Legal Services Corporation
Board Of Directors
Friday, January 30, 2004
The Melrose Hotel
2430 Pennsylvania Avenue, NW
COMMITTEE MEMBERS PRESENT:
Robert J. Dieter, Chair
Thomas A. Fuentes
Herbert S. Garten
Frank B. Strickland, ex-officio
OTHER BOARD MEMBERS PRESENT:
Maria Luisa Mercado
Michael D. McKay
Florentino A. Subia
STAFF AND PUBLIC PRESENT:
Helaine M. Barnett, President
Victor M. Fortuno, Vice President for Legal Affairs, General Counsel & Corporate Secretary
David Richardson, Treasurer & Comptroller
Leonard Koczur, Acting Inspector General
John Eidleman, Acting Vice President for Compliance & Administration
C O N T E N T S
|P A G E|
|Approval of agenda.||4|
Approval of the minutes of the Committee's
meeting of meeting of November 21, 2003.
|Report on LSC's Temporary Operating Budget, Expenses, and Other Funds Available through November 30, 2003.||
|Consider and act on the President's and Acting Inspector General's recommendations for FY 2004 Consolidated Operating Budget or Revised Temporary Operating Budget||
|Consider and act on space reallocation options at LSC Headquarters and related financial implications||
|Status report from the Inspector General on the Corporation's fiscal year 2003 annual audit.||
|Consider and act on other business.||116|
Consider and act on adjournment of meeting.
|MOTIONS:||Pages 4, 57, 93, 117|
P R O C E E D I N G S
MR. DIETER: This is the Finance Committee meeting. I'm calling it to order.
My name is Rob Dieter and I'm the chairman of the committee, and for the record, Herb Garten and Tom Fuentes, members of the committee, are here, along with other members of the board.
Is there a motion to approve the agenda?
M O T I O N
MR. FUENTES: So moved.
MR. GARTEN: Second.
MR. DIETER: All in favor say aye.
(A chorus of ayes.)
MR. DIETER: It's passed.
Item 2, approval of the minutes of the committee's meeting of November 21st.
M O T I O N
MR. GARTEN: Move approval as submitted.
MR. FUENTES: Second.
MR. DIETER: All in favor?
(A chorus of ayes.)
MR. DIETER: It's unanimous.
I would note, and I did note to the recorder that they had said that the last meeting was called to order by Ralph Dieter, not Robert Dieter, if we could make that change.
MR. DIETER: Then Item 3, which is the report on Legal Service's temporary operating budget, expenses, and other funds available through November 30, 2003.
In the board book are sort of two packets of information. There's a cover letter followed by various schedules, and as I understand it, Item 3 concerns the first letter dated January 21, 2004, and the attachments going through Page 12 of the revised handout.
The handout is -- we had to renumber the pages, so I want to be sure everybody's got the same information. It was all the information, but it's just been reshuffled by page number.
MR. STRICKLAND: What we should have is this handout that was on the table.
MR. DIETER: Yeah, not in the board book, but on the table. So this concerns Pages 5 through 11.
All right, David, do you want to begin?
MR. RICHARDSON: Sure. Good morning.
For the record, my name is David Richardson, and I'm the treasurer/comptroller of the corporation.
The report, as Rob said, is through November, and it displays the amount of expenditures that we've had through the November date and also provides a comparison of the budget, the temporary budget that you approved to the expenses, and also reports the other funds available that we have received through this period.
There's four attachments. Each contains a little more detail than the one before.
Attachment A displays the temporary operating budget that was approved by the board in September. That particular report is Page 7.
And then what I'll do is, I'll refer to the pages beyond that as we discuss and give my report here.
The board approved a budget of $344,250,170. Of that money, we have spent through November $5,624,000.
The reason for that, of course, is we normally do not give our grants out until January 1st, so as you look, there's very little basic field spending there. There's only one grant that has been given. That was basically some carryover money from last year to fund a short-term grant.
Item 3 on Page 7, I want to call to your attention, because it does show a deficit there, and we're going to revise our temporary operating budget, but to explain what happened there --
MR. DIETER: Excuse me, but I have to interrupt. That's under "Field Programs," Item 3, the "Grants" --
MR. RICHARDSON: That's correct.
MR. DIETER: -- "From Other Funds Available."
MR. RICHARDSON: Right.
Last year, when we did our projections at year end -- and this temporary operating budget is based on a projection of the amount of money that would be left at September 30th -- we had projected that a grant would be given to a Florida program in September. That grant was for $808,000 for them to purchase a building.
This was part of the money of the sale of a building that came back to the Corporation, so we were putting the money back into Florida for them to secure premises for a Florida grantee.
That money did not get out in September, it went out in November, so the carryover is larger, and when we get to our revised budget, you'll see that the carryover is like $1.1 million and I'll go further into that, but there is money available for this expenditure resulting from the carryover and that grant not being completed by September 30th.
As far as the spending, you'll see that the management and the administration budget -- actually, let me go back.
The technology grants, we had carryover there of over $3 million, and as you see, we've given out $2 million, almost 2.1, of those grants.
Additional grants were made in December and there will be additional grants in January and then, as they complete the grant process there, most of that money will be used also going into the next grant cycle where we have additional money available.
The U.S. Court of Veterans' Appeals money, we haven't spent any of that in this particular year, but that's a pass-through grant.
We get money from the court to administer the program, and when we get again to the revised temporary operating budget, we did receive information on Monday that there is additional money available for this year.
Within the management and administration, we have a budget of $13,882,000 and we've spent to date $2,215,000. The remaining funds, of course, will just go to help support the operations in the coming years. There is no budget within that that's in any particular problem.
Let me refer to Page 9 and 10, and I'll go through a couple of items that further break down the management and administration spending.
MR. DIETER: Just to help people, because it helped me, if you take Page 9 and you were to take Page, just attach Page 10, you would end up with a long spreadsheet that shows everything, so that the two pages sort of are like this, but that's the way those two pages would correlate.
MR. RICHARDSON: What you have on Page 9 is the individual spending for each office, and then on Page 10, you'll see that where we've got management and administration expenses on Page 9, it just corresponds to the middle paragraph, "Total Expenses Through November," and then we compare it to the budget.
Through November, two months of the year is basically 16.67 percent of the year, and we are spending at a total rate of 15.96, based on this budget.
There are a few areas that are over that benchmark, as I call it, to indicate that spending is above where we would normally like to see it, but there are some explanations about that.
For instance, in the temporary employee pay, you'll see that we're at 30.72 percent.
The reason for that is we've had some employee changes and we've had to bring some temporary employees on to help us during the transition until we hire additional staff to replace staff that have separated from the Corporation.
Within the communications line, in the memorandum I explained that we try to do a full search of expenses for each year in September. We do it each quarter, and at end of September specifically for the audit to make sure that we have all the expenses for that fiscal year reported in the budget.
As it turned out, we had a bill from a telephone company that had not been forwarded to us, and that was paid at the end of November after the audit was completed, so we couldn't include it in last year's spending, so we're just a little bit over the 16.67 benchmark, and we'll make an adjustment within the budget to accommodate for that.
Within the other operating expenses, as tradition, we have paid our annual insurance costs, our commercial general liability coverage, our directors and officers liability coverage, so this is showing 23.4 percent.
This percentage will go down throughout you year, so there's nothing -- while it looks to be over the benchmark, it's not abnormal to the way we normally would operate.
And then within the capital expenditures, we held off some capital purchases at the end of the year just to get them into this year.
There's a few things that were ordered right at the end of the year that is a part of our carryover -- a desk that was broken during the move that had to be replaced, a couple of file cabinets, and so forth -- so that's the reason that there's a little higher amount there in the capital expenditures, but of course those are not reoccurring expenses, so that line will also come down during the year.
Within the individual categories, you'll see that the rent is right on target, the $250,000 for management, and the other spending is within the lines and the amounts they should be.
If you have any questions about, if you've reviewed the expenditures on 9 and have any individual concerns or questions, I'd be glad to answer those.
The normal ones that we see is the consulting, again, going back to Page 9, is the consulting in the legal affairs office is $12,000. It has not been a whole lot thus far this year.
The consulting in human resources is 49,000, and that is for some employee matters that we are -- when we present our temporary operating budget, we have made an adjustment to accommodate the additional spending there.
Within financial administrative services, the 95,000 there that is shown for the other operating expenses, that's where the directors and officers liability insurance is covered.
That cost, just to let you know, is around $75,000 this year for the directors and officers and the commercial general liability, and the travel package that we have available for insurance.
The other area that I'll point out to you is within compliance, you'll see that there is consulting costs of $28,0000 there and the travel costs of 43,000, and those are monies that are spent to help with the case service management reviews that go on, and the spending has been a little more than we had originally thought there, but we are addressing that internally with some reductions in the future.
MR. FUENTES: Mr. Chairman, I'm wondering, with this benchmark figure that you give to us, this 16-plus percent, I wonder if we were to add to this spreadsheet Page 10 that we're looking at that quantified in another column in hard dollars for comparative purposes on an ongoing basis, if I had that and yet another column here, perhaps next to or before -- between the fiscal year budget and the total expenses, if we saw what represented a benchmark in dollars in a column for comparative monitoring purposes, it would be helpful to me.
MR. RICHARDSON: Okay.
MR. FUENTES: Could we do that?
MR. RICHARDSON: It's not a problem.
MR. DIETER: Okay. Maria Luisa?
MS. MERCADO: Yes. One of the things that might be helpful, and I think that when you're first starting out it's kind of hard to see it, but over a long period of time, in the percentages of the budget, some items are expended a lot earlier in the fiscal year than other items, and so sometimes one of them is, say it's 30 or 40 percent, but then it evens out at the end of the year, and maybe what might be helpful for the Finance Committee or the board is maybe to look at a couple of years past, what your percentages have looked like throughout the year.
As long as toward the end of the year they end up balancing out, then you're not in the extreme or shortchanged finance-wise in the different categories.
That might be helpful, because I know that when you start looking at some of these items that are certainly above the average mode they should be in for expenses, but then it evens out toward the end of the year, and maybe David can correct me if I'm wrong on that.
MR. RICHARDSON: Yeah, it does, and certainly we have an opportunity with our budget reviews if we do see an area that we have additional spending in because of a changing priority or something occurs that we've got to address, when we go in and do our budget revisions, we have an opportunity to address that and state that we'll either increase the budget, subtracting it from a certain line, or that we'll modify spending in the future, and I could certainly do that.
MR. DIETER: Herb?
MR. GARTEN: David, I note that you comment that other operating expenses are above the benchmark because the corporate insurance package has been paid for the year.
MR. RICHARDSON: Right.
MR. GARTEN: Why don't you pro-rate that over the period for which the insurance applies, rather than charge it all, as I seem to think you're saying, to the one period, for the two months? You might have 12 months of insurance expense. Normally, we would pro-rate that over the life of the policy.
MR. RICHARDSON: It's mainly because we've already paid it, and it's an annual cost, but I could certainly revise the reporting to reflect that or at least let me see how I can change that to make it more --
MR. FUENTES: Just a footnote.
