LSC Finance Committee Transcript—Jan. 19, 2002




Legal Services Corporation
Board Of Directors

Meeting Of The Finance Committee

Saturday, January 19, 2002 
9:05 a.m.

Hilton Alexandria Mark Center 
5000 Seminary Road 
Alexandria, Virginia

Nancy H. Rogers, Chair 
Edna Fairbanks-Williams 
Thomas F. Smegal, Jr. 
Douglas S. Eakeley 
John N. Erlenborn

LaVeeda Morgan Battle 
Edna Fairbanks-Williams 
Maria Luisa Mercado 
F. William McCalpin 
Ernestine P. Watlington

Victor M. Fortuno, Vice President for Legal Affairs, General Counsel & Corporate Secretary 
Mauricio Vivero, Vice President for Government Relations & Public Affairs 
Randi Youells, Vice President for Programs 
Leonard Koczur, Acting Inspector General 
Laurie Tarantowicz, Assistant Inspector General for Legal Review 
Michael Genz, Director, Office of Program Performance 
Alice Dickerson, Director, Office of Human Resources 
Leslie Q. Russell, Director, Office of Information Technology 
David L. Richardson, Acting Vice President for Administration, Treasurer, and Comptroller 
Catherine Sulzer, Deputy Director, Government Relations and Public Affairs 
Robert D. Gross, Senior Program Counsel, Office of Program Performance 
Patricia Hanrahan, Special Assistant to the Vice President for Programs 
Julie Clark, Vice President for Government Relations, National Legal Aid and Defenders Association 
Don Saunders, Director for Civil Legal Services, National Legal Aid and Defenders Association 
Linda Perle, Senior Attorney, Center for Law and Social Policy 
Lillian Johnson, African American Project Directors Association 
Donald Isaac, African American Project Directors Association 
Wilhelm Joseph, African American Project Directors Association 
Lillian Moy, African American Project Directors Association 
Allison Thompson, African American Project Directors Association

    C O N T E N T S  
1.   Approval of agenda   4
2.   Approval of the minutes of the Committee's meeting of meeting of September 8, 2001
3.   Office of Inspector General's presentation of the Corporation's FY '01 annual audit
4.   Review and adoption of FY '02 operating budget for the Corporation
5.   Review of expenses through November 30, 2001   31
6.   Consider and act on conforming amendments to LSC's 403(b) plan
     Adjournment   56

MOTIONS: 4, 6, 30, 48, 50, 52, 53, 54, 55, 56


CHAIR ROGERS: This is the finance committee, Nancy Rogers, chair, calling it to order.

In attendance we have LaVeeda Morgan Battle, Doug Eakeley, Tom Smegal, Edna Fairbanks-Williams, Ernestine Watlington, and our president --

MR. ERLENBORN: And fellow board member.

CHAIR ROGERS: -- and fellow board member, John Erlenborn.

Do I have a motion to approve the agenda, which is in our board book behind the tab for finance committee?



MR. EAKELEY: So move.


MR. SMEGAL: Second.

CHAIR ROGERS: Discussion?

(No response.)

CHAIR ROGERS: All in favor?

(A chorus of ayes.)


(No response.)

CHAIR ROGERS: Motion to approve the minutes of the September 8th committee meeting?

MR. ERLENBORN: I have an amendment to suggest. I believe I'm a member of this committee, and I am not listed. I know I was present. I think it's confusing because I'm recognized as also attending as the president, but I really spent most of my time as a member of the board and of the committee.

CHAIR ROGERS: Is there consent to that amendment?

MR. EAKELEY: Absolutely.

CHAIR ROGERS: And a motion to approve the minutes as amended?

MR. SMEGAL: Madame Chair, I do have another -- I think, if Mr. Richardson will indulge me, my recollection is we had a discussion about the budget mark for '03, and the resolution we passed at the committee and passed on to the board did not have 396 million in it. It had 375 million. I believe that's right.

I believe the minutes need to be modified in the paragraph that says that the budget mark was 396. Mr. Richardson, isn't that correct?

MR. RICHARDSON: I think you are correct. There was discussion earlier to go to 396, and it was later reduced.

MR. SMEGAL: So that would be, I think, appropriate to change.

CHAIR ROGERS: Changing 396 to --

MR. SMEGAL: 375, I believe, was our resolution. Mr. Eakeley may have a recollection.

MR. EAKELEY: No. I think that's right, in both places.

CHAIR ROGERS: Okay. I see consent to that amendment. Is there a motion to approve the minutes as twice amended?





MR. EAKELEY: Aye. Oh, second.

CHAIR ROGERS: Discussion?

(No response.)

CHAIR ROGERS: All in favor?

(A chorus of ayes.)


(No response.)


We have a report by the Inspector General first. Len, welcome. And the audit, I think, then has been passed out separately and is separately bound. Is that right?

MR. KOCZUR: Yes. That's correct.

We've issued the audit report on the financial statements for the Corporation for 2001. We had a new auditor this year, but the results were the same, an unqualified opinion, which is what we've come to expect from Dave.

It was interesting that the auditors, for the first time in my experience, pointed out that it was for them an easy audit because of the records that were available and the cooperation of Dave and his staff. They didn't reduce their fee because of that, but it's good to know that they found it -- found David and his staff very, very cooperative on it.

They did, in addition to the report, issue a management letter, which is kind of a thing where it's things that are not -- do not affect the validity of the statements or the accuracy of the statement, but are things they think the board of directors should know.

