This interim rule implements a provision of the Agricultural Risk Protection Act of 2000, Public Law (P.L.) 106-224, enacted June 20, 2000. P.L. 106-224 amended section 9(b)(2)(C) of the Richard B. Russell National School Lunch Act (NSLA) (42 U.S.C. 1758(b)(2)(C)) to add Medicaid under title XIX of the Social Security Act (42 U.S.C. 1396 et seq. ) and SCHIP under title XXI of that Act (42 U.S.C. 1397aa et seq. ) to the programs that are authorized limited access to children's free and reduced price meal or free milk eligibility information provided:

(1) The State agency and school food authority elect to disclose children's free and reduced price meal or free milk eligibility information to these health insurance programs;

(2) There is a written agreement between the school and the health insurance program agency that requires the health insurance program agency to use the information to seek to enroll children in Medicaid and SCHIP; and

(3) Parents/guardians are notified and given an opportunity to elect not to have their children's eligibility information disclosed to Medicaid or SCHIP.

On July 25, 2000, the Food and Nutrition Service (FNS) published a proposed rule on the disclosure of children's (and adult participants' in the Child and Adult Care Food Program) free and reduced price meal or free milk eligibility information (65 FR 45725) to implement provisions of Pub. L. 103-448, the Healthy Meals for Healthy Americans Act of 1994. Pub. L. 103-448 amended the NSLA to allow limited disclosure of children's eligibility information to certain programs and individuals. The comment period for the proposed rule closes on November 22, 2000. In accordance with the statute, the proposed rule would authorize disclosure, without parental/guardian consent, to persons directly connected with the administration or enforcement of:

(1) The NSLA or the Child Nutrition Act of 1966 (CNA) (42 U.S.C. § 1771 et seq. ) or a regulation issued under either of those Acts;

(2) A Federal education program;

(3) A State health or education program (other than Medicaid) administered by the State or local education agency;

(4) A Federal, State or local means-tested nutrition program with eligibility standards comparable to the National School Lunch Program (NSLP);

(5) The Comptroller General of the United States for audit and examination; and

(6) Certain law enforcement officials for investigating alleged program violations.

Pub. L. 103-448 specifically excluded disclosure of children's eligibility information, without consent, to a program under title XIX of the Social Security Act, i.e., Medicaid (42 U.S.C. 1396 et. seq.). Pub. L. 103-448 did not address disclosure of children's eligibility information to SCHIP, which was established in later Federal legislation. The Agricultural Risk Protection Act of 2000, Pub. L. 106-224, subsequently amended the NSLA to provide disclosure of children's eligibility information to Medicaid and SCHIP. This interim rule promulgates the regulations for Pub. L. 106-224.

FNS previously issued guidance that allows disclosure of eligibility information consistent with P.L. 103-448. Under that guidance, disclosure to Medicaid and SCHIP is allowed with parental/guardian consent. Please refer to the proposed rule published on July 25, 2000 at 65 FR 45725 for a discussion of the disclosure provisions under P.L. 103-448.

Section 242(c) of Pub. L. 106-224 makes the provisions of that law addressed in this rulemaking effective October 1, 2000 and section 263 requires that FNS promulgate regulations to implement the provisions as soon as practicable after the date of enactment without regard to the Administrative Procedure Act's notice and comment provisions at 5 U.S.C. § 553; the Statement of Policy of the Secretary of Agriculture effective July 24, 1971 (36 FR 13804) relating to notices of proposed rulemaking and public participation in rulemaking; and the Paperwork Reduction Act at 44 U.S.C. chapter 35. In addition, section 172 of Pub. L. 106-224 requires us to promulgate rules to carry out the Act and its amendments not later than 120 days after the date of enactment. For these reasons, we are not taking public comment prior to promulgation of this interim rule.

To benefit from the experiences of program operators and because the disclosure of eligibility information is a sensitive issue, FNS decided to issue this rule as an interim, rather than a final rule, in order to facilitate public comment. FNS intends to issue a final rule combining the proposed disclosure provisions implementing Pub. L. 103-448 and these interim disclosure provisions implementing Pub. L. 106-224 after consideration of the comments received on these rules.

As with the amendment to the NSLA made by Pub. L. 103-448, the new provisions pertaining to disclosure of children's eligibility information to Medicaid and SCHIP appear in the part of the NSLA that applies to the free and reduced price meal application process for the NSLP. However, based on FNS practices and policies dealing with past issues and the need for consistency among the Child Nutrition Programs, these regulations on the disclosure of free and reduced price meal or free milk eligibility information by determining agencies to Medicaid and SCHIP apply to all the Child Nutrition Programs—the NSLP, School Breakfast Program (SBP), Special Milk Program for Children (SMP), Child and Adult Care Food Program (CACFP), and camps and enrolled sites in the Summer Food Service Program (SFSP). Therefore, this rule amends the regulations for each of these programs. The various sections amended are listed following the discussion of each issue addressed by this rule. The minor wording differences necessary to accommodate the terminology for the specific programs are not addressed in the preamble. School food authorities, SMP child-care institutions, CACFP institutions, and SFSP sponsors are determining agencies and are collectively referred to as “program operators” in the preamble. Additionally, this approach is consistent with the July 25, 2000, proposed rule.

Disclosure. Any time information is revealed or used for a purpose other than for the purpose for which the information was obtained, it is a disclosure. This is true even when the same agency that obtained the information is the one wishing to use it for another purpose. The term “disclosure,” refers to access, release, or transfer of personal data about participants by means of print, tape, microfilm, microfiche, electronic communication or any other means. In this rule, the data would be individual children's free and reduced price eligibility status or other information obtained through the free and reduced price meal or free milk application or through direct certification.

Medicaid and SCHIP. Medicaid and SCHIP refers to the Federal and State funded health insurance programs under titles XIX and XXI of the Social Security Act, which provide free and low cost health insurance to needy children.

This interim rule will include the above definitions in the alphabetical listings at 7 CFR 215.2, 225.2, 226.2, and 245.2.

Section 9(b)(2)(C)(ii)(IV) of the NSLA, as amended by Pub. L. 106-224, specifies that individual children's eligibility information may be disclosed to Medicaid and SCHIP only if the State agency and program operators “elect” to do so. Both the State agency and program operator must agree to the disclosure. Since the disclosure provision applies to all the Child Nutrition Programs, in most cases, this would be the State agency and the school food authority or school, SFSP sponsor, or CACFP institution. This provision is included in §§ 215.13a(g)(1), 225.15(g)(1), 226.23(i)(1), 245.6(f)(1) of this interim rule. Additionally, as discussed later in this preamble, parents/guardians must be given the opportunity to elect not to have their information disclosed.

When both the State agency and program operators elect to disclose eligibility information for use by Medicaid/SCHIP and parents/guardians have not declined the disclosure, program operators may disclose children's eligibility information. In accordance with section 9(b)(2)(C)(iii)(IV) of the NSLA, program operators may disclose children's names, eligibility status (whether they are eligible for free or reduced price meals or free milk), and any other eligibility information obtained from the application for free and reduced price meals or free milk or through direct certification to persons directly connected with the administration of Medicaid or SCHIP. (Please note that for the Child and Adult Care Food Program and the Summer Food Service Program, children's eligibility information may only be disclosed to the extent that there are free and reduced price meal applications for these children.) This provision is included in §§ 215.13a(g)(2), 225.15(g)(2), 226.23(i)(2), and 245.6(f)(2).

The NSLA permits disclosure and use of program eligibility information specifically to “a person directly connected with the administration” of Medicaid or SCHIP for the purpose of identifying and seeking to enroll children in Medicaid or SCHIP. Persons directly connected with the administration of State Medicaid and SCHIP for purposes of disclosure of free and reduced price meal and free milk eligibility information are State employees and persons authorized under Federal and State Medicaid and SCHIP requirements to carry out initial processing of Medicaid or SCHIP applications or to make eligibility determinations for Medicaid or SCHIP. Initial processing of Medicaid or SCHIP applications includes assisting individuals to fill out the application, explaining requirements and similar activities. In addition to being authorized under Federal and State Medicaid requirements, persons directly connected with Medicaid or SCHIP administration must be designated by the Medicaid or SCHIP agency to receive Medicaid or SCHIP eligibility information. This may include employees of county health departments, county departments of human or social services, family service agencies or income maintenance agencies. This also may include persons under contract to the State health program to make eligibility determinations and enroll children in the State health insurance program. These entities and persons must have a formal relationship with the Medicaid or SCHIP agency to be directly connected with Medicaid or SCHIP administration.

The statute allows disclosure of children's eligibility information to identify children who may be eligible for one of these health insurance programs and to seek to enroll eligible children in the applicable program. The statute does not authorize disclosure to persons connected with Medicaid or SCHIP enforcement activities. Thus, Federal, State and local reviewers responsible for reviewing or auditing compliance with State Medicaid or SCHIP regulations may not have access to children's free and reduced price meal or free milk eligibility information under this rule.

In general, organizations and individuals assisting in Medicaid and SCHIP outreach activities are not authorized access to children's free and reduced price eligibility information. The intent is to limit disclosure of program eligibility information to those who have a “need to know” program eligibility information for identifying and seeking to enroll eligible children in Medicaid and SCHIP. Since States have flexibility in implementing Medicaid and SCHIP, FNS recommends that State agencies and determining agencies contact the Medicaid/SCHIP coordinator in their State to determine the persons or entities authorized and designated by Medicaid or SCHIP to receive eligibility information. A description of “a person directly connected” with State Medicaid or SCHIP administration is included in §§ 215.13a(g)(3), 225.15(g)(3), 226.23(i)(3), and 245.6(f)(3) of this rule.

FNS is concerned about maintaining the confidentiality of children's eligibility information that is maintained in a computerized data base. Procedures must be in place to ensure that only authorized individuals have access to children's eligibility information.