MR. GARTEN: Normally, you would pro-rate that type of expense over a period so it wouldn't be all tied up in a two-month period.
MR. RICHARDSON: Okay. I'll look at how I might be able to accomplish that within the reporting.
MR. DIETER: How much of the 126,000 is the insurance bill?
MR. RICHARDSON: About 75,000.
MR. DIETER: Seventy-five? And that hen on Page 10, the first column actually, mine shows fiscal year 2003. That would be 2004, correct?
MR. RICHARDSON: Should be 4, yes.
MR. DIETER: Okay. And also, going from Page -- I think to follow things, from Page 9 to Page 10, on Page 10, the column titled "Total Expenses Through November" is in reality the same thing as management expenses on Page 9, right?
MR. RICHARDSON: That is correct.
MR. DIETER: And if we somehow had a consistent labeling there, if it would help track these things, you know, as we go from page to page --
MS. MERCADO: I'm sorry.
MR. DIETER: Yeah.
MS. MERCADO: Your label at the top of your heading is the "Management and Administration Budget and Expenses by Category."
I'm sorry. The label to this particular item, Attachment C, is at the top, which says, "LSC Management and Administration Budget and Expenses by Category," so when we're talking about the total expenses --
MR. DIETER: Right.
MS. MERCADO: -- now, remember, whatever, the document itself is management and administration, which equals to your last line in the -- or did you mean a different type of --
MR. DIETER: Well, in reality, this column that totals up to 2,215,822, is the same as the last column on Page 9.
MS. MERCADO: Right.
MR. DIETER: And what I'm trying to do is to be able to go through these a little quicker and easier, if those columns, for example, were somehow indicated the same way, that would help, because in reality, a lot of the information that's on Page 10 is on Page 9, and when you see it repeated, and it's sort of in a different order, et cetera, it's just a little confusing to me.
MS. MERCADO: Well, but aren't you doing a comparison between what your budget is what your expenses are, so that you're looking at what you have, money to spend for the year, for the fiscal year, and then you have your expenses that you are so far done, and it's the two comparisons?
MR. RICHARDSON: It sounds like what you want to do is instead of showing the budget first, you want to show the expenses first, and --
MR. DIETER: Is it a problem to say total expenses for management expenses, or something there? You know what I'm saying? That in reality, they're the same columns and the same information.
They're labeled differently, and when you, you know, get this packet and you're looking through this stuff and trying to track back and forth --
MR. RICHARDSON: Where I've got "Management Expenses" on one side and "Total Expenses through November" on the other?
MR. DIETER: Well, however you want to do it.
MR. RICHARDSON: All right.
MR. DIETER: I guess that would be easier for us.
MR. RICHARDSON: Sure. Okay.
MR. GARTEN: David, I'd like to get something clarified.
Normally, when you have percentage of budget expended, in the budget for the year, it doesn't work out that you're spending all your money, as you pointed out --
MR. RICHARDSON: In linear, right.
MR. GARTEN: You don't do a month-by-month comparison to come up with the percentage of budget?
MR. RICHARDSON: No, we just take two-twelfths of the annual budget.
MR. GARTEN: Take the full 12 years. So the last column really can vary considerably, depending upon with hen these expenditures arise during the course of the year?
MR. RICHARDSON: Absolutely. The ebb and flow of operations and how things change.
For instance, right now there's little to no expenses in here for the competition initiative. That doesn't take off until May, for the basic field grants, so it doesn't run linear. It is cyclical in nature, is what you're getting to.
MR. GARTEN: Normally, when you see percentage of budget expended, it's based upon a month by month analysis. Is that something that is possible to be reflected on these statements?
MR. RICHARDSON: No, we do an annual budget. We do not do a monthly budget.
MR. GARTEN: You don't break it out?
MR. RICHARDSON: No, we do not.
MR. DIETER: I think we rely on David to alert us if these percentages historically present some sort of problem.
I mean, that sort of gets to your point. And then he highlights where we're under or over and indicates how, going forward, that's going to look.
MS. MERCADO: Yeah, and in some of the areas that generally happens in, like in the Office of Legal Affairs, if we've been sued by somebody and there is some extensive litigation going on, then that so-called consulting line may be much higher within a period of time, and then depending on whether we get reimbursed by the insurance company or it's a cost that we're bearing, then that line may change and we may have to readjust from other lines in the budget that haven't been expended yet, so instead of buying other new computer systems that you have planned, you might have to use it for the legal line.
MR. RICHARDSON: And that is a part of the review that we do each month and each quarter with the vice presidents if there is a need for changing priority, as you say, litigation, or maybe it is a computer failure or something, you've got to replace something quickly, and we can address that and adjust spending going forward.
MR. DIETER: The other question I had is how soon -- how quickly do you -- for example, would it be possible to prepare for this board meeting in January expenses through December, or is that impossible to do?
MR. RICHARDSON: Actually, they are on my desk right now. We had a little computer failure last week, that it took us a few days to straighten out, but --
MR. DIETER: Is it normal, is it 60 days to sort of close the books on a month, or 30, or --
MR. RICHARDSON: Usually, I close it by the 15th of the month and have the reports to the directors, the vice presidents by the 20th of the month.
That's just a little computer problem we had at this time, and then the weather glitch that we had Monday, Tuesday, Wednesday, that created the problem of not having it available for this meeting.
You need to remember, too, that most of this stuff is prepared before the Board meeting, so when it's prepared on the 21st, it was just to the point of reviewing the getting the December out, so it wouldn't be in the board book, as long as you don't have a problem with me coming to a meeting and saying, "Here's November, if you'd like to see December spending, I can give you a handout," and that's just a matter of timing.
MR. GARTEN: So would it be a fair statement to say that the percentage of budget expended is based upon cash expenditures rather than an accrual basis?
MR. RICHARDSON: No, it is accrual basis.
MR. GARTEN: It is accrual?
MR. RICHARDSON: Yes, it is.
MR. GARTEN: With certain exceptions?
MR. RICHARDSON: No.
MR. GARTEN: Okay.
MR. RICHARDSON: We're on an accrual basis. Everything that's been turned in to me and every contract that we have that's completed is expensed.
MR. GARTEN: Thank you.
MR. DIETER: Tom?
MR. FUENTES: Mr. Chairman, what if any of these figures that we're looking at reflects dollars associated with the magazine? Any?
MR. RICHARDSON: Only salaries at this point, because we have not produced a magazine. Nothing has gone out this year.
Let me back up. There is within your government affairs consulting, the $2,797. Part of that is for writing of articles. I don't have the figure exactly as to how much that is. I could provide that to you.
MR. FUENTES: You're looking at Page 9?
MR. RICHARDSON: Page 9, under "Government Relations Public Affairs," and the consulting line, $2,797.
A portion of that, if not all of it, is the magazine, plus we do have staff. The salary costs that are associated with the magazine are in the personnel compensation and benefits line.
MR. DIETER: Maria?
MS. MERCADO: What percentage of the magazine expenditure comes out of Friends of LSC budget?
MR. RICHARDSON: None.
MS. MERCADO: None?
MR. RICHARDSON: It's all funded by Legal Services.
MS. MERCADO: It's all funded by us?
MR. RICHARDSON: That's correct.
MR. FUENTES: So, Mr. Chairman, where would we see the big picture for the budget for the magazine? Where would we see the overall --
MR. DIETER: I think David would have to pull those figures out.
I had him look at that once, to pull those figures out for the various compartments and put it on a consolidated --
MR. RICHARDSON: I could work with the office. They normally give me a budget that is just for the office.
The only thing that I can actually identify that is for the magazine is printing. Other than that, the salaries and benefits are just subsumed in the budget.
But I can work with that office to see if we can get a separate budget built for that that would be a part of the government affairs, and could give you a separate reporting, if that's something you'd like to see.
MR. STRICKLAND: David, with respect to the magazine, I'm not sure which people work on the magazine, but is it fair to say that people have duties who work on the magazine also have duties other than doing that? Is that right? Are there some people who do nothing but that --
MR. RICHARDSON: No.
MR. STRICKLAND: -- whose compensation is in the total compensation figure?
MR. RICHARDSON: All of them have other activities.
There is one gentleman who spends more time than the others, the graphics designer that they have hired. He works basically, the information I've been given is, four days a week on the magazine.
The rest of them, they work anywhere from half a day a week to a day, a day-and-a-half a week. It varies on the production schedule.
MR. STRICKLAND: So at some point, if you were trying to pull together a response to Tom's point about the overall cost of the magazine publishing effort, you really have to do some, I guess you might call it time and motion study, or something to that effect, to determine who is devoting what amount of time to the production and publication of the magazine.
It's not as simple as saying Persons 1 and 2 do nothing but that, therefore, their compensation is in the total, if you pull that out, that's the total compensation for the magazine. You really have to piece it together, do you not?
MR. RICHARDSON: That is correct, much like what I had to do with the board at the end of the year, trying to get the amount of time you spent on legal services activities.
I go to the Office of Government Affairs and ask them to provide me how much time they've spent on the magazine.
I've asked them to keep that monthly for me so that I can do this type of analysis and provide you a quick update when it's needed as to the costs of the magazine and the breakout that they have.
MR. STRICKLAND: Thank you.
MR. DIETER: Maria?
MS. MERCADO: Yes, just since we're on the same subject of the magazine.
At the same time, are we also keeping track -- we had a lot of advertising in the magazine.
MR. RICHARDSON: Mm-hmm.
MS. MERCADO: The funds that came in from the magazine, does that go back to our LSC budget or does it go to Friends of LSC?
MR. RICHARDSON: No, it comes to us.
On Page 8 of your handout, what we have budgeted, last year we received $42,000 in magazine income, so this year I was told to budget 40,000 for magazine income. So far, we've not received any, but the first issue is just coming out shortly, I understand, so we should start seeing some money come in for the sponsorship that's being provided.
MS. MERCADO: So it's possible that the magazine is sort of paying for itself to some extent?
MR. RICHARDSON: It's paying for part of it.
MS. MERCADO: For part of it?
MR. RICHARDSON: But it's not fully paid for. MR. STRICKLAND: Following on that point, I'm not totally familiar with the sponsorship program, but in general terms, I have this impression, and if you know more than I do, that wouldn't be a surprise, but for example, if you see an ad in the magazine for the Coca-Cola Company, or UPS -- I'm going to make up a number -- suppose each one paid $5,000 to, quote, sponsor the magazine.
I think part of what they got for that sponsorship was the placement of that ad in the magazine; isn't that right?
MR. RICHARDSON: That is correct, sir.
MR. STRICKLAND: But notwithstanding that, it is -- money is money, so if $40,000 came in from sponsorships, that certainly covered part of the cost of publishing the magazine.
But I don't know whether, again, on the sponsorship program, I don't know that it's automatic that Coca-Cola will re-up. The same with the rest of the sponsors.
It may take an affirmative effort by someone on the LSC staff to get that sponsor to commit for another year, so that your budget item has some meaning.
MR. RICHARDSON: Right. Somebody is working on that.
MR. STRICKLAND: Okay. I'm not saying you're not. My point was, I don't think it's automatic, without some effort.
MR. RICHARDSON: No, it is not. That is correct.