There were three items reported. The first is that next year, the financial statement will be in a different format. It's a requirement of the accounting standards that it be changed, and they kind of just wanted to give -- put that on the record as an early warning.

That new form for next year will require that this year's statements be restated so that there can be a comparison next year. David's aware of this and that shouldn't create any problem, although there may be some expense related to the restatement of this year's statements. It won't -- it doesn't affect the bottom line. It's just a different categorization of the various line items.

MR. ERLENBORN: This kind of restatement is not like Enron's?

MR. KOCZUR: No, it certainly is not. Enron was correction of an error. This is simply to conform with the new standards required.

The second issue they reported is that in cases where our appropriation is late, which is almost every year, when the final appropriation comes, it requires some adjustment in the amount of the grants to the individual grantees.

We don't have that well documented that it's been approved by everyone in the chain of command, and they suggest we do that. There's nothing wrong with what was done. The allocation was correct. It's just it wasn't documented, the change wasn't documented.

MR. EAKELEY: And have we taken steps to implement that recommendation?

MR. RICHARDSON: Yes, sir. We have. I talked with Ms. Youells about that. Just basically what they're saying is where the OIM staff is following the congressional directives -- they're breaking the information out -- they would like to have an officer of the Corporation sign a document that here is transmitting the grant information and the information has been checked and it's correct.

So we just -- we're very -- have done it informally. As he said, it's correct. It' just that they would like to have a memorandum saying it's been done.

MR. EAKELEY: It sounds like a helpful suggestion for a modest improvement that hopefully doesn't take up a lot more staff time.


MR. KOCZUR: The final item is the -- they have a recommendation for improvement in our procedures for when we dispose of property. There's -- they felt it's just not formalized enough, that when we surplus a piece of equipment, give it to a school, for example, that's not completely documented.

And one result of this was, one of the items on the inventory list that they verified could not be located. And through some additional checking, we concluded that it was a record-keeping problem.

It was a computer. It had been used for a number of years. And it was changed -- we put in -- we purchased more additional computers. These computers were surplus, and we simply failed to record what we did with it at that point.

Almost certainly, they had -- the missing piece of equipment or the untracked piece of equipment had zero value at that point. It had been in service for three to four years, and as you all know, a computer in service that long has virtually no value. So it's -- they made a recommendation that we tighten up on those disposal procedures, and David has agreed with that.

And that concludes my report.

CHAIR ROGERS: Well, thank you very much, Len. Thank you for the indirect compliment to David. I think we want to make it direct. We have been pleased over the years with his fine work, and this is just another example.

MR. SMEGAL: Madame Chair, may I ask a question? My recollection in the past is that we've had some sort of report, a written report, from the auditors. Will that be forthcoming separately?

MR. KOCZUR: Yes. That was the -- I'm sorry. You should have received a copy.

MR. SMEGAL: Oh, was it a separate document? Okay. I got it. Thank you.

CHAIR ROGERS: Thank you very much. The next item on the agenda is review and adoption of fiscal year '02 operating budget for the Corporation. David, your comments?

MR. RICHARDSON: Okay. Within the information that you were given, there's a memorandum dated January 15th. It's on page 39 of your board book. I hope you had an opportunity to go through that. There is additional information that we can provide you at this point.

What I have attempted to do in this particular memorandum is to make it a little bit more explicit of how the --

MR. ERLENBORN: Just a moment. In our board book, the memo starts on page 41.

CHAIR ROGERS: And it's dated January 10th. Should there be a more recent one?

MR. ERLENBORN: Yes. It's dated January 10th. MR. RICHARDSON: No. That's the November expenses. The information got flipped some way.

CHAIR ROGERS: Okay. So we should look back a little bit further?

MS. BATTLE: Page 46 for the January 15th --

MR. ERLENBORN: Well, 39 is the minutes, so -- CHAIR ROGERS: Okay. Page 46, the January 15th memorandum.

MR. RICHARDSON: It's a memorandum actually to dated January 15th.

CHAIR ROGERS: Okay. Yes. We have that on page 46.


MR. ERLENBORN: Now that we're all on the same page.

MR. RICHARDSON: It's actually page 46, evidently, in your book.

CHAIR ROGERS: Thank you, David.

MR. RICHARDSON: I was not aware that we were using different page numbers here.

What I've attempted to do with the memo is to crosswalk you through the two schedules, the Schedule A and B, to show how the information is translated throughout the budget process. Certainly you will see that our total appropriation for this year was $329,300,000. That same information that you'll see on line 1 of Attachment A is also column 1 of Attachment B.

And it's broken out a little differently as you look down through. We're trying to build the budget to show the delivery, the direct cost of the direct -- the delivery of legal assistance. Then we have Corporation management and administration, and the Inspector General's office.

On column 2, you'll see -- and if you look at column -- the Attachment A, the first two columns, the grants, $311 million, and the technology initiatives of 9.1, those two will add together to equal the amount of money shown under the direct delivery of legal assistance.

In column -- in line 2, you'll see -- and 3 of Attachment A, you'll see that there is some information there as far as carryover, deferred revenue that's restricted by either appropriation or where the board has enacted how money is to be spent.

You'll see there that there is money remaining from last year. This is for one grantee in the basic field program that was on a short-term funded. The U.S. Court of Veterans Appeal, all of that money was not used and is incorporated in this year's budget for the U.S. Court of Veterans Appeal.

Additionally, you'll see that there was a carryover in the technology grants, and that money certainly is earmarked for that particular program.