Many schools are now computerized, and individual student information is often part of a Statewide electronic database under the responsibility of the State's Department of Education. The information may also be part of a local school district database. Typically, these databases contain “directory information,” such as student's name, address, phone number, and “education records,” such as achievement test scores, grades, special education plans, and evaluations. The Department of Education has regulations restricting access to “education records,” including those on computerized systems. These regulations are found at 34 CFR Part 99.

Program operators should take note that “education records” do not include Child Nutrition Program eligibility information. Therefore, the Department of Education regulations do not extend to program eligibility information for the Child Nutrition Programs. Nor is compliance with the Department of Education confidentiality regulations sufficient to meet the confidentiality protections in the NSLA. Therefore, program operators, who may also be database managers, must ensure that to the extent that Child Nutrition Program eligibility information is kept together with other school records, controls are established and maintained to ensure that the program eligibility information is available only to authorized persons and used only for authorized purposes.

FNS is not proposing any specific methods to ensure compliance with the NSLA confidentiality provisions in these situations. However, FNS remains concerned about the extent of access to the databases, and ways to protect program eligibility information from disclosure and use beyond what is authorized by Congress. Since FNS experience in this area is limited, commenters are encouraged to provide their experiences with student databases in which access restrictions vary according to the sensitivity of the different data items in the database. An example would be a school district database where access to students' academic records is more restricted than is access to students' class schedules, addresses, and other common information. Comments on this subject will aid FNS in determining whether special controls are necessary in situations in which program eligibility information reside in the same database where other student information is maintained. While this rule would not forbid such arrangement, FNS wishes to emphasize that to comply with this rule, database managers, who may also be program operators, must restrict access to program eligibility information to only those individuals and uses authorized by statute and regulation.

Section 9(b)(2)(C)(iii)(IV) of the NSLA specifies that Medicaid and SCHIP agencies and health insurance program operators receiving children's free and reduced price meal or free milk eligibility information may only use that information to identify children that may be eligible for State Medicaid or SCHIP and to seek to enroll them in those programs. State agencies and program operators must include this restriction in the agreement with Medicaid or SCHIP officials discussed later in this preamble. This provision is added to § § 215.13a(g)(4), 225.15(g)(4), 226.23(i)(4), and 245.6(f)(4).

The statute and this regulation specify that children's eligibility information, when disclosed to Medicaid or SCHIP, must be used to identify and “seek to enroll” children in one of these health insurance programs. In actuality, it is unlikely that children will be automatically enrolled in Medicaid or SCHIP based on information from the free or reduced price application or obtained through direct certification, because Medicaid and SCHIP need additional information to enroll children. Rather, children's free and reduced price meal or free milk eligibility information will be used to facilitate Medicaid and SCHIP enrollment. There is concern that households may believe that by allowing their information to be disclosed to Medicaid and SCHIP, their children will be automatically enrolled in one of these health insurance programs without the household taking further action. Medicaid and SCHIP officials and program operators should work together to ensure that once households are identified as potentially eligible for Medicaid or SCHIP, households are aware that they must complete the Medicaid or SCHIP application process.

In accordance with section 9(b)(2)(C)(vi)(II)(aa) and (bb) of the NSLA, for any disclosures to State Medicaid and/or SCHIP, parents/guardians must be notified of the potential disclosure and given the opportunity to elect not to have their information disclosed. The notification must inform the parents/guardians that: (1) They are not required to consent to the disclosure; (2) the information, if disclosed, will be used to facilitate the identification and enrollment of eligible children in a health insurance program; and (3) their decision will not affect their children's eligibility for free and reduced price meals or free milk. The notification may be included in the letter/notice to parents/guardians that accompanies the free and reduced price meal or free milk application, on the application itself or in a separate but concurrent notice provided to parents/guardians. The notice must be given prior to the disclosure and parents/guardians must be given a reasonable time limit to respond. (A discussion about notifying households of potential disclosures of eligibility information for children who are determined eligible for free meals through direct certification is included below.) Only the parent or guardian who is a member of the household or family for purposes of the free and reduced price meal or free milk application, i.e., the parent/guardian included on the application, must be notified and given the option to decline the disclosure of eligibility information. In most cases of divorce or separation, this means the custodial parent or guardian. However, if custody is shared, the parents or guardians must decide who has primary custody for purposes of making application for the program. The parent or guardian having such custody would be the only person who must be notified and given the option to elect to decline the disclosure. In other words, by not declining to have their information disclosed to Medicaid/SCHIP, the parent/guardian is consenting to have their eligibility information shared. FNS is concerned about the personal financial data at stake. This information is unlike other student records that directly concern the education of the child, and in which both parents have a direct interest. The program eligibility information in these circumstances is associated with one parent or guardian, and FNS believes that only that parent or guardian should be given the option of electing whether or not to disclose their eligibility information. FNS recognizes that this is a difficult issue and is particularly interested in comments on this point.

Regardless of the document used to notify parents/guardians and to secure the consent/declination, officials must provide the household with adequate information for them to determine whether or not to allow the disclosure of their eligibility information. This rule would amend §§ 215.13a(g)(5), 225.15(g)(5), 226.23(i)(5), and 245.6(f)(5) to set the minimum standards for the notice of potential disclosure.

Section 9(b)(2)(C)(iii) of the NSLA authorizes the disclosure of participants' free and reduced price information obtained from a free and reduced price meal application or obtained through direct certification. As specified in § 245.6(b), direct certification is the process by which program operators determine program eligibility by directly communicating with the appropriate State or local agency to obtain documentation that an individual is a member of a food stamp household (or member of a household receiving benefits under the Food Distribution Program on Indian Reservations (FDPIR) in lieu of food stamps) or a member of a family receiving assistance under certain State programs for the Temporary Assistance for Needy Families (TANF). In the case of direct certification, the agency administering the Food Stamp Program, FDPIR or TANF, as appropriate, may add a notification/declination statement to the notice of eligibility for free meals or milk under the Child Nutrition Programs that is provided to the household as documentation of eligibility for free meals. The household would be asked to contact the program operator if they did not want their information disclosed to Medicaid or SCHIP. Another option is for the program operator to include the notification/declination statement on the notice of eligibility for free meals that the program operator provides to the households when the direct certification is accomplished by computer match. Regardless of the method chosen to notify households of the potential disclosure and to obtain their consent/declination, officials must provide households with adequate information to determine whether to disclose their information and adequate time for the household to respond.

The Privacy Act of 1974 (5 U.S.C. 552a note) requires that notice be given of the intended uses of social security numbers. Thus, if a State agency or program operator intends to disclose social security numbers, either through the disclosure provisions authorized in the NSLA or with specific parental consent, then section 7(b) of the Privacy Act of 1974 (5 U.S.C. 552a note) requires that notice of the planned uses of the social security number be given.

The easiest method is to include the planned uses of social security numbers in the Privacy Act notice currently required by §§ 225.15(f)(4)(iv), 226.23(e)(1)(ii)(F), and 245.6(a)(1), because a Privacy Act notice is already on the free and reduced price meal application. The only uses of social security numbers currently listed in the regulations and the prototype application are for the determination and verification of eligibility for program meals. Any State agency or program operator that plans to disclose all eligibility information, including the social security number, to Medicaid or SCHIP administrators or plans to use the number for purposes not specified in their Privacy Act notice must amend the Privacy Act notice to reflect this. State agencies and program operators are responsible for ensuring the adequacy of their Privacy Act notice, and FNS encourages them to consult with their legal counsel. The requirement regarding Privacy Act compliance is specified in §§ 215.13a(g)(6), 225.15(g)(6), 226.23(i)(6), and 245.6(f)(6) of this interim rule.

Currently, the regulations for the SMP do not include a Privacy Act notice. The addition of a Privacy Act notice to the SMP was proposed in the July 25, 2000 rule (65 FR 45725). To ensure Privacy Act compliance in that program, this rule adds a Privacy Act notice requirement for the SMP in child-care institutions. The Privacy Act notice requirement for the SMP in child-care institutions is added at § 215.13a(f).

This rule amends and simplifies current Privacy Act notice required in §§ 226.23(e) and 245.6(a). The revision to the Privacy Act notice on the free and reduced price application replaces the three sentences giving detailed descriptions of the potential use of the social security number for verification with a more general, simpler statement that the social security number will be used in the administration and enforcement of the program. This revision is intended to respond to concerns about the lengthy Privacy Act notice previously required by program regulations. This revision shortens the notice and reduces the amount of space it takes up on the application. An additional Privacy Act notice is required to be given before verification (for those programs subject to verification). That notice would continue to provide the more detailed description on the potential uses of social security numbers in verification. The sections revised are §§ 225.15(f)(4)(iv), 226.23(e)(1)(ii)(F), and 245.6(a)(1). This revision was proposed in the July 25, 2000 rule (65 FR 45725).

Section 9(b)(2)(C)(vi)(I) of the NSLA specifies that the determining agency must have a written agreement with the State or local agency or agencies administering Medicaid and/or SCHIP prior to disclosing children's free and reduced price meal or free milk eligibility information. At a minimum, the agreement must: (1) Identify the health insurance program or health agency receiving children's eligibility information; (2) describe the information that will be disclosed; (3) require the insurance program or health agency to use the eligibility information obtained; (4) specify that the information must only be used to identify children eligible for and to seek to enroll children in Medicaid or SCHIP; (5) describe how the information will be protected from unauthorized uses and disclosures; (6) describe the penalties for unauthorized disclosure; and (7) be signed by both the determining agency and the Medicaid/SCHIP program or agency receiving children's eligibility information. This provision is included in §§ 215.13a(g)(7), 225.15(g)(7), 226.23(i)(7), and 245.6(f)(7).

