SSBG IM 02-2007 Supplemental Funds

Transmittal No. 02-2007

Date: 05/05/2007

TO:                    Social Services Block Grant (SSBG) State Officials and State Program Contacts

SUBJECT:         Director, Office of Community Services (OCS)

PURPOSE:       SSBG Supplemental Funds

Background

The Department of Defense Emergency Supplemental Appropriations to Address Hurricanes in the Gulf of Mexico and Pandemic Influenza Act, 2006 (Public Law (P.L.) 109-148) was signed into law on December 30, 2005, providing $550 million in additional funds to the SSBG program to address social and health services for individuals and for repair, renovation and construction of health facilities affected by the 2005 Gulf Coast Hurricanes. The statute authorizing the SSBG Emergency Supplemental Funding provides

" ... that in addition to other uses permitted by title XX of the Social Security Act, funds
appropriated under this heading may be used for health services (including mental health
services) and for repair, renovation and construction of health facilities (including mental
health facilities)." Note: This provision covers any waivers granted by the Department of
Health and Human Services (HHS) for construction of facilities using SSBG Supplemental
funding.

SSBG policy allows that States may draw down and expend funds in the fiscal year in which the
funds were made available, or the subsequent fiscal year (42 USC 1397a). As such, States have
until September 30, 2007, to use the additional funds.

Use of Funds for Renovation or Construction
The authority as outlined in the Act allows for the allocation of SSBG Emergency Supplemental
Funding to public, non-profit and private entities for the repair, renovation or construction of
health care facilities as a reasonable interpretation of the law. There is no conflict with general
administrative rules, Office of Management and Budget (OMB) circulars, or current grants
administrative policies as long as the use of these funds is consistent with the laws and
procedures applicable to a State, both with regard to the State's own provisions for obligations
and expenditures and those in applicable Federal regulations (see block grant regulatory
language at 45 CFR 96.30(a)).

Waivers
The statute provides waiver authority to allow for use of funds to meet special and related needs
on an exceptional basis. The Administration for Children and Families (ACF) has used the
authority twice: to allow Louisiana to use funds for the repair and construction of child care
centers and to allow Mississippi to use the funds for reconstruction of senior centers.

Protection and Disposition of Real Property
States receiving SSBG Emergency Supplemental Funding are subject to two special award
conditions. These conditions reflect HHS policy on protection and disposition of real property:

1. States must apply their own administrative standards when they issue sub-awards under
the Emergency Supplemental Appropriations Act of 2006 (P.L. 109-148) for construction.
This means State standards relating to the protection and disposition of real estate
purchased or constructed with grant funds are applicable to funds awarded.

2. States must establish, as a condition of funding to all entities receiving SSBG funds for
construction under the Emergency Supplemental Appropriations Act of2005, the
requirement that an NFl is filed as a condition of the award. In this way, the NFl
officially recognizes the Federal Government's continuing financial interest in the
property.

NFl Policy
The Federal Government's interest in protecting its financial investments stems from the
Property Clause of the Constitution, which states: "The Congress shall have Power to dispose of
and make all needful Rules and Regulations respecting the Territory or other Property belonging
to the United States .... " U.S. Constitution, Art. IV, Sec. 3, clause 2. The Property Clause has
been construed as establishing a federal property interest in any expenditure of grant funds, or
property purchased with such funding. It is a fundamental tenet of appropriations law, as
expressed in the authoritative GAO Principles of Appropriations Law: "By virtue of the Property
Clause, no agency or official ofthe government is authorized to sell, lease, give away, or
otherwise dispose of government property without statutory authority, either explicit or by
necessary implication." GAO Redbook, 16-221 (2006).
It is longstanding HHS policy to require the filing of an NFl when grant-funded construction or
major renovation begins or when an existing facility or land is acquired with grant funds. The
policy is based on broadly applicable OMB standards and administrative regulations grounded in
Constitutional and Appropriations law.
The purpose of the NFl is to ensure that the Federal interests in property are not subordinated to
those of non-Federal parties. This means that the NFl serves as a lien that must be filed in the
jurisdiction in which the property is located. The NFl must show that the property was
constructed, acquired or improved with HHS funds. Although the title to the renovated or
reconstructed facilities will vest to the recipient of the funding, all required public filings must
show that the Federal interest in the property may not be conveyed, transferred, assigned,
mortgaged, leased, or otherwise be encumbered or subordinated by the State or its subrecipient
without the express permission of HHS.
OCS has reiterated the Department standard in policy issuances of its own.
NOTE: Please note that Federal interest in a property exists whether or not the NFl is recorded.
The NFl is used to not only to ensure that the Federal interests in property are not subordinated
to those of non-Federal parties, but to protect parties that may attempt to acquire that property in
the future.
General Questions and Answers with respect to the NFl