So when you add the 4.9 million that is in the last column of Schedule A, and then the fund balance of 1.393 million for line 3, these are additive of your undesignated fund balances. And you'll see that there is some there for the grant funds. That's your emergency grants.

And you look at management and administration. We had an undesignated carryover of $871,000 last year. That money is not incorporated into the budget that's presented below here.

We had 108,000 that was designated for a couple of contracts and items that were being closed out at the end of the year. And in the Inspector General, you'll see that there is an amount there of 381,000. That money was not earmarked for any particular activities at the end of the year. And then there was a small amount, almost $5,000, for a contract that was outstanding that had not been completed.

Two additional funding sources that we have this year are the U.S. Court of Veterans Appeal. We are getting a new grant there, $895,000. One of the things that we have changed this year because we're listening to what is going on the field, we did not have additional money for any type of emergency relief.

So the interest money that we are receiving from our banks when we deposit the money in the bank, the interest we're earning is just -- is clearing money. We've got to deposit the money, write the checks, or make the direct deposits, and then there's still about 20 of our grants that get a check.

So what we're talking about is the time that -- the money goes into the bank the day before we write the checks or make the direct deposits, and the bank requires us to put it two days in before settlement. This is the interest we're earning.

So what we have done is the interest we have reduced this year because we had originally estimated 300,000; last year we only got up to 293,000, but that was in a year when we saw seven interest rate cuts. And my understanding is there may be another one coming; just this week, there was some discussion of that.

So the 275 is borderline. We're hoping that we can manage the money to get that amount. But what we've done is we've earmarked 100,000 to go to support the emergency grants through the grants from other funds available, and 175,000 for the -- to support management and administration.

MR. EAKELEY: Where will that 175 go within management and administration?

MR. RICHARDSON: It is spread throughout the budget. The original budget that we received from all the directors was substantially higher than the total amount of money that is currently available. So it's just going to help across-the-board operations. The vast majority of it does go to help program performance because that is the area where the most discretion is available.

MR. EAKELEY: Just as a follow-up on that, that's where I would invest our money if and when we could. And this is really the first opportunity we've had to spend a modest amount more on program performance in difficult times.

But the 871,000 carryover in undesignated M&A funds from last year, was that largely just staff openings that had not been filled?

MR. RICHARDSON: It was staff openings that had not been filled. It was projects that were delayed during the last quarter.

MR. EAKELEY: I mean, how much of that money could have been spent, for example, on technical assistance or program support?

MR. RICHARDSON: The vast majority of it. There was over $500,000 carryover in one particular office, and then the rest of it was just throughout the Corporation. Certainly there was money left in the executive office and general counsel because we're trying to project, for instance, litigation costs. And we actually got a refund of some of the money. And I'll actually point that out to you. I'll just do it now, since you've asked.

When you look at the November expenses, you'll see that there is a negative in the consulting line for legal affairs. That's because the money that we spent last year, the insurance company has now decided to reimburse us for some of that. So that money is going back into the legal affairs budget.

That's one of the reasons, when you look at his budget, you'll see that it's $200,000. We're certainly aware that there's some additional litigation going on, but right now there's $88,000 negative in that line. I actually got a check the day before yesterday for an additional $16,000.

So as that insurance money comes back in, it will be rolled back into the legal affairs budget to help support that activity. And then if he determines -- if Vic determines, in looking at the projected litigation, his projected staffing costs, and all that, as all of us do, if that money becomes freed up, it will go back into operations for state planning, competition initiative, capability assessments, anything that the OPP staff feels like that they need to undertake at this point.

And certainly we come back to you at the end of March for a six-month review, come back to the board at the end of June, and we make those recommendations to you. Under our current guidelines, the president can transfer up to $75,000 to assist in this. If it goes over $75,000, then we would write a memorandum to the board and ask an assent to continue with that project.

CHAIR ROGERS: Thank you, David.

MS. FAIRBANKS-WILLIAMS: You said the carryover from M&A, that part of it was people that wasn't hired and part of it was projects. Do you have to set aside some money for any of those projects, or are they dead in the water, or --

MR. RICHARDSON: They're incorporated in this particular budget. For instance, we have some attorney training. One of the carryovers you'll see here that was designated is we've entered into a $100,000 contract for management to coordinate some attorney training for field attorneys.

There's $160,000 that were -- they were written so close to the end of the year that they were not designated, but they're built into this budget to help support the state planning efforts and the consultants needed there.

You've gotten a report this morning. I think there's a total of like $370,000 that has been set aside within the OPP budget as it currently exists to help with state planning. There are certainly other initiates, but that one seems to be the topic of most concern.

The document this morning showed 396,000 for state planning. The technology initiatives, and certainly as you see that we've got new money for technology and we've got the carryover. There's consultants and staffing costs as far as travel. There's another $70,000 there. And then there's other special projects that the OPP staff is wanting to undertake that adds to the remainder of the budget that they have.

Let me just -- since we've gone through the memo, let me sort of give you the highlights of the budget. For instance, for the board's budget, you'll see that it is a good deal higher than in prior years in anticipation of a new board, anticipation of a search committee for a president, inspector general. We have allocated the money for that particular purpose in that budget.

Certainly we look and see that if it's continuing to be delayed as far as the new board that's prospective coming in, and if it comes out that we see that it's going to be delayed even further, perhaps into next fiscal year, then when we come back to you in March, we'll make an adjustment to that allocation.