MR. DIETER: Do they sponsor for a year, or is it just per issue, or is it mixed, or do you know?
MR. RICHARDSON: It's a little mixed. As I understand, one of the sponsors last time only did one issue. Another agreed to do three issues.
So it varies with what they're comfortable with, and the message that's getting out in the magazine and, as you say, the advertising that they are receiving.
Coca-Cola has been one that's been very good. I mention that, since they have started advertising sponsorship, and they have continued to do so with many of the issues.
MR. STRICKLAND: I had breakfast recently with the general counsel of Coca-Cola along with Steve Gottlieb, the director of the Legal Aid Society, and we didn't bring up that topic.
MR. STRICKLAND: It was a friendly breakfast, so we didn't want to ask for any money, but I think we at least positioned ourselves to make a followup contact with Duvall Patrick, who is the general counsel, and he certainly indicated he's supportive of what we do.
But the point is, we didn't close the sale at that breakfast. It was really to express appreciation for prior support, rather than seek ongoing support, but I think the door is open.
I agree with you that Coca-Cola has been a good sponsor and is likely to continue, but they may have to be reminded.
MR. RICHARDSON: Yes.
MR. STRICKLAND: I better stop talking. I might get the assignment to remind them.
MR. RICHARDSON: I've already written that down.
MR. DIETER: Tom?
MR. FUENTES: David, could you give us some further insight, Page 8, on interest income?
MR. RICHARDSON: Sure. Within the budget, we have started allocating a portion, or projecting interest income that we anticipate getting on our funds.
We don't invest money, per se, but what we do is we have a sweep account with our checking account, we put money in the bank, and then we write a check. We don't do the reverse. So however long it takes for that vendor to cash that check, we're earning interest on that money.
Most all of our grantees are on direct deposit. I think we currently have approximately 15 that are getting a check. They just want a piece of paper. They're used to it.
So what we do is, we have to transmit -- for instance, we will pay grants February 2nd, Monday of next week. We had to put the money in the bank on Thursday, because the bank requires it to be in their hands two days before they pay the direct deposit.
As it so happens, it happens to be a weekend, so instead of getting two days interest, we will get four days interest on that money, the float of that money. That's how we earn the interest on the money.
Last year, we earned $62,000 interest on our money. We have earned a great deal more, but interest rates are considerably down.
Last year, one of the periods we received .256 interest on our money. Last week, we received .359 percent -- very low.
MR. FUENTES: As a followup, do you think that the $60,000 figure is appropriate now?
MR. RICHARDSON: Yes, I think it's do-able. I keep in contact with our banks about the interest rate, and am comfortable with what Bank of America and their people are telling us in regards to the interest rates.
They've sort of stabilized and probably won't get a whole lot more than that the first six months of the year, but as we heard Mr. Greenspan last week, he's not betting the farm that the interest rates won't go up anytime, won't be held constant like they have been. They may go up.
MR. DIETER: Okay. Are there any other questions, then, about the first 11 pages, I guess?
MR. FUENTES: Do you want a motion, Mr. Chairman?
MR. DIETER: Well, I think we'll go ahead and take it all up at once.
David, go ahead with the report on the temporary -- this is Item 4, then, that we're moving on to, right?
MR. RICHARDSON: And it's Page 12.
MR. DIETER: Twelve through 18.
MR. RICHARDSON: Within the memo here, I've tried to explain what our normal process is.
Certainly, in September, you've passed a temporary operating budget based on projected appropriation, projected carryover, and now we have better information.
Normally, we would be coming to you and asking you to pass a consolidated operating budget at the end of the meeting, but because the appropriation was passed so late this year, we were not able to do that, but we do have better carryover figures and we have more information on the U.S. Court of Veterans' Appeals.
So what I have done is put together a couple of spreadsheets, and the memorandum explains that, that what I've tried to do is identify all the monies that we felt were coming to us during this fiscal year, and in so doing, I've identified the -- and I will flip to, it's actually covered on Page 12 -- I've identified the anticipated appropriation.
It's at the very bottom of the written memorandum but it's also included -- let me stop and ask that.
What would you prefer me, to refer to the memorandum or go to the worksheets and explain them there?
MS. MERCADO: Worksheets.
MR. DIETER: Worksheets.
MR. RICHARDSON: The worksheets? Okay. No problem.
MR. DIETER: Let's go slowly through the worksheets.
MR. RICHARDSON: Okay.
MR. DIETER: And identify the items.
MR. RICHARDSON: And that starts with Page 16.
MR. DIETER: Okay.
MR. RICHARDSON: With the -- and I think it's the fifth line down, you'll see under (1), let me just start across the top, and I'll do that.
We break our funds down from our appropriation into our grants, our technology initiatives, management and administration, and inspector general.
We do that because that is the four lines that are identified within our appropriation.
And down the left-hand column, you'll see the different sources and how we break that money up.
I have labeled Number (1) the "Anticipated FY 2004 Appropriations Minus Both Rescissions." This year we have a rescission within Commerce, State, Justice, and related agencies that affects us, and then we have a government-wide rescission that affects us.
The figures you see here are close, but I was talking with our budget examiner yesterday. We're sort of negotiating how we might be able to wiggle a little bit of money out of using their rounding mechanism within government, so the figures here are not reflective of the appropriation that was passed on the 23rd. This was actually prepared, as the memo states, prior to the 21st, so that we could write the memo.
So when we come back to you in April, we will have that information as we have negotiated with OMB, with a better appropriation line.
But the one that's labeled, "FY 2004 Appropriations," you see that there's a breakout there between the grants, the funds, the technology, the grant funds, the $219,971,000, that's made up of two categories, the basic field and then the 2.5 million in those 10 states that were most affected by the Census adjustment.
MR. DIETER: Where are you?
MR. RICHARDSON: Grant funds, Column 1, and it's the fifth number down, 319,971,000.
MR. DIETER: Okay.
MR. RICHARDSON: What I'm getting at is when you add those across -- the technology, the management and administration, and the inspector general -- the total appropriation was the 338,848,000, and then with the two rescissions, you add -- you have to subtract it, and you do it in steps.
You take the first rescission, and you make the calculation, and then you take the second rescission and base it on the revised rescission figure from the Commerce, State, Justice. That's the reason you just don't add the two numbers together.
So basically, this temporary operating budget shows that there's $316,619,988 available for the grants, and that is the very first line, the anticipated carryover.
With the new board, just to explain a little bit, this adds up. It's sort of a government mechanism, the way they do it, so you've got the appropriation, you've got the rescission, and then you see there's a line there and there's a total of $318 million.
The second rescission is based on that $318 million. That's the reason it is shown again on the second line, the rescission of that amount.
MR. DIETER: Mike, do you have a question?
MR. McKAY: Mr. Chairman, yes, I have a question.
Could you explain the purpose of those two rescissions? What is a rescission?
MR. RICHARDSON: A rescission is a matter of balancing the budget, and what they do is they set target amounts, all locations within each of the areas, whether it be a Department of Defense or Commerce, State, Justice, in our case.
They may have -- and I'll just pick a figure -- $50 billion to allocate. If they allocate 51 billion, they've got to make a decision as to cutting a specific program that billion dollars or just saying, "To heck with it, affect everybody by a percentage and get it down to the $50 billion." That's what they've done.
The same thing within the government. They have a target, also, so when they go over that target, they rescind a part of it so that everybody sort of suffers the same, you might say.
MR. DIETER: Can these rescissions happen all through the fiscal year?
MR. RICHARDSON: Only within the appropriations cycle.
We have only had one instance where in, I think it was actually in March or April of '95, where they did rescind an amount of $15 million. It has to be done by legislation, and that was a year that we went from a $400 million budget to a $415 million budget, and then when the new Congress came in, they rescinded $15 million of that. It can be done, but it's not normal.
MR. DIETER: So the 335,299,293, which is the top right corner number, is the money that we have, within thousands of dollars --
MR. RICHARDSON: That's correct.
MR. DIETER: -- going forward, what we should have for 2004?
MR. RICHARDSON: That's correct, in that range. It will change slightly.
The other items that we identified as far as sources of funds is the carry over from last year, and that carryover is broken up in the next two elements, (2), which is the deferred revenue, and (3) is the fund balances.
Now, the difference there is, when you have deferred revenues, it's money that has not yet earned. The Congress appropriates money for a specific purpose, and we allocate it -- and this one, like the basic field program you see is $159,000 -- we allocate the money to the different service areas, and then if a grantee is on a short-term funded, they're not given an annualized funding, that money is set aside as not earned, but it is an area that will go to that grantee.
Since it's not our money, it's not built into the fund balance, we haven't earned it yet, it has to be shown as a deferred revenue.
The same thing with the U.S. Court of Veterans' Appeals. We get that money as a passthrough. It has to be spent on the U.S. Court of Veterans' Appeals.
We get reimbursable expenses as we spend money or staff time to administer the grants, but until we do, it has to be shown as a deferred revenue because it's not ours.
And of course, with the money for the technology grants, as we saw through November, we have spent a part of that, but that money is designated for those programs, so it is shown as the deferred.
The remaining funds, the fund balances that are there, you see there's a designation of 105,000. That's the carryover that we projected for the grants for other funds available and the additional 1,028,000 is the money that came in that was not clearly designated at year end, so it goes back into the basic field grant line, or in this particular case, it goes to support the grants from other funds available.
The technology is mentioned, the management and administration, the $13.3 million appropriation rescinded goes down to a total of $13,160,700. We add to that the carryover.
If you'll recall when we did our temporary operating budget, we had a carryover of $480,000.
There were items that were not completed during the year, so the carryover for management and administration increased from 480,000 to $1.1 million, so that money is now being built into the budget to help support the 2004 operations.
The same thing with the inspector general. New appropriation of $2.6 million, the rescinded totals for the temporary budget here is $2,572,700; carryover of 1,359,000, given a budget of $3,931,800.
MR. DIETER: Maria?
MS. MERCADO: Yes. I'm not sure, and you may have mentioned this before, but on the inspector general line, they have a carryover almost half their budget. Is there some explanation for that?
MR. RICHARDSON: It's mainly open positions.
You know, currently we have an acting inspector general who is incumbering basically two positions, so until the board tacks on hiring an inspector general and then filling positions -- I think we're down to 14, perhaps 13 in the inspector general's office right now; there are some open positions. And then you will start seeing money spent there.
It is my understanding in talking to the inspector general's office, while you see a carryover here of $1.3 million, that they do have a plan to spend that money down over the next three years and have the carryover very close to zero, much like we do, we attempt do.
So he does have a plan in place to do that.
MR. FUENTES: Mr. Chairman, when would we see a plan like that, in what format, or how would that come to us?
MR. DIETER: Maybe Len would talk to it.
MR. RICHARDSON: It's mainly within the documents we have here.
I have some additional breakdown, but for instance, on Page 18, it's not completely reflective as I look at it here, but you'll see that the IG's budget, far right hand, almost the next to the last column, it matches the $3,931,000.
The big item there is the consulting line, which is shown as 1,631,000. He has provided some supporting documentation to show that there will be some consulting costs due to the continued operations, and then they anticipate approximately 700,000, I think it is, to be carried into next year and the year after that.