The NSLA establishes a fine of not more than $1000 or imprisonment of not more than 1 year, or both, for publishing, divulging, disclosing, or making known in any manner or extent not authorized by Federal law, any eligibility information. This includes the disclosure of eligibility information by one entity authorized under the statute to receive the information to any other entity, even if that entity would otherwise be authorized to receive the information directly from the determining agency, i.e., third party disclosures are prohibited. These penalties are described in §§ 215.13a(g)(8), 225.15(g)(8), 226.23(i)(8), and 245.6(f)(8) of this interim rule.

A State agency that elects to disclose children's free and reduced price meal or free milk information, with the agreement of the determining agency, must ensure that the determining agency: (1) Has a written agreement with the State or local agency or agencies administering health insurance programs for children under title XIX and XXI of the Social Security Act (42 U.S.C. 1396 et seq. and 1397aa et seq. ) that requires the health agencies to use children's free and reduced price meal or free milk eligibility information to seek to enroll children in those health insurance programs; and (2) notifies each household of the information that will be disclosed, that the information disclosed will be used only to seek to enroll children in Medicaid or the State Children's Health Insurance Program and provides each parent/guardian with an opportunity to elect not to have the information disclosed. Sections 215.13a(g)(9), 225.15(g)(9), 226.23(i)(9), and 245.6(f)(9) specify the State agency's responsibilities regarding disclosures.

FNS is amending the Child Nutrition Program regulations to permit the disclosure of program eligibility information to Medicaid and SCHIP consistent with the recent amendments to the NSLA made by P.L. 106-224. FNS' goal is to facilitate the enrollment of eligible children in those health insurance programs, without sacrificing the confidentiality of children's eligibility information.

Section 242(c) of Pub. L. 106-224 (7 U.S.C. 1421 note) makes the provisions of this rule effective on October 1, 2000. Further, section 263 of Pub. L. 106-224 directs the Department to implement these provisions without regard to the Administrative Procedure Act's notice and public comment provisions at 5 U.S.C. § 553. The Department is thus promulgating the provisions of this interim rule without prior notice or public comment. As a result, as of October 1, program administrators will be given the opportunity to disclose participant's program eligibility information to Medicaid and SCHIP to facilitate enrollment in those programs. The Department, however, is providing interested parties an opportunity to comment on the interim regulatory provisions during the public comment period and will consider comments submitted when finalizing this rule.

This rule has been determined to be significant and was reviewed by the Office of Management and Budget under Executive Order 12866.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes a requirement for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, the FNS generally prepares a written statement, including a cost-benefit analysis. This is done for proposed and final rules that have “Federal mandates” which may result in expenditures of $100 million or more in any one year by State, local, or tribal governments, in the aggregate, or by the private sector. When this statement is needed for a rule, section 205 of the UMRA generally requires the FNS to identify and consider a reasonable number of regulatory alternatives. It must then adopt the least costly, most cost-effective or least burdensome alternative that achieves the objectives of the rule.

This interim rule contains no Federal mandates of $100 million or more in any one year (under regulatory provisions of Title II of the UMRA) for State, local, and tribal governments or the private sector. Thus, this interim rule is not subject to the requirements of sections 202 and 205 of the UMRA.

This interim rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). Shirley R. Watkins, Under Secretary for Food, Nutrition and Consumer Services, has certified that this rule will not have a significant economic impact on a substantial number of small entities. By permitting access to certain eligibility information, this rule could reduce duplicative paperwork by certain agencies which serve low-income children and adults. The rule could streamline operations of those programs. The provisions of this rule also may enhance access to these programs by needy children. The Department of Agriculture does not anticipate any adverse fiscal impact resulting from implementation of this rulemaking. Although there may be some burdens associated with this rule, the burdens would not be significant and would be outweighed by the benefits of sharing of information.

The Special Milk Program, the Summer Food Service Program, and the Child and Adult Care Food Program are listed in the Catalog of Federal Domestic Assistance under Nos. 10.556, 10.559, and 10.558 respectively. These programs are subject to the provisions of Executive Order 12372, which requires intergovernmental consultation with State and local officials (7 CFR Part 3015, Subpart V, and final rule related notice at 48 FR 29115, June 24, 1983).

This interim rule has been reviewed under Executive Order 12988, Civil Justice Reform. It is intended to have preemptive effect with respect to any State or local laws, regulations or policies which conflict with its provisions or which would impede its full implementation. This rule is not intended to have retroactive effect unless that is specified in the Effective Date section of the preamble of the final rule. Before any judicial challenge to the provisions of this rule or the application of its provisions, all administrative procedures that apply must be followed. The only administrative appeal procedures relevant to this proposed rule are the hearings that FNS must provide for decisions relating to eligibility for free and reduced price meals and free milk (§ 245.7 for the NSLP, SBP, and SMP in schools; § 226.23(e)(5) for the CACFP).

In accordance with the authority provided under section 263 of Pub. L. 106-224, this rulemaking is made without regard to the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

This rule contains burdens that were included in the burden estimate in the proposed rule, Disclosure of Children's Eligibility Information, published on July 25, 2000, at 65 FR 45725. That rule proposed to allow the disclosure of children's eligibility information to various education, nutrition, and health programs authorized under Pub. L. 103-448. Additionally, under the proposed rule, officials may disclose children's eligibility to other programs, such as Medicaid and SCHIP, with parental consent.

Since many of the provisions in the proposed rule, mentioned above, and this interim rule are similar, such as taking agreements with persons or agencies receiving children's eligibility information and notifying households of potential disclosures, the Department plans to issue one final rule that responds to commenter concerns on the proposed rule and this interim rule. The Department will make any adjustments to the burden estimate in that final rule.

Executive Order 13132 requires Federal agencies to consider the impact of their regulatory actions on State and local governments. Where such actions have “federalism implications,” agencies are directed to provide a statement for inclusion in the preamble to the regulation describing the agency's considerations in terms of the three categories called for under section (6)(a)(B) of Executive Order 13132:

Prior to drafting this interim rule, we received input from State and local agencies at various times. Since the Child Nutrition Programs (CNP) are State administered, federally funded programs, our regional offices have informal and formal discussions with State and local officials on an ongoing basis regarding program implementation and performance. This arrangement allows State and local agencies to provide feedback that forms the basis for any discretionary decisions in this and other CNP rules. The provisions in this rule are primarily non-discretionary. Pub. L. 106-224 mandates that we promptly promulgate regulations without regard to the notice and comment provisions of 5 U.S.C. 553. However, because the disclosure of children's eligibility information is a sensitive issue, we are issuing this rule as an interim rule with a request for public comment.

State and local agencies are generally concerned about protecting the confidentiality of children's eligibility information. They are also concerned about the paperwork and financial burdens placed on food service to provide eligibility information to Medicaid and SCHIP officials.

The issuance of a regulation is required by Pub. L. 106-224. Prior to Pub. L. 106-224, program officials were permitted to disclose children's eligibility information to certain programs and individuals without parental consent. Medicaid and SCHIP were not included. Therefore, program officials had to obtain the consent of parents/guardians if they elected to disclose children's eligibility information with Medicaid and SCHIP. A proposed rule to allow the disclosure of eligibility information to these other programs was published on July 25, 2000 (64 FR 45725). In accordance with Pub. L. 106-224, this interim rule will allow the disclosure of children's eligibility information unless parents/guardian elect not to have their information disclosed to Medicaid and SCHIP. Certain other provisions, as specified in the statute, must also be met prior to disclosing information to Medicaid and SCHIP.

We believe that we adequately address the issue of State and local flexibility. We clarify that the disclosure of children's eligibility information to Medicaid is a State and local decision. They are not required to disclose children's eligibility information. However, we encourage State and local agencies to work with Medicaid and SCHIP officials to make the exchange of eligibility information as streamlined as possible. Additionally, FNS has issued prototype materials, such as a prototype agreement between program operators and an agency receiving eligibility information and a prototype notification to parents/guardians that their eligibility information may be disclosed unless the program operator is notified that they do not want their information disclosed. Additionally, the Department of Health and Human Services, the department that administers Medicaid and SCHIP, is preparing an administrative guidance on reimbursement for costs associated with Medicaid and SCHIP outreach and enrollment. Finally, we will consider all comments received on this rule when we draft the final rule.

a. Add a new paragraph (i-l) Disclosure ;

b. Add a new paragraph (k-l) Medicaid ; and

c. Redesignate paragraph (aa) Summer Food Service Program as paragraph (bb) Summer Food Service Program and add a new paragraph (aa) State Children's Health Insurance Program in its place.

The additions read as follows:

Section 301(c) of the FMIA (21 U.S.C. 661(c)) and section 5(c) of the PPIA (21 U.S.C. 454(c)) authorize the Secretary of Agriculture (Secretary) to designate a State as one in which the provisions of Titles I and IV of the FMIA and sections 1-4, 6-11, and 12-22 of the PPIA will apply to operations and transactions wholly within the State after the Secretary has determined that requirements at least “equal to” those imposed under the Acts have not been developed and effectively enforced by the State.

On August 18, 1972, the Secretary designated the State of Missouri under section 301(c) of the FMIA and section 5(c) of the PPIA as a State in which the Federal Government is responsible for providing meat and poultry inspection at eligible establishments and for otherwise enforcing the applicable provisions of the FMIA and the PPIA with regard to intrastate activities in the State.

In addition, on January 31, 1975, the Federal Government assumed the responsibility of administering the authorities provided for under sections 202 and 203 of the FMIA (21 U.S.C. 642 and 643) and sections 11(b) and (c) of the PPIA (21 U.S.C. 460(b) and (c)) regarding certain classes of operators of meat and poultry products in Missouri.

These designations were undertaken by the Secretary when he determined that the State of Missouri was not in a position to enforce requirements that are at least “equal to” the requirements of FMIA and PPIA enforced by the Federal Government.

