transferred from the disposed property (by program), and a schedule for all significant events in the move to the replacement property. The plan may be amended at the discretion of the Department of Labor.

          (b)  Utilization for UI or ES program purposes.  The replacement property must serve the same program(s) as the disposed property. Therefore, only the portion of the proceeds that are attributable to UI funding may be used for UI purposes in the replacement property; the same treatment must be accorded the ES portion of the proceeds. Proceeds attributable to pre-1983 AS&T funds may be used for either UI or ES purposes provided they are identified as either UI or ES equity in the replacement property at the time of replacement and thereafter accounted for as such.

          (c)  Additional UI or ES cost.  The amount of current or future UI grant funds that may be used to acquire or amortize replacement real property may not exceed the DOL equity attributable to the UI portion of the cost of the replacement real property (see Section 7.b.(2)) less the UI share of the proceeds from the disposed property, subject to the total spending limitation in Section 7.b.(1) above. The same treatment must be accorded costs charged to ES grant funds.

          (d)  Location.  The replacement property must be in the same State as the property that has been disposed of but does not have to serve or be located in the same geographic locality if there are valid program-related reasons for the replacement action, such as an increased need for service in one area and a decreased need in another, or because the replacement will reduce the grantee's net space costs.

          (e)  Retention period.  The proceeds resulting from the disposition of real property should be immediately used in the acquisition of the replacement property. However, DOL will permit retention of the proceeds in an interest-bearing escrow or other interest-bearing restricted account until the end of the Federal fiscal year in which disposition of the subject property occurred in order to allow the State to complete the actions involved in securing replacement property. Such interest-bearing accounts should yield interest equal to or greater than the rate required by 31 CFR Part 205, the regulations implementing the Cash Management Improvement Act (CMIA). Interest earned on the proceeds must be used in the acquisition of the replacement property and included as DOL equity. (Note that proceeds of a Reed Act equity may not be handled in the same manner. See Section 9.d.(1)).

          If more time is necessary, the State should request it in the disposition-acquisition plan accompanying the request for disposition instructions along with the period of time the State expects to retain the proceeds (see Section 9.d.(2)(a)). In the event that circumstances prevent the replacement to be made within the approved time frame, the State may request an extension from DOL. If the approved plan is not being implemented, then there is no replacement. (See Section 9.d.(2)(a)).

          (f)  Proceeds; time of disposition.  Regardless of the type of transaction, DOL's equity in the proceeds is based on the property's fair market value in accordance with 29 CFR 97.31(c). Fair market value is determined by an arm's length sale or by an independent appraisal, at the earlier of the date the property ceases to be used for UI or ES program purposes or the date cash is received for the property.

          (g)  Use of proceeds after replacement.  If the property being replaced is worth more than the replacement, the excess cash proceeds received or equivalent cash shall be handled in accordance with Section 9.e.(2).

          (h)  Amortization acceleration.  Proceeds from the disposition of SESA real property may not be used to accelerate the amortization of Reed Act or other fund source used to acquire other real property.

          (i)  Capital improvements.  Proceeds from the disposition of SESA real property must be handled according to OMB Circular A-87 and 29 CFR 97.31. They must be returned to the Department of Labor or used to acquire replacement property. Therefore, such proceeds may not be used to make capital improvements to existing properties unless the improvements create additional space to be used for employment security purposes, e.g., additions to buildings.

          (j)  Property records.  The State's property records for the replacement property shall reflect any DOL or Reed Act equity transferred from the prior property as contributions to the cost of, and consequently equity in, the replacement property.

    5. Deposit and Subsequent Use of Cash Proceeds.

        (1)  Reed Act Funds.  The Reed Act share of cash proceeds received from the sale or other disposition of real property must immediately be deposited in the State's account in the Unemployment Trust Fund (Section 303(a)(4) of the Social Security Act and Section 3304(a)(3) of the Internal Revenue Code of 1986). In addition, any portion of the Reed Act share of the proceeds from a disposition action that is not used for replacement property, as provided in Section 9.d.(1), must be immediately deposited in the State's account in the Unemployment Trust Fund. As Section 7.a.(2) states, however, only the adjusted contribution of Reed Act funds to the cost of the property may be credited as Reed Act funds. The remainder of the Reed Act share of the cash proceeds, if any, may not be credited as Reed Act funds and must be used solely for the payment of unemployment benefits. Failure to immediately deposit the applicable Reed Act proceeds into the Unemployment Trust Fund may be cause for the Secretary of Labor to commence conformity/compliance proceedings and to assess interest on the amount outstanding.

        (2)  UI and ES Grant Funds.  The total UI and ES shares (DOL equity) of the cash proceeds from the sale or other disposition of real property must be remitted to DOL or used to acquire replacement real property. A check payable to the United States in the amount of the DOL portion of the cash proceeds should be sent to the Regional office.

    6. Disposition of Real Property with Reed Act Equity and No UI or ES Grant Funds Equity.

        (1)  General.  Some States have chosen not to use UI or ES grant funds to amortize SESA real property acquired with Reed Act or other non-Federal funds and used for UI or ES purposes. There is no DOL equity in this property and it may be sold or otherwise disposed of without obtaining DOL approval or DOL disposition instructions.

        (2)  Payment of Equity.  A diversion of real property acquired with Reed Act funds (and not amortized) from employment security purposes due to reductions in UI and/or ES use or for other reasons creates a liability to the State's unemployment compensation fund. The amount of the liability created would be equal to the diverted portion's share of the sale price or fair market value of the property as of the time employment security program use ends.

        Cash proceeds from the sale or other disposition of the property must be immediately deposited in the State's account in the Unemployment Trust Fund, subject to the restrictions discussed above in Section 9.e.(1).

  10. Inquiries. Address any questions on this GAL to the Regional Office.