MR. DIETER: As I understand it, you can correct me if I'm wrong, on the inspector general, this money is not available to Legal Services Corporation, per se, to use in any way, and that if the money were to go back to Congress or would go back, it would just go back to the IG's office, so it's not there for us to derive any direct benefit from.
MR. RICHARDSON: That is correct. It is money that is appropriated for the inspector general. It remains in that line until expended.
MR. DIETER: And the other thing, in looking at it, is that if the board decided that we wanted to reduce that budget, it wouldn't necessarily mean that the Legal Services Corporation budget would increase by that amount, so that it's really sort of a separate, autonomous spending category that we have oversight for, I guess, at some level, but it's not fungible.
MR. RICHARDSON: That is correct, sir.
As Congress appropriates the money and it's signed into law, it remains theirs to be spent as they see fit within their operations.
MR. GARTEN: And that's an unlimited carryover. It can continue indefinitely.
MR. KOCZUR: That's correct, yes. If you would like, Mr. Chairman, we can provide you with our plan for showing the reduction, a three-year plan to reduce the carryover.
MR. DIETER: Okay. When would you be able to do that?
MR. KOCZUR: We can certainly get it to you next week.
MR. DIETER: All right.
One question here on Page 16, on this Item 3, the 2003 fund balances, the undesignated line.
The $105,000 that's in the grant fund, now, that doesn't go into the management and administration carryover, that just stays? How does that get disbursed, or do we just increase everybody's grant proportionately, or what happens to that money?
MR. KOCZUR: No, this is how we address special needs, and if we have an emergency.
We used to call this emergency grants, but it has sort of change in nature as any need that a grantee would come to us and express and give us a proposal and that we would accept, we could, the president has the authority to make a grant for an amount of money up to that, up to the dollar amount that's in the budget.
MR. FUENTES: Where is that figure, Mr. Chairman?
MR. DIETER: It's right in the first column, "Grant Funds," the 105,193.
MR. FUENTES: Thank you.
MS. MERCADO: Because that line is designated, just like the inspector general is going to be -- this is to the granted fields --
MR. DIETER: Yeah, I just wasn't sure what happened to it.
MR. RICHARDSON: Let me -- let's turn to the next page, and let me give you an example and just sort of run through some round numbers.
What you have on the next page is a matrix that shows the anticipated 2004 appropriation, which is what I have shown on the previous page, and you also see the rescission, which is the two lines added together.
You also have the allocation of the carryover, which is the fund balance and the deferred revenue added together, and then the Court of Veterans' Appeals is the money not connected to last year, but money that we anticipate in 2004 receiving to help give us funds for this budget.
Looking at, under the "Delivery of Legal Services," I, and you got down to A, you see "Basic Fields," and then 3 is the "Grants From Other Funds Available." You see that there's $1,134,000 that corresponds to the prior page.
We've already given a grant of $808,000. If we would give grants totalling another up to $1,100,000 -- I'm sorry, more -- that would leave a balance of $34,000.
That would be money, because you would be, if we approved this budget, that is designated by the board to be used for grants from other funds available.
In so doing, that money would be designated by the board, and that's how we get the designation to be shown in the financial statements.
It's the allocation that you approve that we use to spend money against, and in this particular item, we would hold it aside in the grants from other funds and show it as designated in our financial statements.
MR. DIETER: That 1,134,189 there is the same as this column on Page 16, they are fiscal year fund balances, grant funds, right?
MR. RICHARDSON: Yes, that's correct.
What I have done is, across the bottom, you'll see the Line 6, and this is on Page 16, you'll see the delivery of legal assistance is the combination of the grants funds and the technology, so you've got a total for the delivery of legal assistance of $323,976,207. That goes over to Line 7.
And then what I've done is I've broken it out between the basic field program, the U.S. Court of Veterans' Appeals, the grant funds, and the technology.
And then, the same when you look at management and administration. You'll see that the total funding is $14,360,781. That also goes over to Page 17, and is shown for management and administration.
And then the IG's budget, the 3,931,856, also goes over and is shown as their budget.
And you'll see that on Page, again, 16, the total budget, 342,268,844, matches what is shown on Page 17.
So I've shown the full source of funds that we've identified to this point, their breakout, and then I've broken it out further on the second attachment, and that would be Attachment C.
Now, further in that breakdown, we don't really -- we could certainly provide to you the basic field grants, we have that available, and the other grants that we have. The technology we can't do, because we haven't gone through the competitive process yet for the new grants.
Management and administration and the inspector general, the breakout, as how they're going to spend, the spending plan that they've put together for the current year to correspond to the amount of money that's available is shown on Attachment C.
And within the memo, I've tried to highlight some of the main items that we're talking about, some of the items that we had to address within our budgeting, so I think it best to go back to the memorandum at that point, and in particular, looking at Page 14.
This will give you a quick summary what we have budgeted here and some of the items that we are anticipating.
Let me interject here, no one has introduced our new president, Ms. Helaine Barnett, at this point, and I'll take an opportunity to do that and welcome her joining us.
This budget, while I have talked with her about this and gone over it, Ms. Barnett has just joined us, and there's a process that we're going to have to go through as far as reviewing, getting a timetable, getting the initiatives that she would like to undertake addressed in our budget.
So this budget, while it's normally the president's budget and the inspector general, I have labeled this budget the management team budget and inspector general.
When we come back to you in April, I might say when she gets her feet a little more on the ground here, and identifies some of the projects and initiatives that she would like to undertake, this is going to change somewhat, and that's one of the reasons that you're going to see, and I'll address here, that we've left a contingency, so that we can address some of those needs, so that we can address any type of new direction, new initiatives that we'd like to be undertaken by our new president.
Going back to Page 14, you'll see that we have budgeted five board meetings. We've budgeted currently three meetings in Washington and two at other sites outside the District.
We have budgeted money for the completion of the president search and money for an inspector general search.
This budget also includes 94 staff members and you'll see in the chart there how we have broken those out.
I will note here that when we were looking at budgets before, we saw that, I don't have the exact figure in front of me, that last year's management and administration budget for the executive office included a budget of $948,000. Well, that included the vice president for programs, her executive assistant and her special assistant for programs.
When we asked you to approve the temporary budget, we had moved those three positions and their associated costs -- their personnel benefits, their salaries, their travel costs -- to program performance, so that's the reason there's a little footnote there on the executive office and it probably should be footnoted on program performance, too, because the staffing level has gone down in the executive office but has increased in the program performance those amounts, and we've adjusted the spending, therefore, in those areas.
As far as the other changes, we've added one additional person in the Legal Affairs Office, and the Government Affairs Office, there's one additional person because of the personnel changes that were made.
We have budgeted a 2 percent increase for the staff, the executive office, and the reason I've put this amount here, not having the president available to help us build a travel budget and see what her plans are, we've budgeted $31,000, and we've already talked about addressing that and increasing that in the future when we do our consolidated operating budget.
I had mentioned when we talked about the November spending that we had only spent $12,000 in litigation. As you see here, there's 300,000 set aside for the outside counsel through the Legal Affairs Office.
The printing and reproduction costs, there's $10,000 budgeted there for an annual report that is due this year, and then there's 70,000 for the magazine that's budgeted at this point.
The next page gives a further breakdown. I'd be glad to walk through it. I know we're sort of --
MR. DIETER: Just, if anybody has any questions on that breakdown, rather than go through it item by item.
MS. MERCADO: Right, and this will probably change at the next board meeting or the one after that, after the new president looks at all those different lines.
MR. DIETER: Yeah.
MR. GARTEN: I just would like to comment that the format on Page 17 to me is the clearest presentation, across the board, of what you're doing. It's my favorite schedule.
MR. RICHARDSON: Thank you, sir.
MR. DIETER: We could retitle that.
MS. MERCADO: "Herb's Favorite."
MR. DIETER: Are there any other questions about anything?
MR. DIETER: I guess what we're supposed to do at this point is to consider recommending to the board at the board meeting Resolution 2004-002, which I've given a copy to the committee members, and I have some extra copies here for the other board members.
MR. RICHARDSON: If I could, one additional item, and I've talked with our chairman about that, so let me just get it on the record here.
When this was prepared, we did not know, when the board materials were prepared, we did not know how much the U.S. Court of Veterans' Appeals funding would be, and we received that information on Monday.
So what I have done is, I've put together a resolution, but the attachments and the totals are slightly different than what's in the board book. It is increased by the U.S. Court of Veterans' Appeals money.
I just wanted to make sure that everybody is aware that I have reproduced the resolution and all the attachments that support it, and included the U.S. Court of Veterans' Appeals money, because normally once we get that money, it is awarded within just two or three weeks, and since we are meeting, our next scheduled meeting is probably going to be in April, I didn't want the same thing to happen that we just saw with the grants from other funds available. I wanted to make sure that we had the information.
I don't like to give too many handouts at the board meeting, and especially revisions of this nature, but I wanted to make sure that I could get before you a temporary operating budget that reflected what we were going to be doing until April and ask that you approve this higher mark than is what is in the board book.
MR. DIETER: Okay. So the resolution that we would recommend to the board is to approve an advised temporary operating budget totalling $343,443,844; is that right?
MR. RICHARDSON: That is correct, sir.
M O T I O N
MR. GARTEN: Move approval, Mr. Chairman, of the resolution recommended.
MR. FUENTES: Second.
MR. DIETER: Second, and before we vote on it, I just wanted to, as I guess a point of discussion, clarify that the $14,360,781 that's in the resolution and is also on Page 18 of the board book, if in fact management and administration spent that full amount of money this year, that unless Congress were to increase our appropriations considerably going forward, we would be in a position of having to cut back because in reality, our fiscal year appropriation for '04 is only $13,160,711; is that right?
MR. RICHARDSON: That is correct, sir.
MR. DIETER: So that's just a point of information, I guess, in terms of the significance of what we're actually doing, and as I guess chairman of the Finance Committee, I'd assume that we would be, you know, informed, kept apprised by the executive office that if we started going over 13,160,000 significantly to where we might be creating problems in the future, that we would be informed of that. That's all.
MS. MERCADO: Part of it, I think, was a huge carryover, especially in the technology initiative grants, that weren't -- part of it was the huge carryover that you had in technology grants that were not disbursed during FY '03 and carried over. It was 2 million and something that was carried over to '04.
Obviously, we wouldn't have whatever amount of money is appropriated for FY '05 if the technology grant is all we can allocate. I mean, the budget reflects what we have.
MR. DIETER: No, but the management, this figure just is management and administration, exclusive of the technology grants.
MR. RICHARDSON: The Attachment A to the resolution I think sort of gives the picture of what Chairman Dieter is talking about.
If you look at management and administration, you'll see that the anticipated 2004 appropriation minus the rescissions is the $13,160,711 that he spoke about.
MR. DIETER: On the very top.
MR. RICHARDSON: At the very top.
And basically, where we're going with this is if we would spend all the money according to this budget, the 14,360,000, and we got a freeze budget next year, we would have to reduce our operations from a $14,360,000 budget to a $13,160,000 budget. We would have to cut $1.2 million in round numbers.