The Director of Agriculture of the State of Missouri has advised FSIS that on January 1, 2001, the State of Missouri will be in a position to administer a State meat and poultry products inspection program that includes requirements at least “equal to” those imposed under the Federal meat and poultry products inspection program.

Section 301(c) of the FMIA and section 5(c) of the PPIA provide that whenever the Secretary of Agriculture determines that any designated State has developed and will enforce State meat and poultry products inspection requirements at least “equal to” those imposed by the Federal Government under the FMIA and the PPIA with regard to intrastate operations and transactions, the Secretary will terminate the designation of such State. The Secretary has determined that the State of Missouri has developed, and will enforce, such a State meat and poultry products inspection program in accordance with the applicable provisions of the FMIA and the PPIA.

Since it does not appear that public participation in this matter would make additional relevant information available to the Secretary under the administrative procedure provisions in 5 U.S.C. 553, it is found upon good cause that such procedure is impracticable and unnecessary.

This final rule is issued in conformance with Executive Order 12886 and has been determined not to be a major rule. It will not result in an annual effect on the economy of $100 million or more and will not adversely affect the economy or any segment of the economy. Because this final rule is not a significant rule under Executive Order 12866, it has not undergone review by the Office of Management and Budget.

The FSIS Administrator has determined that this action will not have a significant economic impact on a substantial number of small entities, as defined by the Regulatory Flexibility Act (Pub. L. 96-354; 6 U.S.C. 601). As stated above, the State of Missouri is assuming a responsibility, previously limited to the Federal Government, of administering the meat and poultry products inspection program for intrastate operations and transactions.

FSIS has considered the potential civil rights impact of this final rule on minorities, women, and persons with disabilities. Public involvement in all segments of rulemaking and policy development is important. Consequently, in an effort to better ensure that minorities, women, and persons with disabilities are aware of this rulemaking, FSIS will announce it and provide copies of this Federal Register publication in the FSIS Constituent Update.

FSIS provides a weekly Constituent Update, which is communicated via fax to more than 300 organizations and individuals. In addition, the update is available on-line through the FSIS web page located at http://fsis.usda.gov. The update is used to provide information regarding FSIS policies, procedures, regulations, Federal Register notices, FSIS public meetings, recalls, and any other types of information that could affect or be of interest to our constituents and shareholders. The constituent fax list consists of industry, trade, and farm groups, consumer interest groups, allied health professionals, and other persons who have requested to be included. Through these various channels, FSIS is able to provide information to a much broader and diverse audience. For more information and to be added to the constituent fax list, fax your request to (202) 720-5704.

This notice of final rulemaking concludes a regulatory action that is mandated under section 7 of the Energy Conservation Reauthorization Act of 1998 (ECRA), Pub. L. No. 105-388. ECRA adds section 312 to title III of the Energy Policy Act of 1992 (EPACT), 42 U.S.C. 13211-13219. Section 312 allows titles III and V fleets and covered persons, that are required to acquire certain annual percentages of alternative fueled vehicles, to use biodiesel fuel use credits to meet, in part, these acquisition requirements. (Although title IV is included as one of the titles covered in ECRA, this inclusion appears to be a drafting error since title IV has no mandated acquisition requirements for fleets and covered persons.) DOE is required to allocate one credit to fleets and covered persons for using, in certain vehicles, 450 gallons (or “qualifying volume”) of the biodiesel component of a motor fuel containing at least 20 percent biodiesel by volume.

Additionally, the vehicles in which the fuel is used must weigh more than 8,500 pounds gross vehicle weight rating. Fleets and covered persons must own or operate these vehicles and the biodiesel fuel must be used in these vehicles if the fleets and covered persons are to receive credits. Credits will be allocated only for the biodiesel fuel purchased after the enactment of ECRA, i.e., November 13, 1998. The legislation prohibits the allocation of biodiesel fuel use credits for the purchase of biodiesel when the biodiesel is used in alternative fueled vehicles that are utilized to satisfy the EPACT alternative fueled vehicle purchase requirements, or when biodiesel fuel use is required by Federal or State law. With the exception of biodiesel fuel providers, allocated credits can be used to satisfy up to 50 percent of a fleet's or covered person's alternative fueled vehicles requirements. For biodiesel fuel providers, biodiesel credits can satisfy up to 100 percent of the requirements.

On May 19, 1999, DOE issued an interim final rule (64 FR 27169) that added a new subpart H to DOE's Alternative Fuel Transportation Program rules at 10 CFR part 490. The interim final rule became effective on June 18, 1999. The interim final rule established procedures for fleets that are required to purchase alternative fueled vehicles under titles III and V of EPACT to meet these requirements, in part, through the use of biodiesel fuel use credits. With changes, this final rule adopts the interim final rule.

DOE received from 10 interested organizations comments on the interim final rule. Most commenters addressed essentially the same issues.

Five commenters all argued that there is no evidence that Congress intended to compel the use of biodiesel within the model year in which the biodiesel is purchased. It appears that the commenters wish to carry forward unused biodiesel to another model year or that they wish to sell excess purchases of biodiesel to other fleets. DOE believes that ECRA bases the allocation of biodiesel fuel use credits on biodiesel purchases. However, DOE points out that ECRA requires that the fuel must be purchased for use in the covered entities' vehicles to earn credits. Credits are earned when the fuel is purchased for use in the covered entities' vehicles, even though the fuel may be used at a later date. On this issue, DOE explained in the Preamble that “[t]he use of biodiesel fuel credit to serve as the acquisition of one alternative fueled vehicle is restricted to the model year, or the fiscal year in the case of Federal fleets, in which the biodiesel is purchased and cannot be carried forward like alternative fueled vehicle acquisition credits generated under Subpart F.” DOE reinforced this statement by citing language from the House of Representatives Commerce Committee Report 105-727. That report provided that credits “may only be used by the fleet or covered person that earned the credits and only in the year that the credit is issued, so they cannot be traded or banked.” H.R. Rep. No. 727, 105th Cong., 2d Sess., at 20 (1998). (See also the discussion under section 490.705.)

Three commenters submitted similar comments on language contained in section 490.703 (b). That paragraph prohibits the allocation of biodiesel fuel use credits if: (1) the biodiesel is used in an alternative fueled vehicle; or (2) if the biodiesel fuel use is required by Federal or State law. They argue that there are certain circumstances where a covered fleet may want to acquire an alternative fueled vehicle (AFV) as a result of a local, State or Federal incentive program or policy, unrelated to EPACT AFV purchase requirements. Allowing fleets to count biodiesel fuel used in AFVs, provided those AFVs are not used to meet EPACT AFV requirements, according to one commenter, would increase the flexibility of covered fleets to integrate biodiesel fuel into their fuel mix. This commenter recommends that DOE amend the language in section 490.703(b) in two ways. First, that DOE clarify that the prohibition against allocating a credit for biodiesel fuel use in AFVs be restricted to only AFVs used to meet EPACT AFV purchase requirements. DOE agrees with this comment and has integrated it into the final regulatory language.

Second, this commenter suggests that DOE delete the prohibition against allocating a credit where biodiesel fuel use is also used to meet other Federal or State requirements. DOE does not agree with this comment. The statutory language in ECRA states quite clearly that no credit can be allocated if the fuel is required by Federal or State law. This prohibition appears to be intended to prevent fleets from meeting both EPACT and other Federal and State requirements through the same biodiesel fuel use.

Eight commenters argued that the procedures and documentation requirements of section 490.704 should include only that information that is necessary to support the verification of the biodiesel fuel purchase. They claim that asking for information on vehicle make and model, vehicle model year and vehicle identification number does not relate to fuel purchases of biodiesel and could make reporting more onerous. Providing such information would impose an unnecessary burden on the reporting entities. DOE agrees that requesting specific vehicle data may be burdensome, and believes that asking for such data may reduce the attractiveness of the biodiesel fuel use credit option. DOE has, therefore, revised the Annual Alternative Fuel Vehicle Acquisition Report For State Government and Alternative Fuel Provider Fleets (DOE/OTT/101 form). The revised form only requests that fleets claiming the biodiesel fuel use credit submit model year specific biodiesel purchases and that such fleets maintain records of those purchases for three years. The updated form is posted on the DOE's Office of Transportation Technologies website at http://www.ott.doe.gov/credits. It can also be obtained by calling the National Alternative Fuels Hotline at 1-800-423-1DOE.

Most commenters argued that the language in Sections 705(a) and (b) is too narrow in limiting the biodiesel fuel use credit to fleets covered by section 490.201, section 490.302, section 490.307 and title III of EPACT. A consequence of narrowing the language, according to these commenters, is that the biodiesel fuel use credit regulation may not apply to certain private and municipal fleets if DOE adds these fleets to the Alternative Fuel Transportation Program. These commenters recommend expanding the regulatory language so that it applies to fleets or covered persons identified in EPACT titles III and V, rather than the specific sections in the regulation. DOE believes that the current regulatory language is appropriate. Specifically, DOE noted in the Preamble that these fleets would be covered if DOE decides to include them under this subpart in the Alternative Fuel Transportation Program. Section 490.701 also acknowledges that Title V fleets are covered under this subpart. However, DOE recognizes that the rule language could have been clearer. Therefore the language in sections 705(a) and 705(b) has been amended to include references only to EPACT titles III and V.

Seven commenters argued that section 490.705(a) should not restrict the allocation of a biodiesel fuel use credit to the model year in which it is generated. They also contended that fleets should be able to trade excess credits to other covered fleets or bank excess credits for future model years. One commenter asserts that this limitation will prevent over compliance and reduce the likelihood of achieving higher volumes and economies of scale in biodiesel production. Six commenters meanwhile, claim that DOE's reliance on the House of Representatives Commerce Committee Report 105-727 for this restriction is misplaced. They contend that this is not the intent of Congress, and that the restriction would have an adverse impact on the production, sale and use of biodiesel.