We've also added -- because of the remarks at the last board meeting, we've instituted the reg-neg process. The consultants needed for the reg-neg process are included in the board's budget. Vic tells me that there is going to be -- he feels that there will be four to five of the reg-neg processes, so we've added the consulting costs for that to the executive office budget, or to the board budget.

In the executive office, we do continue to have a great deal of travel. You'll see that there is money set aside for that particular purpose. You'll also see that there's money set aside for -- $75,000 for additional consulting.

Last year we had some writing that we contracted to be done. There's also additional work that anticipate under the Strategic Directions, and we've set aside the money for that to be completed.

I've talked about the legal affairs budget. Their budget is pretty well set. We certainly have a projection on what they feel their litigation will be. They are completely staffed up at this point, so as -- if there is additional information there, that of course will be relayed to you also.

Within the -- in GRPA, your government affairs, he is now currently staffed up. As you're aware, we did lose one staff member in the last quarter, and that staff member has been replaced. So there is a little bit of money that has already been shifted out of the GRPA budget for that lapsed time to support other activities.

In addition, there's money in there for the director's -- or the vice president's travel and for the deputy director as to events that they will be taking.

In human resources, there's money there for the different aspects that's needed for that particular office. I will tell you that there is a sea change coming in regards to CSR reporting, retirement reporting, and the Federal Employee Benefits Program because there is actually a bill before Congress, or it's being proposed -- I'm not sure if it's before them now -- that will change the CSR, that we will have to report the current actuarial cost of retirements and health benefits in our financial statements.

And that's something that if it does pass, there's supposed to be a hold harmless aspect to this where we report it, perhaps get the money, and then have to set it aside for that particular purpose. So that could be a significant impact to us in the future. CHAIR ROGERS: Tom?

MR. SMEGAL: Thank you. David, would you remind me, with respect to the veterans affairs appeal process, how does that money get distributed, the 875 or whatever it is?

MR. RICHARDSON: There is a grant that's made toward that, and --

MR. SMEGAL: Who is it made to? Who is the grant made to?


MR. GENZ: The veterans court gets the money and gives it to us for administration.

MR. SMEGAL: Right.

MR. GENZ: We have a grantee presently, and we're going to go through a competition process. The grantee is a veterans consortium that's -- it's a consortium of three veterans organizations that do that, what's essentially a pro bono --

MR. SMEGAL: And then they have panels that cycle on these cases?

MR. GENZ: Right, right. And they train and support those panels.

MR. SMEGAL: Thank you.

CHAIR ROGERS: Maria Luisa?

MS. MERCADO: Yes. David, I just had a question on -- when you were looking at the Office of Legal Affairs, one of the issues that came up several times in the presentation we had yesterday in provisions committee on some of the factors to consider in mergers and acquisitions, different programs, was the issue of litigation, added litigation either, you know, by programs or entities or state planners that didn't necessarily want to incorporate, or there were issues of property disputes.

Does your Office of Legal Affairs incorporate into it that litigation expense, or is that something that would be gathered from some other funds somewhere else?

MR. RICHARDSON: If I can speak, we've talked about that. Vic has included an amount of money in there for that particular purpose. And that -- last year we had to increase that significantly through the year. With the refund from the insurance company, hopefully we will not have to do that again.

But if it happens -- I mean, we're sort of reactionary here, you know. If we get sued, then we certainly have to then come back to the board and say, we need additional resources. And we do that on a quarterly basis and at these type of meetings.

MS. MERCADO: Well, I mean, and I will reiterate my comments again from yesterday, which is to say that if we know we have other states that are going to go through state planning, through mergers and acquisitions, and we have some that are currently undergoing through them, and part of the cost of expense of doing that is not something that the local grantees can take, then in our budgetary requests or how we formulate our budgets, both in the litigation costs and the technology support, on the staff support that they would need to try and equalize salaries and so forth, that those are all costs that we need to incorporate in our budgets to deal with that.

Because we know ahead of time, I would assume, how many states we're going to be dealing with that are going to be going through state planning and merger. And if we have an average or an assumption, the ones that are already undergoing it, what problems have arisen and what costs are associated with that, do we incorporate all that in our budget somewhere?

MR. FORTUNO: I think that -- I want to make sure that we avoid any misimpression. And the funds that have been budgeted in the consulting line for these kinds of occurrences aren't for representation of the grantees.

It's when there is a consolidation, say, just to use that term generically, some sort of reconfiguration, and as a result of that -- for example, yesterday you heard from Virginia and you heard the horror story about the program that lost out and how it locked out all the employees and let employees go.

And that program also filed suit against LSC seeking to enjoin the reconfiguration, if you will. It also refused to surrender the property that was purchased with LSC grant funds and that we sought to transfer to the new grantee.

So we had the one lawsuit that was filed against us, which went through the district court and then up to the Fourth Circuit. We've also been engaged in litigation, and it you heard about the trial date being set for later this year, with respect to recovery of the real estate involved.

There were complaints, miscellaneous complaints filed by this program and program director, including ethics complaints against individual staff members. All of that involves defense costs, so that we have to budget for those.

But the misimpression I didn't want to leave is that what we budgeted is in some way for the defense of the individual grantees who may in some way get caught up in litigation of this sort. And if that's what you're asking about, I just want it to be clear that we haven't budgeted for that.