We have had carryover as little as 300,000, 400,000. We've had carryover as much as $1.5 million.
So part of the process that management goes through is in May, June, when we start getting preliminary appropriation numbers for the next year, and we start reviewing spending, we start talking about how we're going to operate in the next year.
If we saw that we were getting close to the, just say that everything was status quo here, 14,360,000, and we saw that we were going to only get a $13.1 million appropriation, we would start adjusting internally as to how we're going to operate for the remainder of that year, and then how we're going to operate in the future.
We start our budget process at the end of June and it's a continual process. It's a balancing act, is exactly what it is, so that we try to make sure that we do all the initiatives that the board and management has indicated, but yet we have money remaining for next year's operations without having significant cuts.
MR. DIETER: I guess the other thing is, when you do the benchmark percentages --
MR. RICHARDSON: Yes.
MR. DIETER: -- you would be showing a benchmark percentage off this 14,360,000 or off of 13,180,000?
MR. RICHARDSON: In the future, it will be off 14,360,000.
MR. DIETER: Okay.
MR. RICHARDSON: The total budget. You would like to see another report as to what it would be off the 13, 161,000?
MR. DIETER: I don't know. I just would feel more comfortable, I guess, if we had maybe two showing where we are in terms of --
MR. RICHARDSON: I could provide that information to you. That's not a problem.
MS. MERCADO: But you don't have to, for accounting purposes, have actual funds that you have on hand so that -- the actual funds that we have on hand is 14 million and something, and as far as Congress is concerned, we need to show how those funds are being appropriated?
Now, we can certainly have two different columns, one of what was budgeted for this year from Congress plus the carryover that we have, which makes it the 14,600,000.
MR. RICHARDSON: Yeah, but I could do a separate report based on the appropriations that we've got here of the 13,160,000 and show a comparison as far as spending, for informational purposes. That's not a problem.
MR. DIETER: Yeah, it just would help me follow what's going on.
MR. RICHARDSON: The only caveat that I say there is we budget 14,360,000. We don't budget 13 --
MR. DIETER: Right, no, I understand that. It's just that --
MR. RICHARDSON: Maybe I can do a pro-ration and allocate it, just so that you can --
MR. DIETER: Yeah, because we want to look at the pro-ration, go over, well within limits, we don't have to worry, and not realize that we're actually taking that pro-ration from the larger number rather than the more conservative number.
I'm not saying that we should only spend 13,160,000 or anything like that. It's just I want to feel comfortable and know what's happening. So --
MR. RICHARDSON: Understand.
MR. FUENTES: Mr. Chairman, your point is well taken, and as the maker of this motion, I'd like to express for the record, I have seen our president take notes, so I'm sure it's being duly, but you mentioned that, you know, you raised this as a point of information.
I would like to compound that, as a member of the Finance Committee, as a point of concern, as a point of significant interest to this Finance Committee, that we're realizing the point that you make of this carryover and that we don't want to get blindsided with the growth of dollars without knowing that this could hit us a year from now.
And so I think that's very, a point very well taken and I hope duly noted.
MR. GARTEN: I'd just like to point out that, as discussed at the prior meeting, the second recital does point out that we're utilizing the reserve in coming up with this figure, and the schedule on Page 17 clearly reflects the allocation of the carryover by category, so that it's simple to understand, at least looking at that one schedule, which is my favorite schedule, that 1,100,070 of the carryover has been allocated to management and administration. Is that correct?
MR. RICHARDSON: That's correct, sir.
MR. GARTEN: What I've said?
MR. RICHARDSON: Yes.
MR. GARTEN: So I think that it's clear through the second recital, which reflects what we agreed to at the prior meeting, it does point out to anybody looking at this that we are taking into account the reserve in working out our final temporary operating budget. Is that a fair statement?
MR. RICHARDSON: That is correct, sir.
MR. DIETER: I'm just trying to see how many board members are here.
Well, then, I guess we should vote on the resolution, since it's before us, and when it's presented, we'll explain that to the full board and raise our concerns.
If there's any way that they want to change the language of the resolution to reflect that concern, that's fine. If not, we've got to management, and that's fine, as well.
MR. FUENTES: Mr. Chairman, I would have no difficulty as maker of the motion to incorporate language at this time, if you'd like to do that, if we could take a stab, that, whereas, the board recognizes that this carryover is present and has directed management to take that into consideration for further budgetary planning, just something to highlight that.
MS. MERCADO: Just a point of information for the Finance Committee and other board members.
When I came on this board about 10 years ago, we inherited like a 3.8 or 9 million dollar deficit from the former board that was there, and in the whole time that I've been on the board, we've never had any deficits, we've always been within budget and have always had some carryover.
Granted, because of that almost $4 million deficit, our staff had to take a freeze, they didn't take raises for I know three or four years, and a lot of positions were frozen.
So obviously, it's our fiduciary obligation as a board to make sure that we have the proper funding allocated and that we don't go beyond what our budget items are, and I believe that's understood as a board, but I certainly want to assure the new board members that at least in the 10 years that I've been on this board, we have always been within budget and always have had a little better carryover, depending on what the interests rates go, and that you are kept apprised of it during your five meetings that you have throughout the year, so that if there does pop up some emergency or something that happens, that one particular line item has a great expense, you are allowed as a board to look, figure out how you can reallocate maybe some funding that wasn't expended somewhere else, so that you always stay within budget.
MR. DIETER: Yeah. Well, in looking at the resolution, what I thought ahead of time would be the most conservative way, would be to say that we are appropriating a budget for management and administration of 13.1 whatever, and that if management was to exceed that, there's $100,000 in carryover available, but that would have to be presented for approval of the spending.
But I don't want to do that. All I want to do is really just kind of, you know, make everyone aware that if we were to spend 14,360,000 and not get an increase from Congress next year, that we would be faced with the problem you have, where you'd have to start cutting people and restricting things, we don't -- I don't want to lead us down that path in any way.
MR. GARTEN: Yeah, I think that the schedule that you requested of David, Mr. Chairman, will accomplish that, and I think the discussion that we've had is sufficient.
I would not, with all due respect, I would not complicate this resolution. I think we've highlighted the reserve carryover in the second recital sufficiently, together with this discussion, and I think covers it adequately.
MR. DIETER: Is that acceptable to you?
MR. FUENTES: Acceptable.
MR. STRICKLAND: Okay. Yeah, I think if we have the percentage benchmark explained, then we'll be able to tract that informally and watch it.
So all in favor of presenting the motion to the full board as it's been presented to us?
(A chorus of ayes.)
MR. DIETER: It passes unanimously. All right. Thank you, David.
Next, Item 5 is to consider and act on space reallocation options at the Legal Services Headquarters and related financial implications.
Could we just, in order to be sure that we finish on time and that John has time to present his information, Vic, could you just present us with the numbers at this point? Because I don't think the Finance Committee is really going to do anything with this information before we present it to the full Board, or would you rather just make the whole presentation to the full board?
MR. FORTUNO: Oh, I could -- it's the committee's pleasure. I'm prepared to do either one.
MR. DIETER: Why don't you give us the numbers you've got. Do you just have them in a handout?
MR. FORTUNO: Actually, the numbers, we were just getting final numbers as the committee was finishing up with David, so they're hot off the presses.
What's happened is there is some space on the fourth floor, that is the top floor, where the executive office is located, that's becoming available, because we have a tenant that because of its needs is moving elsewhere.
Friends of LSC thought that it would be appropriate to ask LSC whether it wants the space before making it available to other tenants.
The president and the chair toured what's going to be available back on the 20th. We met with an architect and with a leasing agent just to get some very quick, very rough numbers and sketches, and they presented us this week with five options, and then last night sent us some numbers, which I can communicate to you now.
There were some gaps left in what we received last night, so we got some oral supplementation of that just moments ago, and I can give you that information.
The space that's available on the fourth floor, if you're familiar with the fourth floor, it's the back side of the building, has the largest piece of space.
I think the president and the chair have toured it and concluded, and I think everyone who saw the space agreed that while it's nice space, it's not really suitable for us at this time, because it would take too much to convert, and it's more space than we LSC needs.
There is some small amount of space on the front side of the building, and that totals just a little over 2,500 square feet.
What the architect did was it ran some rough sketches. The designs that we have, and I have here, and unfortunately, we just have the one set, are five, the first of which would add a reception area to the executive suite. The reception area would be immediately off the elevators, two double doors right off the elevators.
That would entail essentially no construction costs, and I think the president has examined that and concluded that that doesn't really provide us anything of significance and that it's not worth pursuing, but that the other four we should have some information on, and we have gone ahead and gotten information from our architect.
Of the other four options, one would give us an additional 337 square feet.
The cost of that would be outlined -- you do have some handouts, and at the very -- on the fourth page of Option A, I think at the bottom of the page, you see that the total cost of outfitting that space, and this would include everything including a 10 percent contingent fee in case there are any complications, including the contingent fee, the total cost would be just under $55,000. That's the cost of construction.
The additional rental obligation on LSC would be $12,800 a year.
You then have an Option B. I think each one in the handout you do have is five pages long, and it's at Page 4 of each that you have some relevant information.
You'll see that for Option B, the total cost, including the overhead and 10 percent contingency, comes to $62,685.93. That's the construction cost, that is, to expand the LSC space and to build it out.
The added rent that that would entail is $30,894 a year.
MR. DIETER: And how many square feet would that be?
MR. FORTUNO: That's 813 square feet of additional space?
MR. GARTEN: As opposed to 300?
MR. FORTUNO: Yes, as opposed to the 337. Each of these options is for increasingly more space.
MR. STRICKLAND: What's the annual rent on that, on the second one?
MR. FORTUNO: On the second one, it's $30,894.
MR. STRICKLAND: Okay.
MR. FORTUNO: On Option C --
MR. GARTEN: What does that come to a square foot/
MR. FORTUNO: $38 a square foot.
Option C, the additional space would be 1,312 square feet, and if you look at the handout that you have, Option C, the construction cost would be $70,806.60, so roughly $71,000 would be the construction cost for that space. The additional rental obligation would be $49,856 a year.
And then the last option, which is D, the construction cost for that would be $94,738, and the added rental obligation would be $96,938 a year.
That last one I can tell you would add six additional offices and a reception area right off the lobby, if you will, as you get off the elevators on the fourth floor.
The rent would be $38 a square foot, which is what LSC is paying for all of its space currently, and that's the -- LSC has a 10-year lease with no passthroughs and no escalations. It would be the same rent.
It's actually, frankly, somewhat, probably the nicest space in the building, because all the space we're talking about here is on the fourth floor, which is the top floor of the building, the river side, facing the Potomac River and Virginia to the south.
So the issue is this.
Before Friends of LSC leases that space out -- and there are a number of parties lined up who are interested in taking it.
In fact, since after it was, the back space was looked at and we decided not to pursue that, we've already got two parties interested in taking that. It looks like one will be signing a lease for the space.
The front space, which is what we've been discussing here, has not -- we don't have any kind of agreement with anyone for that space yet. We're hopeful that that can be leased fairly easily, but thought that before proceeding with that, we would make the space available to LSC.