What services may be provided with SSBG Supplemental Hurricane Funds?
States may use supplemental SSBG funds for the usual array of human services. In addition, the
funds may be used to help meet the health care and mental health needs of people affected by the
hurricanes. The funds may also be used to restore operation of health care providers and centers
through repairs or reconstruction. Examples of eligible institutions include community health
centers, rural hospitals and clinics, community mental health centers, public hospitals and other
providers with substantial percentages of uninsured patients.

What authority does ACF have to require the NFl?
It is longstanding HHS policy to require the filing of an NFl when grant-funded construction or
major renovation begins or when an existing facility or land is acquired with grant funds. The
policy is based on broadly applicable OMB standards and administrative regulations grounded in
Constitutional and Appropriations law.

What is the purpose of the NFl?
The purpose of the NFl is to protect Federal interests in real property bought or improved with
Federal funds and to ensure that Federal interests in the property are not subordinated to those of
non-Federal parties [ACF Grants Policy Note 06-03 , dated July 21, 2006]. This means that the
NFl serves as a lien that must be filed in the jurisdiction in which the property is located. The
NFl must show that the property was constructed, acquired or improved with HHS funds.
Although the title to the property will vest to the recipient of the funding, all required public
filings must show that the Federal interest in the property may not be conveyed, transferred,
assigned, mortgaged, leased, or otherwise be encumbered without the express permission of
HHS.It is important to note that the Federal interest in the property does not expire.

Is the requirement for an NFl mandated by law or regulations?
The requirement for filing an NFl is found in OMB Circular A-110 (§37) and is reflected in the
Department regulation at 45 CFR 74.37. The directive of the OMB Circular is based on a long recognized
legal principle that grant funds in the hands of a grantee remain the property of the
Federal Government until such time as they are properly obligated and/or expended for
authorized grant purposes. Moreover, the Federal Government retains a reversionary interest in
all property (real, personal, and intangible) purchased or improved with Federal grant funds. The
Part 74 regulations are applicable to grants and subgrants awarded to nonprofit organizations,
institutions of higher education, hospitals, and commercial organizations. The requirement for
filing a Notice of Federal Interest would also apply to facilities to which State or local
governments hold title and that have been reconstructed or renovated with funds appropriated
under P.L. 109-148. Under 45 CFR 92.31 , when real property purchased with grant funds by
States, local governments, or Indian tribes is sold, the Federal share of the proceeds must be paid
to the funding agency.

Can ACF waive the NFl?
No, ACF does not have the authority to waive the filing of an NFI Moreover, as explained
above, HHS has longstanding policy in place, based both on regulation and governmental
financial policy, which requires the filing of an NFI
What problems have States reported on the NFl?
States have expressed concern about:

• the longevity of the Federal lien.
• how to proceed when selling property purchased or improved with Federal funds.
• provider repayment of funds to satisfy the NFL
• applicability of the NFl requirement to county, city or State buildings constructed or
repaired with Federal funds.
• applicability of the Davis-Bacon Act (Title 40 USC, Chapter 31 , Subchapter IV), which
requires contractors to pay the prevailing or average pay in the region. On
September 8, 2005, President Bush issued Proclamation 7924, suspending the Act within
specified geographic areas affected by Hurricane Katrina. The Proclamation was revoked
effective November 8, 2005.

Why must States expend their funds by September 30, 2007? Can ACF waive this
requirement?
This requirement is a matter of law. It cannot be overruled by administrative action. Section
2002 of Title XX of the Social Security Act [42 USC 1397a(c)] requires States " . .. to expend
SSBG funds within the same fiscal year, or the succeeding fiscal year . .. " This requirement is
reflected in Federal SSBG regulations at 45 CFR Subtitle A, 96.14(a): "Amounts unobligated by
the State at the end of the fiscal year in which they were first allotted shall remain available for
obligation during the succeeding fiscal year .... " This has always been the practice under SSBG
grant awards to States. For FY 2006 funding, it means that States must obligate and expend their
regular SSBG funds as well as their supplemental funds by September 30, 2007.