We simply budgeted for representation of the Corporation when the Corporation is brought into the litigation as a party or initiates an action -- for example, it seemed to us that rather than leave it to the new grantee to attempt to recover that property, that we were in a stronger position, both financially and from a legal standpoint -- that is, our position with respect to the property, our claim to the property -- that we were in a stronger position to assert a right, claim the property, obtain the property, and then transfer it over to the new grantee. And that's what we're attempting to do here.

MS. MERCADO: Well, and I think that my question went to both, actually, both litigation costs that LSC, as the national entity, would incur as litigation costs, as well as what grantees -- granted, not all of them, but a significant number of them -- would incur as litigation costs in trying to do those mergers and consolidations.

MR. FORTUNO: As to that second piece, I don't know that we have focused on that specifically and made any provision for that. And I just wanted to be clear on that.

CHAIR ROGERS: Are there questions? Comments? I think that we have been asked to approve the operating budget. Is that right, David?

MR. RICHARDSON: That is correct.

CHAIR ROGERS: Is there a motion to approve?



MR. EAKELEY: So move.

MR. SMEGAL: Second.

CHAIR ROGERS: Discussion?

(No response.)

CHAIR ROGERS: All in favor?

(A chorus of ayes.)

CHAIR ROGERS: All opposed?

(No response.)

CHAIR ROGERS: The motion passes.

And the next agenda item is a review of expenses through November 30, 2001. There is a memorandum from David on page 41 of the board book.

MR. RICHARDSON: If I can, let me go back for one second in regards to the occupancy cost because that has been something that has been ongoing here.

I reported in the memo that we've reduced our occupancy cost from 1.5 million to 1.4 million. We were able to do that because we've been successful at our negotiations of taking the least cost per square foot that the place has been changing us. And they wanted to go to $38.50 a square a foot, which would have been somewhere in the neighborhood of $1.7 million for our occupancy.

We have tried to maintain somewhat consistency here. We've rejected their $2 increase. We are currently paying, actually -- our net cost is $37, over $37 per square foot. We have negotiated a $35.50 rate for next year. So that is -- I'm sorry, $34.50. It is much less than what we are currently paying.

One of the questions that was asked at the last board meeting was that, okay, so that means that our occupancy costs will remain constant. And that, I want to make you aware, is not so because if you'll recall, the first year that we moved into our property, we did not pay rent. But what we did was we recognized rent on a pro rata share, and then we have over the years been decreasing what we term as a deferred rent incentive.

So next year our rent will go up almost $200,000 because we had spread the expense of the last lease over the ten years, and now we're going to have to recognize that. So when you look at the 1.2 that we showed as far as rent cost in 2001, it will go to 1.4 this year.

It will go up again in the next year, and it's because of a 2 percent increase and then getting into the new leasing arrangements, which begin with -- at the term of the last lease, which was June through May. MR. EAKELEY: But we're not doing to the new board what the old board did to us?

MR. RICHARDSON: No, you're not. You're leaving them in much better shape because, as you're aware -- what was it, $1.9 million in deficit that you acquired.

The expenses that are before you, the November expenses, are based on the budget that -- the temporary budget. I have not restated them since you have not approved the budget at that point.

As far as a quick comparison, we are at -- the expenses through November represent 13.5 percent of the temporary operating budget. If you put these same expenses against the budget that you just approved, it is 13.08 percent. So we are operating well within our budget.

MR. EAKELEY: Sorry. I have 13 -- that's 44. That's 13.5. Where's the -- but the next page --

MR. RICHARDSON: Is the IG. I'm just saying I haven't -- it's not in here as far as --

MR. EAKELEY: Oh, okay. I'm sorry. I'm sorry. That's why I can't find it.


MR. EAKELEY: That's a relief to me.

MR. RICHARDSON: But I just wanted to make you aware that we've made the comparisons and we've looked at it to -- we're well within budget. Certainly we've recognized two months of our rent, salaries, and we're within budget. When you look at the 19 percent for temporary employee, that's a little high, but we have made a few adjustments with temporary employee pay in the new budget to recognize that we do have a big of a transition here and we have a few positions that are currently open that we hope to fill in February and March, that there's temporary people in those positions now. So this line should go down throughout the year, percentage-wise.

And since I've already mentioned, I don't -- and I apologize. I was not aware that there was a difference in page numbers, but I certainly would like to note that I said 88. It's actually $98,000 is the credit in the litigation line of legal affairs, and that is, as I said, as a result of receiving money from the insurance companies.

CHAIR ROGERS: Questions or comment on the expenses through November 30, 2001?

(No response.)

CHAIR ROGERS: Anything further, David?

(No response.)

CHAIR ROGERS: Before we move to the next agenda item, I just want to reflect for the record that Maria Luisa Mercado came in shortly after I listed those who were here, and has been here throughout this period.

Next agenda item is, consider and act on conforming amendment to LSC's 403(b) plan. David, some comments?

MR. RICHARDSON: Actually, I'm going to bring our director of human resources up, Ms. Alice Dickerson, and she will go through that with you.

CHAIR ROGERS: Thank you.

MS. DICKERSON: Good morning.

CHAIR ROGERS: Good morning.

MS. DICKERSON: I'm going to just briefly summarize -- for the record, I'm Alice Dickerson, director of human resources. I'm going to just summarize some of these amendments that we're asking you to pass a resolution to, then give the staff authority to make.

We are in need of amending the 403(b) plan to bring it into compliance with the Economic Growth and Tax Relief Reconciliation Act of 2001. This is more commonly referred to as EGTRRA, and I'll be using that acronym frequently in this presentation.