And the question is, does LSC want the additional space? Obviously, there's a cost. This is perfect timing for this discussion, because you've just discussed the M&A budget for the year, and carryover and competing needs.
So the two costs here would be the cost of buildout and the cost of the additional rent.
There is one option which wasn't developed for us, but it's something of which you should be aware, is that for Option D, where we have an additional 2,551 square feet, one variation on that is that instead of taking -- adding to the space we already lease by 2,551, that we'd simply swap, so that we take some property, some offices on the back side or the east side of the building and give that up, and let Friends of LSC lease that out, and instead take the space on the front side of the building, simply because it's more desirable space.
You know, frankly, if somebody whose office is on the back side of the building, I think it's perfectly fine, but I recognize that that is more desirable space, so LSC may, while it has the option of getting the better space, want to go ahead and do that. Of course, associated with that is the costs that we've been discussing.
And I hope that kind of summarized it all.
MR. DIETER: Maria?
MS. MERCADO: Yes. I would think that the construction cost of the build-out would be cost that's incurred by the landlord, Friends of LSC, rather than LSC. I mean, we would obviously incur the rental cost, but not the actual build-out.
MR. FORTUNO: Yes. Certainly that's something that could be discussed with Friends of LSC.
I think the issue here is that since Friends of LSC paid for the build-out of the space we currently occupy, if we were to do a swap, I think it would be dicier in that Friends would probably not want to pay for build-out twice -- that is, for the space that's being given up, which Friends built out just recently, and for the new space.
I agree with you that if LSC were to take over this new space, it seems to me that LSC would be acting reasonably and responsibly to say to Friends of LSC, "We certainly will incur the additional rental obligation, but we think that Friends of LSC ought to be paying some tenant improvements," and that these costs that we've gone through, that you have in your handouts here, should be either fully or at least largely absorbed by Friends of LSC.
The board of Friends of LSC has a meeting on Tuesday, this coming Tuesday, so certainly that's a subject that could be discussed at that point.
I apologize for all of this information being thrown at you in such a hurried fashion at last minute. It just became known that the space would become available fairly recently, and then we didn't want to get ahead of ourselves, thought it appropriate to wait for the new president to arrive, and the new president, on her very first day, actually toured the space, so she turned her attention to it immediately, and the chairman, who was there that day, toured it with the president.
And we thought that, after they'd seen it and had a chance to think about it, and they didn't have much of a chance, we went from touring the space to our conference room to sit down with an architect and a leasing agent and talked for about an hour, and based on that, we've come up with the information that you have here.
So it's just circumstances are such that this is all fairly -- this is all very recent and fairly rapidly developing, but the timing is good in that Friends of LSC will be meeting on Tuesday.
So I think that the decision for the committee is, if this is something that you would like to explore, whether it's something that you want to provide a delegation to the president or some subgroup of the board, the chair or some subgroup, to explore these options and to negotiate a deal with Friends of LSC, or if it's something that you're totally opposed to, then just saying "No, we see no need to do this," and then we just move on with the rest of the agenda.
MR. DIETER: Herb?
MR. GARTEN: I have two questions.
MR. FORTUNO: Yes.
MR. GARTEN: I had the same question initially that you've answered in part.
What was the basis of the original rental agreement? What percentage of the improvements did the Friends pick up?
MR. FORTUNO: I forget the -- in terms of tenant improvements?
MR. GARTEN: Yeah.
MR. FORTUNO: I can't give you dollar per square foot, but Friends of LSC paid for all of LSC's buildout, with the exception of the IG space, which, because the IG wanted some additional upgrades and some variations, they were kind enough to go ahead and contribute towards the buildout of their own space.
MR. GARTEN: Well, it would seem to me that whatever you negotiate should follow the same pattern of the original, and I concur with you that if you're swapping space --
MR. FORTUNO: Yes.
MR. GARTEN: -- then there's more reason for the tenant to pick up the cost of the improvements.
MR. FORTUNO: That's right.
MR. GARTEN: The next question I had is, what is management's recommendation?
MR. FORTUNO: Well, in all fairness to the president and the chair, I should say that they didn't hear these numbers until just now, as you did. We didn't get these numbers in terms of --
MR. GARTEN: Well, putting the numbers aside, which of the options -- and forgetting the price of the buildout and what not -- which of A, B, C, or D, what is the preference?
MR. STRICKLAND: Well, first I'll say I'm pleased to learn that Friends might be willing to bear some or all of the cost of the buildout.
It would seem to me that if they leased it do Sam Stranger, they would have to incur the cost of a buildout to provide incentive for that tenant to take the space, because it's likely that the space is not suitable unless you find -- the space we're talking about is occupied by an architectural firm, and if you found another architectural firm who happened to like it the way it is, that would be one thing, but typically, there's got to be a buildout.
But I think the space is -- obviously, if we don't do something with some or all of the space, it'll be leased to another tenant for at least five years, and it's gone, so we do need, in my view, to pay attention to it and examine it very carefully, and perhaps take some or all of it.
And I know it's hard. It's sort of like writing a letter around the table, to deal with it, when you don't have it absolutely in concrete terms in front of you, but my thought on it is that we should examine it carefully and perhaps follow this suggestion, that there be some delegation of authority to either do it or not do it, based on our general understanding of these numbers.
I was told this morning, and maybe you can flesh this out a little bit, Vic, that there may be a need for some additional space that we didn't discuss the other day when we learned that the space was available. We were talking about a swap, and so on.
Can you expand on that just a little bit?
MR. FORTUNO: Yes. When we got the information that you have before you, what we got last night -- that is, the construction costs -- I briefly discussed it with David on the way over here, and David mentioned that there have been indications from programs, and possibly compliance and enforcement, that they need to expand, add some staff, and have additional space, and the comment David made was, "We have very little expansion room."
So I think that Dave's probably better able to address that, so David, if you would.
MR. RICHARDSON: Sure. The last two years, we've had offices who have requested additional staffing, and budgets have been built as to how much that would cost if we would go to Congress and fund those additional positions.
Because we have limited our increase into management and administration to 4 percent, I don't see that happening next year, as far as adding new staff, but if we have vice presidents and directors come forward expressing a need for staff, as I am hearing, there's going to be some additional spacing needs that we'll need to address if we can get the congressional funding to support those additional staff and additional work that they'll be doing.
MR. STRICKLAND: Can you quantify the -- oh, somebody else had a question. I'm sorry. Go ahead.
MR. GARTEN: Well, I just was wondering, in the past, have you used professional space planners --
MR. RICHARDSON: Yes.
MR. GARTEN: -- in deciding what you needed?
MR. FORTUNO: Well, we've used architects who have handled the space planning for us and have worked with us designs.
I should add, I was just handed a note reminding me that there's also a possibility of some space on the first floor.
The reason why is we have a developer, who incidentally has repeatedly expressed an interest in purchasing our building, but has been told no.
We have a developer based there, and it's that outfit, Pensantz, that would like to move up to the space that we don't take on the fourth floor.
So if they take the space on the back side of the building, which I said was toured and the decision was made not to pursue that, then they will be vacating space on the first floor, so that LSC, if it doesn't take space on four, can take space on one.
But it seems to me that this is, the space we're talking about here on four is far more desirable. It's the top floor of the building, river view, whereas the space on the first floor of the building is on the back side of the building with a view of some shrubs.
So if you're -- unless LSC wants to try to negotiate that space for lesser rent, that's certainly a possibility, but if we're going to be paying $38 a square foot, I think we ought to take the best space available.
MR. GARTEN: But have you consulted with your architects or professional space planners in connection with this possible expansion?
MR. FORTUNO: Not as to the expansion.
We have consulted an architectural firm, Mancini Duffy, and they've done some very rough sketches in terms of the various options available to us for the space that we've been discussing on the front side of the building on the fourth floor.
They have not, however, been asked to advise us on options for expansion over time and different parts of the building.
MR. RICHARDSON: If I could interject, when we started the planning process, we got all the vice presidents and directors together and we did a matrix as to where we would like to be as far as staffing when we moved into the building, and where we would be in three and five years out, and we did that so that we could get a full review as to some of those different space needs.
The first cast at that showed that we needed approximately 52,000 square feet of space.
Now, when the board looked at that, the prior board looked at that, and in essence, we looked at it, also, they restricted us to 45,000 square feet as far as moving into the building.
Later, they decided that we could go up to 47,000 square feet, but at that point, the space was not available, because it was already subleased.
So I think that's where you were going, Mr. Garten, is if we had done that type of planning. We did, but because of the circumstances, we could not move forward at the higher amount at that point.
Just to remind Vic also, there's one additional space on the ground floor that's going to be vacant, and that space will be available, also, the artist agency.
MR. FORTUNO: It's a small loft arrangement. It's occupied by an artist agency now.
They do most of the printouts, provide most of the models for printouts in the Washington Metro Area, and it's very nice space for a business of that sort.
It is certainly usable by LSC, but whether it's optimal for LSC, it being a loft with a spiral staircase and all, is something to be discussed; but that, too, will be coming on the market shortly.
MR. STRICKLAND: A couple of other comments that -- oh, sorry. Go ahead.
MS. MERCADO: Okay. I think part of -- I think that the planning is good, because part of the problem that we're having, at least from the LSC Headquarters perspective, is that you went from a $400 million budget for LSC and the staff that accommodated that in the old headquarters that we had, to $200-and-something million, and so that drastically reduced our staff, and thereby, our space, and in fact, the inspector general ended up taking a whole lot more of that space.
When you look at it historically, as to where, if we were back, you know, in 95 figures, and what our staff would look like, and the kind of work that is required of our staff to do, as an oversight organization of all these LSC funds around the country, then the planning would indicate, and we would hope that we are every year progressively trying to get a little bit more funding to even get us back to '95, to somewhat say that we're adequately delivering legal services.
And so in looking at the planning, I think it's important to hope that we may get some more funding so that we can do better work out there, and that that, in and of itself, means that we have more space, because the space that we have now has grown very slowly, because we had continued cutting a lot of that space, having other tenants lease our space, including the inspector general, because of the huge funding cuts.
And so slowly, as we have gotten a little bit more funding from Congress, our staff needs have increased, and thereby our space that we need, and we need to somehow do that two year, five year projection, thinking on the positive side, that maybe we'll get a little bit more, and make sure that if we're going to make the expenditure now, that we make an expenditure that somewhere is in a medium that will help us with a little bit of that growth that's needed to be able to have the staff that we need to do the work that we do.
MR. RICHARDSON: The staffing that Ms. Mercado is speaking to is that, I think it was '95, we had a staff of 125 in the Corporation. The next year, we cut to 62, with the reduction in funding.
She also mentioned the spacing. At 750 First Street, remember, we had the 10th and 11th floor. We had 66,000 square feet of space. We had to sublease and get out of that space, and we got down to about 41,000 square feet.
So when we went into 3333 K Street, we got a 4000 square foot increase in space, spread over the building, so we've got some additional space, but as we've talked here and been discussing, there is some staffing needs and some logistical needs within the Corporation that we're going to end up needing to address in the next -- in the coming year.
MR. DIETER: I've got one question.