Although DOE respects the commenters' views, DOE has not revised section 490.705. We believe that both the statutory language and the House of Representatives Commerce Committee Report support the restriction. Section 312(b)(1) of EPACT, as amended by ECRA, declares that a credit is to be allocated in the year in which the purchase of a qualifying volume of biodiesel is made. Furthermore, section 312(c) states that a credit under this section shall not be considered a credit as defined by section 508 of EPACT. DOE believes that this statutory view is supported by the House of Representatives Commerce Committee Report 105-727. It stated that biodiesel fuel use credits “may only be used by the fleet or covered person that earned the credits and only in the year the credit is issued, so they cannot be traded or banked.”  1 For these reasons, the rule cannot allow trading or banking of biodiesel fuel use credits. To avoid future questions on this issue, DOE has added to this section a new paragraph (d). Paragraph (d) specifically speaks to this prohibition.

One commenter suggested that DOE annually publish in the Federal Register the “qualifying volume,” which is the amount of biodiesel purchases required to be allocated one biodiesel fuel use credit. As reflected in section 490.707, section 312(d) gives DOE authority, via rulemaking, to increase the qualifying volume. Since the qualifying volume is set at 450 gallons and cannot be changed except via a rulemaking process, DOE sees no reason to annually publish the qualifying volume in the Federal Register . Thus, DOE has not revised this section. Interested parties can be assured that the qualifying volume will stay at 450 gallons, unless DOE commences a rulemaking to increase it. If this happens, DOE will notify the public via a Federal Register notice. DOE will provide ample time and opportunity for the public to submit comments.

Today's regulatory action has been determined not to be a “significant regulatory action” under Executive Order 12866, “Regulatory Planning and Review,” 58 FR 51735 (October 4, 1993). Accordingly, this rulemaking has not been reviewed by the Office of Information and Regulatory Affairs of the Office of Management and Budget.

Executive Order 13132 (64 FR 43255, August 10, 1999) requires agencies to develop an accountable process to ensure meaningful and timely input by State and local officials in the development of regulatory policies that have “federalism implications.” Policies that have federalism implications are defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” On March 14, 2000, DOE published a statement of policy describing the intergovernmental consultation process it will follow in the development of such regulations (65 FR 13735). DOE has examined today's rule and determined that it does not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. No further action is required by the Executive Order.

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. , requires preparation of an initial regulatory flexibility analysis for every rule for which the law requires publication of a general notice of proposed rulemaking unless the agency certifies that the rule, if promulgated, will not have a significant economic impact on a substantial number of small entities. The Regulatory Flexibility Act's requirements do not apply to this final rule because a general notice of proposed rulemaking was not required by law. Accordingly, DOE did not prepare a regulatory flexibility analysis for this rule.

The Department has determined that this rule is covered by categorical exclusion in paragraph A5 to subpart D, 10 CFR part 1021. Accordingly, neither an environmental assessment nor an environmental impact statement is required.

This final rule contains a collection of information that the Office of Management and Budget (OMB) reviews under the Paperwork Reduction Act of 1995. The Paperwork Reduction Act of 1995 (Pub. L. 104-13, 44 U.S.C. Chapter 35) requires agencies to submit information collection requests for OMB review and approval. Accordingly, DOE submitted to OMB the interim final rule. DOE sought public comments on: (1) Whether the proposed collection of information is necessary, (2) the accuracy of DOE's estimate of the burden of the proposed information collection, (3) ways to enhance the quality, utility, and clarity of the information to be collected, and (4) ways to minimize the burden of the collection of information on those who choose to respond.

As mentioned in this rule's Preamble, several entities submitted comments recommending that DOE only require information that is necessary to verify the biodiesel fuel purchase. In particular, they contended that DOE should not require information on vehicle make and model, vehicle model year and vehicle identification number. They opined that this information does not relate to fuel purchases of biodiesel and would impose an unnecessary burden on the reporting entities. DOE incorporated these recommendations into its information collection request to OMB.

On October 25, 1999, DOE issued a Federal Register notice (64 FR 57445) that announced that DOE had submitted to OMB a proposed information collection request for the collection of biodiesel purchase data from fleets participating in DOE's Alternative Fuel Transportation Program. No additional comments were received in response to the October 25, 1999, Federal Register notice. During the OMB review period, DOE issued interim reporting guidance and placed that guidance on DOE's Office of Transportation Technologies website at http://www.ott.doe.gov/credits.

On February 2, 2000, OMB approved the biodiesel data collection and revised the Annual Alternative Fuel Vehicle Acquisition Report For State Government and Alternative Fuel Provider Fleets (DOE/OTT/101 form, approved under OMB Control No. 1910-5101). Fleets claiming the biodiesel fuel use credit must submit to DOE model year specific biodiesel purchases and maintain records of those purchases for three years. The updated form is posted on the DOE's Office of Transportation Technologies website at http://www.ott.doe.gov/credits or can be obtained by calling the National Alternative Fuels Hotline at 1-800-423-1DOE.

With respect to the review of existing regulations and the promulgation of new regulations, section 3(a) of Executive Order 12988, “Civil Justice Reform,” 61 FR 4729 (February 7, 1996) imposes on executive agencies the general duty to adhere to the following requirements: (1) Eliminate drafting errors and ambiguity; (2) write regulations to minimize litigation; and (3) provide a clear legal standard for affected conduct rather than a general standard and promote simplification and burden reduction. Section 3(b) of Executive Order 12988 specifically requires that executive agencies make every reasonable effort to ensure that the regulation: (1) Clearly specifies the preemptive effect, if any; (2) clearly specifies any effect on existing Federal law or regulation; (3) provides a clear legal standard for affected conduct, while promoting simplification and burden reduction; (4) specifies the retroactive effect, if any; (5) adequately defines key terms; and (6) addresses other important issues affecting clarity and general draftsmanship under any guidelines issued by the Attorney General. Section 3(c) of Executive Order 12988 requires executive agencies to review regulations in light of applicable standards in section 3(a) and section 3(b) to determine whether they are met or it is unreasonable to meet one or more of them. DOE has completed the required review and determined that, to the extent permitted by law, this final rule meets the relevant standards of Executive Order 12988.

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) requires each Federal agency to prepare a written assessment of the effects of any Federal mandate in a proposed or final agency rule that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million in any one year. The Act also requires a Federal agency to develop an effective process to permit timely input by elected officers of State, local, and tribal governments on a proposed “significant intergovernmental mandate.” Additionally, it requires an agency plan for giving notice and opportunity for timely input to potentially affected small governments before establishing any requirements that might significantly or uniquely affect small governments. The final rule published today does not contain any Federal mandate, so these requirements do not apply.

As required by 5 U.S.C. 801, DOE will report to Congress the promulgation of this rule prior to its effective date. The report will state that it has been determined that the rule is not a “major rule” as defined by 5 U.S.C. 801(2).

Pursuant to the authority of sections 10(b), 13, 14, 19, et al., of the Federal Reserve Act, the Board has amended its Regulation A (12 CFR part 201) to incorporate changes in discount rates on Federal Reserve Bank extensions of credit. The discount rates are the interest rates charged to depository institutions when they borrow from their district Reserve Banks.

The “basic discount rate” is a fixed rate charged by Reserve Banks for adjustment credit and, at the Reserve Banks' discretion, for extended credit for up to 30 days. In decreasing the basic discount rate from 6.0 percent to 5.5 percent, the Board acted on requests submitted by the Boards of Directors of the twelve Federal Reserve Banks. The new rate of 5.5 percent was effective for all twelve Reserve Banks on the dates specified below. (Seven of the twelve Reserve Banks reduced the basic discount rate in two steps, from 6.0 percent to 5.75 percent, then from 5.75 percent to 5.5 percent, as specified in the footnote to § 201.51 of revised Regulation A.) The 50-basis-point decrease in the discount rate was associated with a 50-basis-point decrease in the federal funds rate approved by the Federal Open Market Committee.

These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating.

Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 605(b)), the Board certifies that the change in the basic discount rate will not have a significant adverse economic impact on a substantial number of small entities. The rule does not impose any additional requirements on entities affected by the regulation.

The provisions of 5 U.S.C. 553(b) relating to notice and public participation were not followed in connection with the adoption of the amendment because the Board for good cause finds that delaying the change in the basic discount rate in order to allow notice and public comment on the change is impracticable, unnecessary, and contrary to the public interest in fostering price stability and sustainable economic growth.

The provisions of 5 U.S.C. 553(d) that prescribe 30 days prior notice of the effective date of a rule have not been followed because section 553(d) provides that such prior notice is not necessary whenever there is good cause for finding that such notice is contrary to the public interest. As previously stated, the Board determined that delaying the changes in the basic discount rate is contrary to the public interest.

What events have caused this AD? The Direction Geénérale de l'Aviation Civile (DGAC), which is the airworthiness authority for France, recently notified FAA that an unsafe condition may exist on certain Socata Model TBM 700 airplanes. The DGAC reports two occurrences on Socata Model TBM 700 airplanes of abnormal venting conditions of the wing fuel tank.

One occurrence was where an airplane experienced leaking during refueling. Inspection revealed the wing skin had come apart from the rib breaking the sealer, allowing the fuel to leak.

Another reported occurrence was in-flight where the pilot saw a wing skin deformation. These occurrences are caused by low pressure resulting from a misrouted fuel tank air vent valve hose and the fuel tank vent not operating.

What are the consequences if the condition is not corrected? This condition, if not corrected, could result in severe handling problems or reduced structural capability. Continued operation with such structural deformation or handling problems could result in loss of control of the airplane.

Is there service information that applies to this subject? Socata has issued Service Bulletin SB 70-088, dated November 2000. This service bulletin includes procedures for:

What action did DGAC take? The DGAC classified this service bulletin as mandatory and issued French AD T2000-545(A), dated December 20, 2000, to ensure the continued airworthiness of these airplanes in France.