What reaction has ACF received from the States on this expiration of funds?
Several States have contacted ACF by letter, email and phone to express concern about the
requirement that SSBG Supplemental funds be expended by September 30, 2007. Completion of
construction projects by the legislative deadline presents a challenge for two principal reasons.
First, given the scale of reconstruction activities in the affected States, qualified contractors are
not always available. Second, some States have been slow to start projects because of their
concern that the required Nfl, as well as the interest in the property itself, is inhibiting their
ability to secure funding for their construction projects.

Notices of Federal Interest, Mortgage Agreements and Insurance under Hurricane Related
Construction Projects
These questions and answers are intended to assist States in explaining conditions that apply
when sub-recipients use Social Services Block Grant Emergency Funds for construction or
major renovations. While States will follow their own administrative standards as they issue
sub-awards under the Emergency Supplemental Appropriations Act of2006 (P.L. 109-148), as a
condition of those awards, sub-recipients must file a Notice of Federal Interest when they use
funds for construction.

What is a Notice of Federal Interest (NFl)?
An NFl is a lien that must be filed when you use Federal funds to buy property or to build or
renovate a building.

Are there dollar thresholds that trigger the requirement?
Yes, there are. When undertaking renovations that cost more than the lesser of $150,000 or 25
percent of the approved project budget, the property owner must file an NFL Renovation costs
that fall below this threshold are not covered by the requirement. However, all real property
purchases and new construction are covered regardless of dollar level.

What is the purpose of an NFl?
The principal purpose of the NFl to ensure that Federal interests in property are not subordinated
to those of non-Federal parties. That means that the Federal interest in the property may not be
conveyed, transferred, assigned, mortgaged, leased, or otherwise encumbered or subordinated by
a property owner unless a formal waiver is approved by HHS.

How do you calculate the Federal interest in property?
The Federal interest in a property is equivalent to the amount of grant funds spent to purchase or
improve it expressed as a percentage of the total improved property value. For example, if the
property owner spends $200,000 in Federal funds to repair or rebuild a property that, once
improved, is worth $1,000,000, then the Federal share in the property is 20 percent.

Does the Federal interest change over time?
No. As the property value increases or decreases, the Federal share remains constant as a
percentage of the total value.

When does the Federal interest in a property expire?
Unless the legislation authorizing the funding limits the term of the Federal interest, the interest
does not expire.

Where should I file an NFl?
You (the property owner) must file an NFl in the appropriate public records of the jurisdiction in
which the property is located.

May I charge the grant or contract for NFl filing fees?
Yes. You may charge filing fees to the grant or contract.

What information must an NFl contain?
The NFl must accurately indicate that the property was constructed, acquired, or improved with
Federal funds. In addition, it must indicate that during its useful life, as described in the NFl,
applicable Federal use and disposition requirements apply. See attached sample NFL

Can the lien be released?
If you (the property owner) wish to cancel the NFl, you may do so by repaying the Federal
investment. The current fair market value of the property, which could be established through a
professional appraisal of the property, would be the basis for repayment calculations. Multiply
the percentage Federal interest times the total appraised amount for the current Federal interest.

What must I do if I default on my mortgage?
In the event that you default on your mortgage when an NFl is in place, you must notify the State
(The State should enter appropriate contact information here.) and the State must notify the
ACF grants management officer (While the State should not make Federal contact information
available to the subawardee, Joseph Lonergan is the ACF Grants Management Officer for this
program. Mail should be addressed to Joseph Lonergan, Director, Division of Mandatory
Grants, Office of Administration, Administration for Children and Families, 370 L 'Enfant
Promenade, Sw, Washington, DC 20447. Mr. Lonergan can be reached by phone at 202-401-
6603.) immediately both by phone and in writing.