If the Inspector General's Office was to ramp up to their, according to their plan that they're gong to present, what would that do in terms of their need for space that they have?
MR. RICHARDSON: Nothing.
MR. DIETER: Nothing?
MR. RICHARDSON: Their space was planned out for the staffing that that have budgeted, so they're going to be fine.
MR. STRICKLAND: The other comments that I was going to make are that, with regard to the space that Vic addressed when Helaine and I toured the space, we didn't reject it on the spot, but when we sat down with the architect, we did reject that space on the ground that the existing leasehold improvements were inconsistent with the theme that LSC has established, or to state it in different terms, too fancy, and in order to make it look like us, so to speak, you'd have to rip it out, which just didn't make any sense, whereas, the space we're now addressing is plain Jane space.
It's an architectural firm that has not spent much on its interior improvements at all, so the demolition cost to get that suitable for our purposes would be considerably less.
And further, the final point is, if the rent in the building is $38 a foot for all the space, irrespective of where it's located, it certainly makes sense to take the most desirable space at that rent rate, than the least desirable space -- in other words, fourth floor versus first floor. I endorse that comment that Vic made.
So my view is that -- and Helaine can address this as she sees fit -- is that we don't want to let -- if we let this space get away, it's going to be gone for five years, and that's probably not good planning on our part to allow that to happen.
Even though some space may become available on the ground floor, it's obviously less desirable, so I think that we ought to take a serious look at it.
MR. DIETER: Did you want to say something?
MS. BARNETT: I'm heartened by the suggestion that the buildout costs would be, could possibly be borne by the landlord.
MR. DIETER: Yeah.
MS. BARNETT: And then, if you consider the additional rent for the various amounts, it's not a significant amount.
And so perhaps there's a way for the Finance Committee or the full board to delegate a decision to be made maybe by the chair or the chair of the Finance Committee, for the discussion with Friends to see about the cost of the buildout, and then looking at the various options for just the additional rent.
MR. DIETER: I had two questions. One is, when do we have to make a decision on this? And number two, then what do you want us to do right now?
MR. FORTUNO: I hate to put it this way, but the sooner the better, because I think that as soon as the space -- the space is being shown already, and as soon as the space is vacated by the architectural firm, it'll be ready for buildout and occupancy by a new tenant, so Friends of LSC is under pressure to find a new tenant to take it over as shortly after it's vacated as possible, so Friends is under pressure to go ahead and let the space out.
I think that from a practical perspective, what makes most sense is, if the committee would like to recommend to the board that it do so, that the board delegate to some smaller group, whether it's one person or two, the authority to negotiate within certain parameters, so that if you were to say, "We recognize LSC once had 66,000 square feet and it now has only 45, and we recognize there's going to be some interest in expanding, but we're not going to authorize going up to 66; we will, however, authorize taking up to the 2,551 that's available on the fourth floor front side of the building, provided that our rental obligation would not exceed" -- and we have an estimate here, the 96,938 -- if you were to give that -- and also authorize the person or persons that you delegate this to to negotiate the tenant improvements, ideally, what that person or persons would do is meet with Friends on Tuesday and work this out, try to get something within these confines, and could settle on a deal and then notify the board.
But I think that it's not going to -- it's probably not going to work if you want for the board to come back once there's additional information, to meet again. Certainly, it's not going to wait 'til April-May. I think by then, the space will be occupied.
But I think that if you delegate the authority to someone to explore and negotiate and make a decision, provided that it's within confines that you set, that's probably the most practical approach at this point in time.
MS. MERCADO: But you can do a conference call.
MR. FORTUNO: Yeah, you can.
MR. DIETER: I think Herb wants to make a motion to kind of move this along.
M O T I O N
MR. GARTEN: Yeah. I recommend, I move that we present to the board the following resolution authorizing the chair and president to enter into negotiations with the landlord to acquire an additional 2,551 square feet, plus or minus, on the fourth floor front at a rental not to exceed $38 per foot, which would be approximately $97,000 per annum, with the tenant improvements to be borne by the landlord on the same basis as the original lease provides, and I'm sure there are provisions dealing with the extent of the landlord's obligations, and that they have the final authority to enter into a lease for that space for a period that would coincide with the existing lease plus any options that you might have under the existing lease.
MR. DIETER: Tom?
MR. FUENTES: Mr. Chairman, did I not --
MR. STRICKLAND: I would second that motion.
MR. FUENTES: I'm sorry, but the Finance Committee --
MS. MERCADO: He's always an ex-officio --
MR. STRICKLAND: I'm an ex-officio member, so I'm seconding the motion just so we can have the discussion.
MR. FUENTES: Okay. The existing space on the fourth floor, did you not speak of that as an option to swap spaces?
MR. FORTUNO: Yes.
MR. FUENTES: But you're talking about adding, not swapping?
MR. GARTEN: That's correct. That's my understanding of what --
MR. FORTUNO: Although, as I understood, that it's negotiating the lease, the possible lease of additional space up to 2,551, 2,551 square feet, give or take, it seems to me that subsumed within that is the authority to lease less space, but to have that lease involve a swap so that --
MR. GARTEN: That would be part of the negotiation.
MR. FORTUNO: Yes.
MR. GARTEN: We're giving them the maximum.
MR. FUENTES: Well, I think that the previous board quite recently reviewed the issue of space quite thoroughly, and in addition, in doing that, looked at projections and needs of the Corporation, and that's how we moved from what was a tired Chevrolet to a very nice new Sedan DeVille, and now we're talking about moving to an Escalade or a Mayback.
And I could find reason to go along with possibly moving from our current Sedan DeVille to a Lincoln Town Car, but I'm not in favor of adding without justification, seeing some real reason for management for the need.
We've heard only the most general of need definition to add. Switching, yes. Adding, not without justification. I don't think we've seen justification.
MR. DIETER: Herb?
MR. GARTEN: I've heard comments from management to the effect that they have made these studies, and that they need the additional space.
I also think, as a practical business decision, losing this space at this time to someone else would be a very poor business decision on the part of this board.
I think the analogy also to Chevrolets and Cadillacs is not appropriate. Here we have more of a decision between a Sedan and a Suburban, perhaps.
MR. FUENTES: An Escalade is a Suburban.
MR. GARTEN: Is it?
MR. DIETER: Well, if we were to lease the space, would we be able to sublease it? How successful have we been in doing that in the past, if we decided we just wanted to grab it and to hold it?
MR. RICHARDSON: I can give you some background on that.
My experience has been, if we need space, we end up paying a premium, but if we want to sublease space, we have to do it at a discount.
MR. FUENTES: Why is that?
MR. RICHARDSON: Convenience, mainly.
When we downsized the 750 First Street -- now, granted, it's a little different real estate market, but we had prime space. We were on the 10th and 11th floors, and we had the front side of the building, we had the view of the Capitol and everything.
But when we had to sublease to get rid of space because of not enough money for operations, we had to subsidize those people to move into the space to get them in quickly to stop the bleed.
MR. STRICKLAND: And among other reasons, on subleases, I think, and based on my own experience with subleases, is that the space is not exactly what the tenant wants, and the duration of the lease means the tenant is going to have to move again relatively soon, and so on, so a sub-tenant is, in a lot of circumstances, not all of them, looking for some incentive to do that kind of deal, rather than one that's tailored to their needs.
MR. FUENTES: Mr. Chairman, I would like to amend the motion to require that the proposal that would come to the full board for any leasing of the space include a justification of staffing plan to support it.
I don't think that we have before us adequate, concrete information to sustain making an additional obligation of acquisition of rent without having anything presented to us by management that details the need for that space.
MR. DIETER: Herb?
MR. GARTEN: Yeah. I have found in the course of negotiating leases that -- over a long period of time as counsel -- that delaying usually presents problems, and I think we have to give the authority to the chair and the president to make a decision.
There's been study, and perhaps there will be further study, as I asked the question during the course of our discussion, and I think it's important we give them the opportunity to come to a decision.
We have heard that the Friends are meeting next Tuesday here, so that things will probably move very fast, and I have the confidence that our delegates are going to negotiate the best deal and be satisfied that if they're taking that space, that it's going to be utilized, or that, for good business reasons, they want to protect what we have here and are willing to take on additional space thinking in terms of future expansion or utilization.
MR. DIETER: Okay. I'm totally sympathetic with Tom's point of view, because I don't really see anything before me that says, "Yeah, we need, you know, 100 feet, 200 feet, or 2,500 feet," but, you know, I'm -- I think I'm willing to rely on the, you know, judgment of management and someone from the board, I guess, to make those kind of decisions.
I mean, personally, looking at the offices that we have, I only toured the one floor, but there's a lot of space, you know, there. It's not -- you know, I'd crank it up a little bit from your characterization compared to where, you know, I work.
So I think we should, with Tom's amendment to your motion, vote on presenting that to the board.
MR. GARTEN: I don't have a problem with it, other than, is it going to have to come back to the board based upon --
MR. DIETER: No, we're just going to present it to the board tomorrow, right, for them to go forward with our recommendation that --
MS. MERCADO: I think it's not real clear what the amendment is.
MR. GARTEN: I'm not clear.
MR. DIETER: His amendment is simply that at the time that the --
MR. GARTEN: You want the designees to make a further study before they conclude the negotiations with the Friends?
MR. DIETER: Well, do you want, Tom, do you -- MR. FUENTES: Well, I would think that our fiduciary responsibility as a Finance Committee and as a board would be to have approved a justifiable growth plan that includes the kinds of numbers of people that we have to house before we go out and lease space and then go fill up the space, and I would like to see some information, documentation brought to this board which we could approve, and then be the reason why we are leasing the additional space. So far, I've not received that as a number.
MS. MERCADO: I guess we have differences of opinion on what we have or haven't received as the justification. I thought I heard Victor and David give us some justification as to what the increase was.
There was already, at the time that we moved in, there was already a need for more space, but we couldn't get it because it was already being utilized by someone else, and we were restricted to a certain amount of space, and that's what we used; and in fact, some of the offices are, I think they're almost sort of like in a cubbyhole type setup.
But my point, actually, that I wanted to make, is that generally issues of leasing space, getting into contracts regarding the space for the Corporation, where it will be done, at least in the past, has always been the purview and prerogative of the president as opposed to the board.
I mean, obviously, we look at a full budget and see what our expenses look like, and if there are some reallocations that need to be made, that gets done.
And part of my concern that I have, and I keep seeing it, we keep doing that, and maybe it's just because most everyone on the board is new, is that to some extent it seems like we're micromanaging what the Corporation, what the president ought to be doing.
Yes, we set a budget of what the expenses will be and we review that to see whether or not they're within those categories, but ultimately, the decision of how the Corporation is going to be run is going to be for your president and your executive team that you have, the different divisions that you have, and part of that is their responsibility as the CEO to decide what leases, or leases they don't have, what properties they do or don't buy, to the extent that they stay within budget.
So I'm always a little leery of having the board necessarily authorize the day-to-day managing of doing things like that, because it's really within the staff's and the president's obligation or duty to do, rather than us to do it.
And so just fundamentally, I have problems with the whole motion, to begin with, but I'm willing to say that the chair and the president can look at it, get the information that they need, and as long as it's all within budget and is accounted for, that we authorize to give them that responsibility to enter into those contracts.