Was this in accordance with the bilateral airworthiness agreement? These airplane models are manufactured in France and are type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement.

In carrying out this bilateral airworthiness agreement, the DGAC has kept FAA informed of the situation described above.

What has FAA decided? The FAA has examined the findings of the DGAC; reviewed all available information, including the service information referenced above; and determined that:

What does this AD require? This AD requires you to do the actions previously specified in accordance with Socata Service Bulletin SB 70-088, dated November 2000.

Will I have the opportunity to comment prior to the issuance of the rule? Because the unsafe condition described in this document could result in structural failure with possible loss of control of the airplane, FAA finds that notice and opportunity for public prior comment are impracticable. Therefore, good cause exists for making this amendment effective in less than 30 days.

How do I comment on this AD? Although this action is in the form of a final rule and was not preceded by notice and opportunity for public comment, we invite your comments on the rule. You may send whatever written data, views, or arguments you choose. You need to include the rule's docket number and send three copies of your comments to the address specified under the caption ADDRESSES . We will consider all comments received by the closing date specified above. We may change this rule in light of comments received. Factual information that supports your ideas and suggestions is extremely helpful in evaluating the effectiveness of the AD action and determining whether we need to take additional rulemaking action.

Are there any specific portions of the AD I should pay attention to? The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of the rule that might require a change to the rule. You may look at all comments we receive. We will file a report in the Rules Docket that summarizes each FAA contact with the public that concerns the substantive parts of this proposal.

We are reviewing the writing style we currently use in regulatory documents, in response to the Presidential memorandum of June 1, 1998. That memorandum requires federal agencies to communicate more clearly with the public. We are interested in your comments on whether the style of this document is clear, and any other suggestions you might have to improve the clarity of FAA communications that affect you. You can get more information about the Presidential memorandum and the plain language initiative at http://www.plainlanguage.gov.

How can I be sure FAA receives my comment? If you want us to acknowledge the receipt of your comments, you must include a self-addressed, stamped postcard. On the postcard, write “Comments to Docket No. 2000-CE-82-AD.” We will date stamp and mail the postcard back to you.

Does this AD impact various entities? These regulations will not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, FAA has determined that this final rule does not have federalism implications under Executive Order 13132.

Does this AD involve a significant rule or regulatory action? The FAA has determined that this regulation is an emergency regulation that must be issued immediately to correct an unsafe condition in aircraft, and is not a significant regulatory action under Executive Order 12866. It has been determined further that this action involves an emergency regulation under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979). If it is determined that this emergency regulation otherwise would be significant under DOT Regulatory Policies and Procedures, a final regulatory evaluation will be prepared and placed in the Rules Docket (otherwise, an evaluation is not required). A copy of it, if filed, may be obtained from the Rules Docket.

The FAA published this direct final rule with a request for comments in the Federal Register on October 24, 2000 (65 FR 63544). The FAA uses the direct final rulemaking procedure for a non-controversial rule where the FAA believes that there will be no adverse public comment. This direct final rule advised the public that no adverse comments were anticipated, and that unless a written adverse comment, or a written notice of intent to submit such an adverse comment, were received within the comment period, the regulation would become effective on march 22, 2001. No adverse comments were received, and thus this notice confirms that this direct final rule will become effective on that date.

On July 25, 2000 DEA published an interim rule with request for comment (65 FR 45712) amending 21 CFR 1306.11(g) to clearly articulate that prescriptions for Schedule II narcotic substances for patients enrolled in hospice care certified by Medicare under Title XVIII or licensed by the state, regardless of whether the patient resides in a hospice facility or other care setting, may be transmitted by facsimile. This final rule makes the clarification permanent.

Section 1306.11(g) of the regulations originally provided that a pharmacy could dispense a Schedule II narcotic substance pursuant to a prescription transmitted to the pharmacy via facsimile for a patient residing in a hospice certified by Medicare under Title XVIII or licensed by the state. The use of the language “residing in a hospice certified by Medicare under Title XVIII or licensed by the state” was perceived by the regulated industry as requiring that the patient reside in a hospice facility to the exclusion of other care settings, such as home hospice care. DEA regulations were meant to cover all patients enrolled in hospice programs certified by Medicare under Title XVIII or licensed by the state, regardless of where the patient resides.

The interim rule amended Section 1306.11(g) to refer to “* * * a patient enrolled in a hospice care program certified and/or paid for by Medicare under Title XVIII or a hospice program which is licensed by the state” to clarify that prescriptions for Schedule II narcotic substances for patients enrolled in recognized hospice programs, regardless of where the patients reside, may be transmitted via facsimile.

No comments were submitted regarding this interim rulemaking. Accordingly, the interim rule amending 21 CFR part 1306, which was published in the Federal Register on July 25, 2000, at 65 FR 45712 is adopted as a final rule.

The Deputy Assistant Administrator hereby certifies that this rulemaking has been drafted in a manner consistent with the principles of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). It will not have a significant economic impact on a substantial number of small business entities. This rulemaking clarifies the regulations regarding the facsimile transmission of prescriptions for Schedule II narcotic substances for patients enrolled in hospice programs.

The Deputy Assistant Administrator further certifies that this rulemaking has been drafted in accordance with the principles in Executive Order 12866, Section 1(b). DEA has determined that this is not a significant rulemaking action. This rulemaking clarifies the regulations regarding the facsimile transmission of prescriptions for Schedule II narcotic substances for patients enrolled in hospice programs. Therefore, this action has not been reviewed by the Office of Management and Budget.

This regulation meets the applicable standards set forth in Sections 3(a) and 3(b)(2) of Executive Order 12988 Civil Justice Reform.

This rulemaking does not preempt or modify any provision of state law; nor does it impose enforcement responsibilities on any state; nor does it diminish the power of any state to enforce its own laws. Accordingly, this rulemaking does not have federalism implications warranting the application of Executive Order 13132.

This rule will not result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions were deemed necessary under the provisions of the Unfunded Mandates Reform Act of 1995.

This rule is not a major rule as defined by section 804 of the Small Business Regulatory Enforcement Fairness Act of 1996. This rule will not result in an annual effect on the economy of $100,000,000 or more; a major increase in costs or prices; or significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based companies to compete with foreign-based companies in domestic and export markets.

The Drug Enforcement Administration makes every effort to write clearly. If you have suggestions as to how to improve the clarity of this regulation, call or write Patricia M. Good, Chief, Liaison and Policy Section, Office of Diversion Control, Drug Enforcement Administration, Washington, DC 20537, telephone (202) 307-7297.

The interim rule amending 21 CFR part 1306, which was published in the Federal Register on July 25, 2000, at 65 FR 45712, is adopted as a final rule without change.

On March 9, 1998, the IRS issued Announcement 98-18 (1998-9 IRB 44) requesting comments relating to the tax issues for U.S. taxpayers operating, investing, or otherwise conducting business in a currency that is converting to the euro. Numerous comments were received. After consideration of the comments, and in order to provide immediate guidance, the Treasury and the IRS published in the Federal Register temporary regulations (63 FR 40366) and a notice of proposed rulemaking by cross-reference to the temporary regulations (63 FR 40383) on July 29, 1998. No public hearing was held in conjunction with the notice of proposed rulemaking because no taxpayers requested to speak at the hearing.

In the notice of proposed rulemaking, the Treasury and The IRS requested comments with respect to certain additional issues. Two comments were received in connection with the request for comments and are discussed in greater detail below.

The temporary regulations provide rules relating to U.S. taxpayers operating, investing, or otherwise conducting business in the currencies of countries that replace their national currencies (legacy currencies) with a single, multinational currency called the euro. Thus, a legacy currency would include former currencies of the eleven countries that adopted the euro in 1999 as well as the currency of a country after it adopts the euro at some later date. The temporary regulations generally provide guidance relating to the circumstances under which the euro conversion creates a realization event with respect to instruments and contracts denominated in a legacy currency, and the circumstances under which the euro conversion constitutes a change in functional currency for a qualified business unit (QBU or QBUs, as the case may be) whose functional currency is a legacy currency, and certain consequences thereof. The temporary regulations published in the Federal Register on July 29, 1998, are finalized substantially as proposed. See the preamble to the temporary regulations for an explanation of the provisions of those regulations.

As noted above, two comments were received in connection with the publication of the temporary regulations and the notice of proposed rulemaking. One comment addressed the effect of the euro conversion to a corporation that has significant numbers of legacy currency transactions but has a non-legacy currency as its functional currency. For example, a corporation may have a non-legacy currency as its functional currency because its economic environment reflected more significant activities denominated in such currency ( e.g., the U.S. dollar or the Swiss franc) relative to any single legacy currency. However, given the aggregation of the individual legacy currencies into the euro, the currency of the corporation's economic environment in which a significant part of its activities are conducted is the euro. The commenter suggested that, in such circumstances, the corporation should be allowed to change its functional currency to the euro automatically.

In response to the comment, the regulation provides a new rule in which a QBU that uses a non-legacy currency as its functional currency may change its functional currency to the euro provided that the euro is a currency of the economic environment in which a significant part of the QBU's activities are conducted, the QBU maintains its books and records in the euro after conversion, and the QBU is not required to use the dollar as its functional currency. The change is deemed to be made with the consent of the Commissioner if the change is made within the period set forth in § 1.985-8(b)(2). A QBU changing its functional currency under this new rule is required to make the change in method of accounting adjustments under § 1.985-5. Treasury and the IRS believe that the rules of § 1.985-5 appropriately apply to this circumstance because the change in functional currency is not an involuntary change of the same nature as a QBU whose functional currency is a legacy currency.