There are, as I said, several amendments that need to be made, and we think the most expedient way to do that is to have the board pass a resolution that would then authorize the officers and agents of the corporation to act to go ahead and make the elections that are necessary to implement these amendments.

MR. SMEGAL: These are retroactive to April 1, 2001, Alice?

MS. DICKERSON: Well, no. The April 1, 2001 date refers to the date that we transferred the plan to Diversified Investment Advisors. That's the reason that date is in there.

MR. SMEGAL: Oh, okay.

MS. DICKERSON: The first thing that staff is recommending that we amend would be the increase in the maximum contributions from $30,000 to $40,000. Presently, staff can contribute on contributions that total up to $30,000 or 25 percent of compensation.

EGTRRA makes a provision for that amount to be increased to $40,000 or 100,000 -- 100 percent, I'm sorry -- of compensation. The increase in compensation limits pursuant to EGTRRA will now go from $170,000 to $200,000. We recommend that we make that amendment as well.

On the vesting provision, we currently have a very generous vesting provision where participants are fully vested after three years' employment. So it's not necessary for us to make an amendment there as the plan is already in compliance with that provision.

There are also two different provisions that have to do with rollover distributions. Some of those are from outgoing contributions, meaning when participants leave LSC's employee and wish to take their funds with them, this will allow them more leeway in what they can roll that money into, and they will be able to roll it into any defined contribution plan.

For instance, if a participant left us right now, we have a 403(b). If they go to an employee who has a 401(k), they can't roll it into that. Or if they go into a governmental plan, they can't roll it into that.

MR. SMEGAL: So what can they do? They can roll it --

MS. DICKERSON: If we amend this, they will be able to.

MR. SMEGAL: They can roll it into an IRA, at present?

MS. DICKERSON: Yes. If we make these amendments.


MS. DICKERSON: Well, actually, the IRA they can do even now.

MR. SMEGAL: Yes. That's what I mean. They can do that now.

MS. DICKERSON: Yes. Also, then, for incoming money, when we hire new employees, if they've been in a 401(k), they'll now be able to roll that money into our 403(b), where at the current time they can't do that. So staff does recommend that we make that amendment.

On cashouts, when participants leave a plan, if their balance is less than $5,000, they're required to cash out of the plan. Right now, any money that they roll into the plan is not considered as part of that -- the calculation of that $5,000. EGTRRA will then allow you to disregard those rollovers. Staff is not recommending that we make that amendment. We want to continue with the plan the way it is on that provision.

One of the other provisions of EGTRRA is that it will increase the elective salary deferrals. This year, participants can contribute as much as $11,000 pursuant to EGTRRA, and we want to make that amendment.

We are recommending, however, that rather than state the amount in the amendment, that we would just reference the relevant provision of laws because this amount is going to change each year for the next five years, and it will be a maximum of $15,000 by 2006.

On hardships --

MS. BATTLE: I need to understand the distinction between a participant's annual addition and the deferral amount.

MS. DICKERSON: Participant's annual addition? MS. BATTLE: Yes. The first one was that you could be -- the 25 percent cap on the amount that you could contribute moved up to $40,000.

MS. DICKERSON: To 40,000.

MS. BATTLE: And now we're talking about elective deferrals at $11,000.

MS. DICKERSON: Okay. The elective deferral is the amount that the employee can actually defer from their salary. The $40,000 is the maximum that could be contributed by the employee and the employer.

MS. BATTLE: And the employer together?

MS. DICKERSON: And the employer, uh-huh, for a participant.

EGTRRA also has provisions that relate to hardship withdrawals. Currently, if a participant makes a hardship withdrawal, then they are prohibited from contributing for a period of 12 months. Under EGTRRA, that is basically repealed and they could begin to contribute again within six months. And so we do recommend that we amend the plan for that.

One final provision under EGTRRA would be the same desk rule. This has to do with a situation that there has been a lot of litigation about in the past few years, with relation to corporate mergers and so on, where employees who continue with the successor employer, basically in the same job, have not been allowed to take distributions from their pension plans.

EGTRRA repeals that provision, and they would now be able to take a distribution in that event. While we realize that's unlikely in LSC's situation, we still recommend that we go ahead and amend the plan so that we are -- that the plan language, at least, is in compliance with that provision.

We have one further -- are there any other questions before I --

CHAIR ROGERS: Maria Luisa?

MS. MERCADO: Yes. I just had a question. I wasn't real clear. Does this also apply to the Inspector General's staff or --

MS. DICKERSON: Yes, it does. Yes, it does.


MS. DICKERSON: To all employees of LSC who participate in the 403(b).


MR. SMEGAL: Nancy, we do some matching --


MR. SMEGAL: -- of contributions by the employees to their 403(b)?

MS. DICKERSON: We do a 2.51 percent match and a 6 percent basic contribution.

MR. SMEGAL: So the 6 percent doesn't change?


MR. SMEGAL: The 2.5 is capped?

MS. DICKERSON: The 2.5 -- no, it's not capped, but it's the amount that the board has approved in the past as what the LSC matching contribution would be. And that figure would not change unless there was some amendment by the board to do that. We're not proposing anything like that.

MR. SMEGAL: No, that -- well, thank you. My question is a little different than that. I'm trying to determine -- as you went through these, I wrote "NC" down here, no cost, on most of these. And it sounds to me like --

MS. DICKERSON: Oh, yes. There's no cost to the Corporation.