MR. GARTEN: I'm sympathetic to what you said, Tom. I understand that.
And maybe a way of working that out would be to give them the authority to negotiate those, make your study, and then ask for a 30-day option, or less, to come back to the board, and we can have a telephone board meeting to hear your report and vote up or down at that time.
MR. DIETER: In the meantime, prepare our -- I mean, getting to your point, we're looking at ranges from $12,000 to $100,000, and 300 feet to 2,500 feet.
It's not like someone has presented us with a proposal of, "We need X and we need to do, you know, Y," and if somebody said to me, "We have $100,000, how would the board like to spend it," I might say, "We need more space," or I might say, "No, we need to do something else with it."
So I do think it is appropriate to bring it to the Finance Committee in the context that this arose, but I think what Tom is getting at is whether or not before the final thing is agreed to and executed that he would like to see justification for which of these options we've chosen and why. Is that correct?
MR. FUENTES: Right.
MR. GARTEN: Are you satisfied with handling it the way I suggested?
MR. FUENTES: Mechanically, I think that's going to work, but I would like to get one point of clarification, because I saw the chairman respond with delight to say that, when Vic spoke, and you said you were pleased to hear that the Friends of LSC would pick up the improvement costs, and what I had heard, and I wonder if we could clarify this, is that he could take such a proposal that they pick up the tab to them, but they've made no indication that they're offering to take care of picking up the tab for improvement costs.
I was wondering if you were --
MR. STRICKLAND: No, I'm not aware of any proposal by Friends to that effect. I was just taking Vic at his word.
But I did make the point that Friends, in order to lease that space to a new tenant other than LSC, in my view, would have to expend some money to build out the leasehold improvements suitable for that tenant.
So I'm assuming and hoping, and I think Herb's motion addresses it, that Friends, as a responsible landlord, would make that offer to LSC, as its main tenant.
MS. MERCADO: And his motion says that.
MR. GARTEN: That's implicit in my motion.
MR. FUENTES: Oh, okay.
MR. STRICKLAND: I think it was specific in his motion.
MS. MERCADO: It was specific in his motion that the landlord incur the expenses.
MR. GARTEN: All bets are off the table if the landlord isn't picking up the tab for improvements.
MR. FUENTES: It would have to come back to the board.
MR. STRICKLAND: We'd certainly have to bring that back, because that was specific, I think --
MS. MERCADO: Yes, it was.
MR. FUENTES: What do think that the -- I mean, what would you say you think the chances are, Vic? You've dealt with these people for some time.
MR. FORTUNO: Certainly I've discuss it with Tom Smegal, who is chair of Friends. It hasn't been discussed with the entire board.
But I pointed out, Tom, that the space was coming available and that I thought it would be appropriate to inform LSC of it and give LSC the, for lack of a better handle on it, right of first refusal. Tom agreed. That's why Friends of LSC is here, and we like to think of this as the LSC building.
So there is an interest in doing what need be done to make it convenient for LSC.
It seems to me that Friends of LSC would have to be paying some tenant improvement for any tenant, so it seems to me that if Friends of LSC is going to pay any tenant -- it may be that some other interested party will come in and say, "Look, we want the space so much that we don't need tenant improvement, we'll handle that ourselves." Then that poses an interesting problem for Friends.
Frankly, I doubt it. I think any tenant coming along looking at the space is going to want it built out by the landlord.
So it seems to me reasonable that LSC would look to Friends to pay all or at least most of the tenant improvement costs.
That just, you know, my read of the situation, not based on specific discussion of that particular with anybody on the board.
MR. GARTEN: From the tenant's standpoint, we're asking for a lot, because it's the equivalent of one year's rent that they'd have to pay out in improvements, so it would be a very good deal from the tenant if $38 is the right price. If you come to Baltimore, I think I could get it for you for $20 a foot.
MR. DIETER: Okay.
MR. STRICKLAND: Although a $38 rate sounds excessive based on the Atlanta market, as well, but the fact that it's a flat rate with no passthrough --
MR. GARTEN: I'm only joshing.
MR. STRICKLAND: -- is pretty good.
MR. GARTEN: Things are much cheaper in Baltimore. That's why I want you to have your next meeting there.
MR. STRICKLAND: I know, I've heard that.
MR. FORTUNO: Just a kind of collateral point here.
I thought I heard some mention in the past that there was an interest in negotiating and inserting a renewal clause in the lease. I know that the prior board decided just to negotiate the flat 10-year term.
I don't know if that renewal piece is something that folks want to take up. Certainly that could be brought up with Friends, and I assume that Friends would be happy to entertain that.
I mention it only because I thought I'd heard that referenced at one point in the past. If that's something you have an interest in, that could certainly be raised with the board of Friends at this meeting, but it's not integral to the discussion about additional space. Clearly, that's separate and apart.
MR. FUENTES: I don't think we want to cloud the issue with that big a flight at this point.
MR. STRICKLAND: I wouldn't either, but I'd be interested.
Can you tell us now -- I know there's some revenue bond financing associated with the acquisition of the building -- what's the term of the revenue bond deal? Twenty years?
MR. FORTUNO: I think it's 20, but we're not sure. We'd have to check.
MR. STRICKLAND: Well, if it's 20, I would think that, just as a practical matter, that the landlord would be delighted to have a tenant that wanted to renew and continue helping them service that debt, as opposed to having a 40-or-50 thousand square foot tenant bail out and have to expend more money to bring another tenant in.
So at some point, we should raise the renewal question, not necessarily in connection with this small sublease.
MR. DIETER: We have the option to renew, right?
MR. FORTUNO: No.
MS. MERCADO: No.
MR. GARTEN: From a tenant standpoint, an option is a one-way street in favor of the tenant, so that I don't see -- at least, we should say, "Let's make it a new ten-year lease covering all the space, including the new space," at the least, or ask for an option, and that's not going to cloud the issue, that would be normal.
MS. MERCADO: That makes sense.
MR. GARTEN: That would be normal in any negotiations.
So it seems to me the board should certainly authorize you, if you can get an option, it's not going to cost us anything, and we don't have to exercise it. It's just a right that we have.
MR. RICHARDSON: Let me interject here. We were talking about the bond financing.
The bonds are being amortized over a 20-year period, but at the end of seven years they would have to be refinanced and redone, and we have found that in the market that that's sort of commonplace after a length of period, and it happened to be seven years for us, that we would have to go back and do a refinancing at that point.
MR. FORTUNO: And again, not to overly complicate matters, but something that you might be interested in is having LSC extract from Friends of LSC a right of first refusal for space as it becomes available in the building so that if, in fact, there is a need for expansion at some point in the future, and additional space becomes available, LSC has a contractu al right of first refusal as opposed to depending on, just generally speaking, the good will of Friends of LSC to go ahead and make it available even though it's not contractually obligated to do so.
MR. GARTEN: Here again, to the extent that you can improve our situation, you have the authority to do it, and certainly that's a very good suggestion.
Are we ready to --
MR. DIETER: Yeah, I think -- well, do you want to just amend the motion to recommend to the board that they enter into an option?
MR. GARTEN: Yeah. I'll add the additional language to it, provided that the chairman and president obtain a 30-day option with the understanding that the final arrangement that they have worked out, including the study, formal study that they will make regarding the space requirements and future requirements will be reported back to the board at a telephonic meeting to be held, at which time they would receive final approval or rejection of the arrangements that they have made with the landlord.
Is that satisfactory?
MR. FUENTES: Yes.
MR. GARTEN: Okay.
MR. DIETER: All right. All in favor of presenting that information to the board tomorrow?
(A chorus of ayes.)
MR. DIETER: It passes unanimously.
We have 6 and 7 to consider, and it's 12:20. I personally prefer to just keep going, and those people who want to have lunch can go ahead and have lunch, I guess. Is that all right?
Item 6 is a status report from the inspector general on the Corporation's fiscal year annual audit, and Len is going to make that presentation.
MR. KOCZUR: Thank you, Mr. Chairman.
MR. DIETER: Hold on just a second.
MR. STRICKLAND: In terms of our schedule for the rest of the day, I think that --
MS. MERCADO: Of course, you might want to do Item 7 in the full board.
MR. STRICKLAND: Yeah. That's a good way to handle that. That's a great suggestion.
I don't think the Search Committee would -- well, it might take that out of time, but with respect to Item 7 on your agenda, Maria Luisa just suggested that that is such a significant item --
MS. MERCADO: It is.
MR. STRICKLAND: -- that it might be just as well that that be presented to the full board rather than to your committee.
MR. DIETER: Yeah. Would that be tomorrow at 1:30?
MR. STRICKLAND: Yeah. Correct.
MR. DIETER: Okay.
MR. STRICKLAND: But I agree with you that you probably want to go ahead with Item 6, and finish that up.
MR. DIETER: Let's go ahead and finish, or proceed with Item 6, Len.
MR. KOCZUR: Thank you, Mr. Chairman.
Normally, at the annual meeting, we present the Corporation's financial audit report for the preceding fiscal year. We're not going to be able to do that this year.
The audit is essentially completed, the LSC audit is essentially completed, but because of our relationship with Friends, we need to include a footnote, two footnotes, on Friends in the financial statements, and those footnotes have to be done after the Friends audit has been completed. That has not taken place yet, so our audit is being held up.
The auditors plan to start the Friends audit on the 23rd of February, and this is predicated, as I understand, there's some information that hasn't been provided yet for the auditors to begin their audit, and that was supposed to be done yesterday, and we're not sure whether that information was received.
So once the audit is done, we'll move forward with the issuance of the report and our plans are certainly to have it by prior to the next board meeting, barring any really unusual problems with the Friends audit.
MR. DIETER: I understood, basically, our audit is in order, we just need that other information?
MR. KOCZUR: Yes, our audit is complete except for basically putting the -- formatting the statements and including the footnotes, and there are no issues there.
Although the auditor can't speak to it right now, it's very clear it will be an unqualified opinion, as we normally get, and there won't be any significant issues in the report.
MR. FUENTES: Just for clarification, the audit of Friends is by an outside auditor --
MR. KOCZUR: Yes, fortunately, the audit of Friends is done by the same auditor that does the Corporation's audit, so that facilitates the final preparation of our audit, the audit report.
MR. FUENTES: Thank you.
MR. DIETER: Okay, thank you very much.
MR. KOCZUR: You're welcome.
MR. DIETER: So Item 7, John Eidleman is going to present that information, and John, you heard that we're going to do that tomorrow at 1:30 at the board meeting?
MR. EIDLEMAN: That's fine.
MR. DIETER: Okay.
MS. MERCADO: And that will give us time to actually look at it and read it, because we just got it a few minutes ago.
MR. DIETER: Is there any other business that we want to bring up at this time from the committee or the board members?
MR. DIETER: Is there any public comment?
M O T I O N
MR. DIETER: Then I move that we adjourn the meeting.
MR. GARTEN: Second.
MR. FUENTES: Second.
MR. DIETER: Unanimous. Let's go have lunch.
(Whereupon, at 12:26 p.m., the meeting was concluded.)