The second comment suggested that the temporary regulations do not provide clear guidance in the case where, prior to conversion, the functional currency of a taxpayer and one of its QBU branches is the same legacy currency, and either the taxpayer or its QBU branch converts to the euro as its functional currency in a taxable year prior to the conversion of the other. The comment noted that the temporary regulations presume that the taxpayer and its branch have a different functional currency, but do not address instances where they have the same functional currency. The comment recommended that the regulations provide rules that require calculation of section 987 gain or loss during the period in which the taxpayer and its branch have different functional currencies. The recommendation is not adopted because section 987 currency gain or loss should not arise when a taxpayer and its branch use the same legacy currency as their functional currencies even if each adopts the euro as its functional currency in different years.

Finally, the notice of proposed rulemaking requested comments regarding the treatment of section 988 transactions that are held by euro functional currency QBUs and that are denominated in a currency that is replaced by the euro in the future. While no comments were received, Treasury and the IRS believe that rules relating to this issue should be clarified. Accordingly, § 1.985-8(d) provides that the principles of § 1.985-8(c)(3) apply in this context. Under this rule, legacy currency transactions generally continue to be treated as section 988 transactions and the principles of section 988 apply. Further, the principles provided in § 1.985-8(c)(3)(iii) and (iv) continue to apply to currency and accounts payable and receivable, respectively.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the final rule does not impose a collection of information on small entities, the provisions of the Regulatory Flexibility Act do not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

The principal authors of these final regulations are John W. Rogers III of the Office of the Associate Chief Counsel (International) and Thomas Preston of the Office of Associate Chief Counsel (Financial Institutions and Products). Other personnel from the IRS and Treasury Department also participated in their development.

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1650. Responses to this collection of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The estimated annual burden per respondent and/or recordkeeper is 15 minutes.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Section 460, which was enacted by section 804 of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2085, 2358-2361), generally requires a taxpayer to determine the taxable income from a long-term contract using the percentage-of-completion method. Section 460 was amended by section 10203 of the Omnibus Budget Reconciliation Act of 1987, Public Law 100-203 (101 Stat. 1330, 1330-394); by sections 1008(c) and 5041 of the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342, 3438-3439 and 3673-3676); by sections 7621 and 7811(e) of the Omnibus Budget Reconciliation Act of 1989, Public Law 101-239 (103 Stat. 2106, 2375-2377 and 2408-2409); by section 11812 of the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508 (104 Stat. 1388, 1388-534 to 1388-536); by sections 1702(h)(15) and 1704(t)(28) of the Small Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1755, 1874, 1888); and by section 1211 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788, 998-1000).

Section 460(h) directs the Secretary to prescribe regulations to the extent necessary or appropriate to carry out the purpose of section 460, including regulations to prevent a taxpayer from avoiding section 460 by using related parties, pass-through entities, intermediaries, options, and other similar arrangements.

On May 5, 1999, the IRS and Treasury Department published a notice of proposed rulemaking (64 FR 24096 [REG-208156-91, 1999-22 I.R.B. 11]) relating to section 460. Comments responding to the notice were received, and a public hearing was scheduled for September 14, 1999.

The IRS and Treasury Department received eleven comment letters concerning the notice of proposed rulemaking. After considering the comments contained in these letters, the IRS and Treasury Department adopt the proposed regulations as revised by this Treasury decision. The comments and revisions are discussed below.

Section 460 generally requires the income from a long-term contract to be determined using the percentage-of-completion method based on a cost-to-cost comparison (PCM). However, the income from exempt construction contracts still may be determined using the completed-contract method (CCM), the exempt-contract percentage-of-completion method (EPCM), or any other permissible method. Contracts that are not long-term contracts must be accounted for using a permissible method of accounting other than a long-term contract method ( i.e., a method other than the PCM, the CCM, or the EPCM). See section 446 and the regulations thereunder.

One commentator suggested that the exceptions to the mandatory use of the PCM included in the proposed regulations be expanded to include “any portion of the long-term manufacturing contract for which no payment for the manufacture of the subject matter of the contract is required to be made before the manufacture of the item is completed.” The exceptions contained in the proposed regulations were specifically provided by the statute and the statute does not include the suggestion made by the commentator. Thus, the IRS and Treasury Department did not adopt this suggestion.

Under section 460(f), “long-term contract” generally means any contract for the building, installation, construction (construction), or the manufacture, of property if the contract is not completed within the taxable year the taxpayer enters into the contract (contracting year). However, a manufacturing contract is not a long-term contract unless it involves the manufacture of (1) a unique item of a type that is not normally included in the finished goods inventory of the taxpayer or (2) an item normally requiring more than 12 calendar months to complete, regardless of the duration of the contract.

Continuing the policy established in Notice 89-15 (1989-1 C.B. 634), the proposed regulations provide that it is not relevant whether the customer has title to, control over, or risk of loss with respect to the property. One commentator suggested that the final regulations should not retain the rule that requires a contractor to ignore title and risk-of-loss issues relative to the applicability of section 460 because a contractor has little freedom to restructure a contract to “construct” into a contract to “sell.” The IRS and Treasury Department did not adopt this suggestion because we believe that a contract's classification should be based on the performance required of the taxpayer under the contract regardless of whether that contract otherwise would be classified as a sales contract or a construction or manufacturing contract. Moreover, the IRS and Treasury Department continue to believe that the rule in the proposed regulations is necessary to prevent a taxpayer from circumventing section 460 by structuring a construction contract to resemble a sales contract without changing the taxpayer's obligations under the contract. Another commentator asked whether a contract is subject to section 460 if it requires the taxpayer to manufacture or construct property in order to fulfill its contractual obligation but the property is never delivered to the customer ( e.g. , a research contract for test results). Again, the IRS and Treasury Department believe that a contract's classification should depend upon the performance required of the taxpayer under the contract. Thus, the final regulations clarify that it is irrelevant whether title in the property manufactured or constructed under the contract is delivered to the customer.

The proposed regulations provide that a contract is not a construction contract if it requires the taxpayer to provide land to the customer and the estimated total allocable contract costs attributable to the taxpayer's construction activities are less than 10 percent of the contract's total contract price. One commentator asked for clarification concerning whether the estimated total allocable contract costs attributable to the taxpayer's construction activities includes the cost of the land provided under the contract. The final regulations clarify that the cost of this land is not an allocable contract cost when the taxpayer determines whether the cost of its construction activities is less than 10 percent of the contract's total contract price.

The proposed regulations provide that a long-term contract is completed in the earlier taxable year (completion year) that: (1) The customer uses the subject matter of the contract (other than for testing) and at least 95 percent of the total allocable contract costs attributable to the subject matter have been incurred by the taxpayer; or (2) the subject matter of the contract is finally completed and accepted. To the extent that the “customer-use” rule requires a taxpayer to treat a contract as completed before final completion and acceptance have occurred, the proposed regulations explicitly adopt a rule different from that considered in Ball, Ball and Brosamer, Inc. v. Commissioner, 964 F.2d 890 (9th Cir. 1992), aff'g T.C. Memo. 1990-454.

Some commentators argued against having a rule that will declare a contract completed earlier than under the finally-completed-and-accepted standard illustrated in Ball. Some commentators also argued that the customer-use rule is confusing to subcontractors because it is unclear whether a subcontractor's “customer” is the general, or “prime,” contractor or the ultimate owner of the property. On the other hand, one commentator asked for a bright-line standard for completion and suggested, among other possibilities, that completion occur when 95 percent of the estimated costs have been incurred.

The IRS and Treasury Department continue to believe that a contract is complete for all practical purposes when the customer uses the subject matter of that contract and the taxpayer has only five percent or less of the total allocable contract costs remaining to be incurred. Delaying a contract's completion beyond this point, as the Tax Court permitted in Ball, does not reflect the substance of the transaction and could encourage the use of formalities to delay a contract's completion unreasonably. Thus, the final regulations do not substantively change the customer-use rule contained in the proposed regulations. However, the final regulations clarify that a subcontractor's customer is the general contractor.

Several commentators expressed concern that the customer-use rule contained in the proposed regulations will create additional administrative burdens for taxpayers using the PCM because they often will have to apply the look-back method two times, first upon customer use and again upon final completion and acceptance. Though the IRS and Treasury Department believe that the customer-use rule results in an appropriate determination of completion, we understand these concerns. Thus, to simplify a taxpayer's reporting requirements under the look-back method, the IRS and Treasury Department have modified the look-back regulations to require a taxpayer to delay the first application of the look-back method until the taxable year in which a long-term contract is finally completed and accepted.

The proposed regulations allow the Commissioner, and generally require a taxpayer, to sever and aggregate contracts when necessary to clearly reflect income. The proposed regulations provide the following criteria for determining whether severance or aggregation is required: Independent versus interdependent pricing, separate delivery or acceptance, and the reasonable businessperson standard. However, under the proposed regulations, a taxpayer may not sever a contract subject to the PCM. In addition, the proposed regulations require a taxpayer to notify the Commissioner when severing a long-term contract not accounted for using the PCM and provide agreement-specific information, including the criteria for severing or aggregating the agreement.

Some commentators criticized the “no severance” rule for long-term contracts subject to the PCM. The “no severance” rule is provided in the proposed regulations because the IRS and Treasury Department believe that in most cases, a taxpayer's use of the PCM and look-back method will clearly reflect the taxpayer's income from a long-term contract. To date, the only identified reason to allow severance of a contract subject to the PCM related to the application of the 10-percent method as shown in § 1.460-1(j) Example 8 of the proposed income tax regulations. Conversely, the IRS and Treasury Department believe that permitting a taxpayer to sever a contract subject to the PCM could allow the taxpayer to manipulate taxable income ( e.g., by severing to create a loss contract and accelerate the loss) or to avoid the application of section 460 ( e.g., by “completing” the contract during the contracting year). Nonetheless, the IRS and Treasury Department agree with the commentators' concerns that to the extent severance is necessary to clearly reflect income from a long-term contract ( e.g., due to the application of the 10-percent method), it should be permitted. Accordingly, the final regulations allow a taxpayer to sever a long-term contract if necessary to clearly reflect income, but only if the taxpayer has obtained the Commissioner's prior written consent.