MR. SMEGAL: No. But it sounds to me like, with respect to my question, if the employee can contribute more and we match 2.5 percent of what they contribute, there is a cost to us if -- well, because of the fact that the amounts the employee can contribute are increased, am I correct in understanding that 2.5 percent of some increase is more money?

MS. DICKERSON: If we had employees who were at that salary level. We don't. Because of the cap on the president's salary, we don't have anyone in excess of the 121,600.

MR. SMEGAL: Okay. So the practicality is that we don't. The theoretic is that we do.

MS. DICKERSON: We could.

MR. SMEGAL: We are increasing our exposure or our cost of the program. I mean, but we have to because the law has changed, but -- is that right, David?

MS. DICKERSON: I mean, we don't have to. We --

MR. SMEGAL: I don't have any reason not to do it. I just want to understand the parameters of what we're doing. Is it all theoretical in the sense of my question, or is there any practical?

MR. RICHARDSON: Okay. The amount that we pay per employee is based on base wage.

MR. SMEGAL: Right.

MR. RICHARDSON: Well, base wage of compensation. And that is 2.51 percent of their salaries.

MR. SMEGAL: Right.

MR. RICHARDSON: So if an individual -- we're paying 2.51. The Corporation contributes 6 percent. If that would equal an amount less than the $11,000 that we're talking about an employee can contribute of their own money, that does not go up.

If an employee is contributing $7,000 and they go to $8,000, these are percentage basis. It's not based on the contribution of the employees. So the cost of the plan only goes up when salaries increase.

MR. EAKELEY: Well, is you're answer to Tom's question then that there is no effective practical cost increase to the Corporation that is imputable to these changes that are being recommended?

MR. RICHARDSON: That is correct.

MR. SMEGAL: I guess what you're saying, Alice, is going from 170 to 200 has no effect because nobody's at 170 now and therefore nobody's at 200.

MS. DICKERSON: That's right.

MR. SMEGAL: And 2.51 percent of something beyond where they are now is zero.

MS. DICKERSON: Yes. That's correct.

MR. SMEGAL: Okay. Thank you.

CHAIR ROGERS: Thanks, Alice and David. I take it that you are recommending Resolution -- that we recommend Resolution 2002-003 for board approval?

MR. SMEGAL: Oh, I'm sorry. She had another item.

MS. DICKERSON: 2002 and 2003. 2002 has to do with the EGTRRA amendments. 2003 has to do with an amendment that we need to make to the plan document when the plan was administered by Mutual of America.

This one is a strange one. It's going to have no effect on the plan. It has to do with the transportation benefit that is provided by the Corporation, and that is fully paid by the Corporation.

So what this amendment does is to simply change the definition of compensation under the plan. But it has no real meaning to us because there are no more contributions going into that plan, and even if there were, our benefit is fully employer-paid so there are no salary deferrals by employees to pay for this. It's simply making the plan document say what it needs to say to be in compliance with the law.

MR. SMEGAL: Which is, we don't make a contribution for transportation allocation? Is that what you said?

MS. DICKERSON: No. Under Mutual of America, because we have transferred that plan now and DIA currently has it, we don't make any contributions to Mutual of America. We have some employees who didn't transfer their money, and so there are still funds in that plan. But there are no further contributions made to it.

CHAIR ROGERS: Alice, did you have anything further to report before we begin consideration of the two resolutions?

MS. DICKERSON: No, I don't. There were two changes in the resolutions, though, from what you have in your board book, and I'll point those out to you.

In the summary of the EGTRRA amendments on the vesting, the summary listed that beginning at years after 2002. It's actually after 2001. It doesn't really make any change because that's not one we're even recommending that you make the amendment on. We just wanted to correct that for the record.

And then on the Mutual of America amendment, the one in your board book has an effective date of January 2. We need this to be dated -- to be effective not later than December 31, 2001, in order to be in compliance.

CHAIR ROGERS: Okay. Thank you.

MS. MERCADO: Alice, the new ones that we got this morning, do those reflect the changes?

MS. DICKERSON: They have the correct dates, yes.

CHAIR ROGERS: So there should be three documents before you on the table, and those are the three that we will now consider for recommendation to the board for approval.

Any further questions or discussion?

(No response.)

CHAIR ROGERS: Let the record reflect that Bill McCalpin has now joined this committee.

MR. SMEGAL: Are we in 2002-002?

CHAIR ROGERS: We are, yes.

MR. SMEGAL: Okay. Third paragraph. Alice, I think maybe a few more words would be helpful to me. I read this -- the first time I read it, I read this to be retroactive to April 1, 2001.

And either -- if we talk about the current plan, which was effective, or if we talk about the plan that was effective April 1, it seems to me, at least in English, it would read a little better if we had a couple more words in here, unless you tell me that that would be bad.



MR. SMEGAL: I would propose that each time it says "plan effective April 1, 2001," that it say, "plan that was effective April 1, 2001."

MS. MERCADO: Is that in Resolution 2002?

MR. SMEGAL: 002, right. So unless you tell me there's some reason not to, it would seem to me to read more clearly.

MS. DICKERSON: I don't think there's any problem with that change.

MR. SMEGAL: That was, plan that was effective.

MS. DICKERSON: That was effective.

MS. MERCADO: Or that became effective.

CHAIR ROGERS: Okay. It's been moved we amend Resolution 2002-002 to add the words "that was" --

MR. SMEGAL: "That became."

MS. DICKERSON: "That became effective."

CHAIR ROGERS: "That became" before the word "effective," and that's twice?

MR. SMEGAL: Yes. In paragraphs 2 and 3, "Whereas" clauses.