If I enter into a mortgage agreement, are there specific provisions that the mortgage must
include?
Yes. Since you cannot subordinate the Federal interest, the mortgage would be in the form of a
subordinate trust or "second mortgage." It would need to specifically provide that:

• In the event of default, ACF may, at its option and in lieu of repayment based on sales
  proceeds, assume the role of mortgagor (or designate someone else to play that role) and
  continue to make payments on the mortgage.
• The mortgagee must notify ACF at least 30 days before initiating foreclosure action so
  that ACF can determine the preferred course of action. Any ACF assignment of the
  property and mortgage responsibilities to a third party must receive the concurrence of
  the mortgagee.
• In the event of a default, if ACF chooses not to assume the role of mortgagor, the
  mortgagee must pay ACF an amount equal to its share of the sales proceeds otherwise
  due the mortgagor.

What debt collections requirements apply under NFl agreements?
Any amounts owed under Nfl agreements will be determined and collected according to the
HHS debt collection requirements under 45 CFR Part 30.

What insurance requirements apply to property built or renovated with ACF funds?
Property owners who undertake Federally funded construction at any cost or renovations or
reconstruction costing more than the lesser of $150,000 or 25 percent of the project budget must
purchase title insurance and insurance against risk from physical destruction. These policies
must be in place immediately on the completion of construction. Construction contractors are
expected to carry their own insurance throughout the period of construction.

What level of title insurance coverage is required?
The title insurance policy must insure the property in an amount not less than its full appraised
value as approved by the State. When the Federal participation in the construction covers only a
portion of the cost of the property, title insurance must cover the total cost of the facility and land
in order to prevent liens on the unsecured portion from affecting the Federal interest in the
property.

Suppose I already own the land on which the building is being built?
If you already own the land on which a building is being constructed, in lieu of a title insurance
policy, you may provide evidence such as a legal or title opinion, that the property has good and
merchantable title (a title free and clear of reasonable objections and doubts) free of all
mortgages or other foreclosable liens to all land, rights of way, and easements necessary for the
project.

What if I was given the land by the State?
If you were given land by a State, or if the State recently acquired the land in a "land swap"
transaction, you must obtain title insurance. If the State owned the land for at least five years, a
copy of the State documents giving you the land is sufficient to meet the requirement.

What level of physical destruction insurance is required?
The physical destruction insurance policy must insure the full appraised value (as approved and
certified by the State) of the building from risk of partial and total physical destruction. When
Federal participation in the construction or acquisition of a building covers only a portion of the
cost, the insurance must cover the total cost of the facility because damage to the building could
make it unusable and, thereby, affect the Federal interest. The insurance policy must be
maintained for the duration of the recipient's ownership of the property.

Can the insurance requirements be waived?
ACF may waive either or both of the insurance requirements if the State can demonstrate, to the
satisfaction of the ACF Grants Management Officer, that the recipient is effectively self-insured,
i.e., the recipient has sufficient funds to pay for any damage to the facility, including total
replacement, or to satisfy any liens placed against the facility or the land. This is generally the
case for units of government with taxing authority.

Are there additional insurance requirements?
Yes. Insurance policies must include a requirement for the company to notify ACF of any
changes in the policy or coverage. In addition, in the event of a payout under a required
insurance, you must remit the Federal share of the proceeds to the State which will, in tum,
refund those monies to ACF unless ACF authorizes an alternate use.

How can the Federal Interest be liquidated?
States and subgrantees that no longer can use the facility for the purpose for which it was
constructed or renovated should request disposition instructions from OCS. The options for
disposition of real estate in which there is a Federal interest are discussed in 45 CFR 74.32.

Inquiries:
Please address inquiries to
            Marsha Werner
            Social Services Program Specialist
            Office of Community Services
            U.S. Department of Health and Human Services
            370 L’Enfant Promenade, SW
            Washington, DC 20447
            Telephone:  (202) 401-5281
            Fax:  (202) 401-5718
            Email: Marsha.Werner@acf.hhs.gov

___________/s/____________
Josephine B. Robinson
Director
Office of Community Services

SAMPLE NOTICE OF FEDERAL INTEREST
Title: -----------------------------
Date: -----------------------------
10
(EXAMPLE OF NOTARIZED AFFIRMATION)
STATE OF ______ _
COUNTYOF _________ __
On this __ day of _____ , 20_, before me, the undersigned, a Notary Public for the
County of , (State), personally appeared before me and is known to be the
person who executed this instrument on behalf of said ________ , and
acknowledged to me that he/she executed the same as the free act and deed of said Corporation.
Witness my hand and official seal.
Notary Public in and for the County of
____________ , State of ______ _