CHAIR ROGERS: In paragraphs 2 and 3.

MS. MERCADO: Madame Chairman, just so that you've got some consistency, does it also apply to year 2003, which also talks about an effective plan April 1, 2001?

MR. SMEGAL: Yes. That became, unless --

CHAIR ROGERS: Okay. Is there a second to that motion? Any further discussion? Second?


CHAIR ROGERS: Any further discussion?

(No response.)

CHAIR ROGERS: All in favor?

(A chorus of ayes.)


(No response.)

CHAIR ROGERS: Okay. Anything further before we consider a recommendation of Resolution of 2002-002, first of all, for recommendation to the board?

MR. SMEGAL: Sorry. 003? Didn't we just do 002?

CHAIR ROGERS: We haven't voted on 002 as amended. We just amended it.

MR. SMEGAL: Oh, okay.

CHAIR ROGERS: Anything further on that?

(No response.)

CHAIR ROGERS: Is there a motion that we recommend adoption of Resolution 002 to the full board?


MR. SMEGAL: So move.


CHAIR ROGERS: Discussion?

(No response.)

CHAIR ROGERS: All in favor?

(A chorus of ayes.)


(No response.)

CHAIR ROGERS: We will make that recommendation.

And the second, Resolution 2002-003, which we've discussed. Any further discussion?

(No response.)

CHAIR ROGERS: Is there a motion we recommend its adoption by the board?

MR. SMEGAL: Well, with the correction Ms. Mercado pointed out of putting the words "that became" between "effective" and "April 1."

MR. EAKELEY: And we want to change "affective" to "effective."

MS. DICKERSON: "Affective" to "effective." That's right.

MS. MERCADO: Since I'm not a member of your committee, it's somewhat --

CHAIR ROGERS: So this is in item 1? You'll make the motion?



MR. SMEGAL: Yes, please.

CHAIR ROGERS: Go ahead, Tom.

MR. SMEGAL: Yes. The motion in 003 is, in the second "Whereas," correct the spelling of "effective," and after "effective," put in "that became."

CHAIR ROGERS: Before "effective," put in "that became"?

MR. SMEGAL: No. After "effective," but change -- correct the spelling of "effective." Following "effective" and before "April 1, 2001."

CHAIR ROGERS: Okay. We think you're wrong. Before "effective," "that became"?

MS. MERCADO: "That became effective."

CHAIR ROGERS: You mean to say that "that became" is to be inserted before "effective"?

MR. SMEGAL: Oh, you're right. You're right.

CHAIR ROGERS: Okay. That's the motion. Is there a second?

MR. EAKELEY: Second.

MS. BATTLE: I might suggest, then, "Now therefore be it resolved that the hereto appended one-page amendment is hereby adopted, to be effective December 31, 2001."

CHAIR ROGERS: You want to make that -- as soon as we vote on the --

MR. EAKELEY: That's two votes together.

CHAIR ROGERS: All right.

MS. BATTLE: I can't make the motion but I --



MR. SMEGAL: I'll make that motion.

MR. ERLENBORN: I'll second.

MR. EAKELEY: As a friendly amendment.

CHAIR ROGERS: There's no discussion. It's been moved and seconded that we make two amendments to 003 to change spelling of "effective" on line 2 of the second "Whereas" clause, and insert before it the words "that became," to insert the words "to be" in the item numbered 1 before the word "effective."


MR. ERLENBORN: A question. The "to be effective," is that this last line?


MR. ERLENBORN: This is retroactive, then?


MS. DICKERSON: That's the whole point, to make sure that it's retroactive to December -- and I thought that was one of the points that I mentioned.

CHAIR ROGERS: Yes. It has to be retroactive to December 31st.

MR. ERLENBORN: I just wanted to be certain.

CHAIR ROGERS: There being no further discussion, all those in favor say aye.

(A chorus of ayes.)

CHAIR ROGERS: Opposed, nay?

(No response.)

CHAIR ROGERS: The amendments, motions to amend, are passed and approved. And we have the resolution itself before us to recommend to the board. This is Resolution 2002-003.

Is there a motion?



MR. SMEGAL: So move.

MS. BATTLE: Second.

CHAIR ROGERS: Discussion?

(No response.)

CHAIR ROGERS: All in favor?

(A chorus of ayes.)


(No response.)

CHAIR ROGERS: The recommendation is approved. Is there any other further -- any other business to come before the finance committee?

MR. SMEGAL: Yes. We have another resolution to approve, Madame Chair, Resolution 2002-004, which conforms the action I think we took earlier of adopting the consolidated operating budget for fiscal year 2002.



MR. SMEGAL: And I move its adoption -- or I move its recommendation to the board.


MS. FAIRBANKS-WILLIAMS: Second. I second it. CHAIR ROGERS: There being no further discussion, all those in favor, signify by saying "Aye."

(A chorus of ayes.)

CHAIR ROGERS: Opposed, nay?

(No response.)

CHAIR ROGERS: The resolution is recommended to the board.

MR. ERLENBORN: Madame Chair, before Alice might leave here, let me say that I want to compliment her on her presentation and the work that she does because this is really highly technical, hard to understand, and she does a great job.

MS. DICKERSON: Thank you.

CHAIR ROGERS: Thank you very much.

Anything further?



MR. EAKELEY: I move we adjourn.

MR. SMEGAL: Second.


(A chorus of ayes.)

(Whereupon, at 10:00 a.m., the meeting was concluded.)

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