Some commentators criticized the notification requirement for severed and aggregated contracts as being unduly burdensome. The IRS and Treasury Department continue to believe that notification will help taxpayers and the IRS consistently apply the severing and aggregating rules. In recognition of the potential burden associated with the proposed notification requirement, however, the final regulations simplify the notification by only requiring that a taxpayer inform the IRS when it has severed or aggregated agreements. Thus, the taxpayer is no longer required to provide agreement-specific information.

One commentator suggested that the reasonable businessperson standard be eliminated because it is merely a subset of independent pricing and interdependent pricing (the pricing standards), which should be the primary criteria for determining whether long-term contracts must be severed or aggregated to clearly reflect income. The IRS and Treasury Department agree that the pricing standards and the reasonable businessperson standard overlap, but believe that the pricing standard is a subset of the reasonable businessperson standard. Besides requiring an analysis of pricing, the reasonable businessperson standard requires an analysis of all the facts and circumstances of the business arrangement between the taxpayer and the customer. Thus, because the absence of the reasonable businessperson standard might change the decision to sever or aggregate in some cases, the final regulations retain this criterion and clarify its distinction from the pricing standards.

Under the proposed regulations, a taxpayer generally must classify a contract that requires the taxpayer to manufacture personal property and to construct real property (hybrid contract) as separate manufacturing and construction contracts. If at least 95 percent of the estimated allocable contract costs are reasonably allocable to manufacturing (or construction) activities, the taxpayer may classify the contract as a manufacturing (or construction) contract.

One commentator suggested that the final regulations allow a taxpayer to elect to use the PCM to account for a hybrid contract instead of requiring the taxpayer to account for both parts separately. The IRS and Treasury Department agree with the commentator's request for simplification. Accordingly, the final regulations allow a taxpayer to elect, on a contract-by-contract basis, to classify a hybrid contract as a long-term manufacturing contract subject to the PCM. In addition, because this election effectively supersedes the 95-percent election that would have applied to hybrid contracts that are primarily manufacturing contracts, the final regulations retain the 95-percent election as a second election that applies only to hybrid contracts that are primarily construction contracts.

The proposed regulations provide that if a related party and its customer enter into a long-term contract subject to the PCM, and a taxpayer performs any activity that is incident to or necessary for the related party's long-term contract, the taxpayer must account for the gross receipts and costs attributable to the activity using the PCM. However, the proposed regulations contain an inventory exception for components and subassemblies produced by the taxpayer if the taxpayer regularly carries these items in its finished goods inventories and 80 percent or more of the gross receipts from the sale of these items typically comes from unrelated parties.

One commentator suggested that the percentage threshold be lowered from 80 percent to 50 percent and that the exception not be limited to items regularly carried in the taxpayer's finished goods inventories. The IRS and Treasury Department included the related party rule, originally promulgated in Notice 89-15, in the proposed regulations to prevent taxpayers from establishing special-purpose subsidiaries to avoid the application of section 460. However, in recognition that a related party that sells most units of a manufactured item to unrelated parties was not established for the purpose of avoiding section 460, the IRS and Treasury Department added the inventory exception to the proposed regulations to reduce the related party's accounting burden. The IRS and Treasury Department agree, however, that the inventory exception is too narrow. Accordingly, the final regulations lower the percentage threshold from “80 percent or more” to “more than 50 percent” and eliminate the requirement that the components or subassemblies be carried in finished goods inventories.

Section 460 applies if a taxpayer manufactures a unique item of a type that is not normally included in the finished goods inventory of the taxpayer and if the contract is not completed by the close of the contracting year. The proposed regulations provide that “unique” means specifically designed for the needs of a customer. In addition, the proposed regulations contain three safe harbors concerning contracts to manufacture unique items. First, an item is not unique if the taxpayer normally completes the item within 90 days. Second, an item is not unique if the total allocable contract costs attributable to customizing activities that are incident to or necessary for the production of the item do not exceed 5 percent of the estimated total costs allocable to the item. Third, a unique item ceases to be unique no later than when the taxpayer normally includes similar items in its finished goods inventory. For an item that does not satisfy one of these three safe harbors, the determination of whether the item is unique is based on the facts and circumstances.

Some commentators suggested that the final regulations contain either a 140-day or a 180-day safe harbor instead of the 90-day safe harbor. The IRS and Treasury Department did not adopt these suggestions because we believe that a 90-day safe harbor appropriately limits the meaning of “unique” in most cases. However, the IRS and Treasury Department have modified the 90-day safe harbor to clarify that in the case of a contract to manufacture multiple units of the same item, the 90-day safe harbor applies only if each unit normally is completed within 90 days.

Some commentators suggested that the final regulations contain either a 10-percent, 15-percent, or 20-percent safe harbor instead of the 5-percent safe harbor. In particular, these commentators stated that a 5-percent safe harbor will not alleviate any controversy between taxpayers and revenue agents because revenue agents generally do not raise the issue of unique items if the taxpayer's customizing costs do not exceed 5 percent. The IRS and Treasury Department agree that it is reasonable to assume that an item is not unique if the taxpayer's customizing costs do not exceed 10 percent. Thus, the customization safe harbor in the final regulations has been increased to 10 percent.

One commentator suggested that the cost of a taxpayer's customizing activities should not include the cost of any customized equipment purchased by a taxpayer from an unrelated party under a “special accommodation” arrangement with the customer that requires the taxpayer to acquire and install that customized equipment. The IRS and Treasury Department did not adopt this suggestion because such a special accommodation rule could enable taxpayers to avoid section 460 by having some long-term contract activities performed by outside parties.

Several commentators questioned the relevance of the “basic design” concept included in § 1.460-2(e) Example 1 of the proposed regulations. To determine whether an item is unique, the relevant analysis is whether an item is customized (or manufactured according to a customer's specifications) regardless of whether the item is customized from a basic design. Accordingly, the final regulations delete the reference to the taxpayer's basic design in the example to eliminate any confusion.

One commentator questioned how the safe harbor applies in the case of a contract to manufacture multiple units of the same item. The IRS and Treasury Department believe that if significant customization is necessary to produce an item for a customer under the contract, that item is specifically designed for the needs of the customer, and thus is a unique item, regardless of the number of units produced for the customer under the contract. Thus, the final regulations clarify that for the purposes of applying the 10-percent safe harbor to a contract to manufacture multiple units of the same item, a taxpayer must allocate all customization costs to the first unit manufactured under the contract.

Some commentators suggested the addition of a fourth safe harbor that would exclude “income on contracts for which progress payments have not been received by year end.” The IRS and Treasury Department did not adopt this suggestion because we do not believe that such a rule bears any relationship to a determination of the uniqueness of an item and because such a rule is inconsistent with the statute.

The proposed regulations provide that a manufactured item normally requires more than 12 months to complete if its “production period,” as defined in § 1.263A-12, is reasonably expected to exceed 12 months, determined at the end of the contracting year. In general, the production period for an item or unit begins when the taxpayer incurs at least 5 percent of the estimated total allocable contract costs, including planning and design expenditures, allocable to the item or unit, and the production period ends when the item or unit is ready for shipment to the taxpayer's customer.

Some commentators suggested that the final regulations be clarified to provide that “normal time to complete” includes only the time of physical production activity and not the time of any research, development, planning, or design activity. The IRS and Treasury Department did not adopt this suggestion because we believe that the definition of “production period” under § 1.263A-12(c)(3), which includes the time required for planning and design activity, is consistent with the allocation of costs to extended-period long-term contracts under § 1.451-3(d)(6) and with section 460(c)(1), which requires that costs be allocated under the rules applicable to extended-period long-term contracts. In addition, if an item manufactured under a long-term contract requires a significant amount of design time to produce, it is appropriate to include the time needed to perform these activities when determining that item's “normal time to complete” because these activities are directly attributable to that contract and are necessary to manufacture the subject matter of the contract. However, the final regulations clarify that a taxpayer is not required to consider activities related to costs that are not allocable contract costs under section 460 ( e.g. , independent research and development expenses, marketing expenses) when determining the item's normal time to complete.

Some commentators asked how the 12-month rule applies in the case of a contract to manufacture multiple units of the same item. The final regulations clarify, that for the purposes of applying the 12-month rule to this type of contract, the time required to design and manufacture the first unit generally does not reflect the item's “normal time to complete.” For example, the time required to design the first unit of an item should not be considered as time required to manufacture subsequent identical units. The final regulations also include an example illustrating the determination of normal time to complete an item in the case of a contract to manufacture multiple units of the same item.

The proposed regulations provide that, under the PCM, a taxpayer generally includes a portion of the total contract price in income for each taxable year that the taxpayer incurs contract costs allocable to the long-term contract. Under the proposed regulations, total contract price included all bonuses, awards, and incentive payments if it is reasonably estimated that they will be received, even if the all events test has not yet been met. If, by the end of the completion year, a taxpayer cannot reasonably estimate whether a contingency will be satisfied, the bonus, award, or incentive payment is not includible in total contract price.

Some commentators argued that a taxpayer should not have to include contingent compensation in “total contract price” until the all events test for the item has been satisfied. The IRS and Treasury Department did not adopt this suggestion because the all events test is a judicially created test applying to taxpayers using an accrual method. U.S. v. Anderson , 269 U.S. 422 (1926). Conversely, section 460 is a self-contained, statutorily created accounting method that requires taxpayers to use estimated amounts when computing taxable income under the PCM and to use actual amounts when applying the look-back method. In addition, using the most accurate estimate of total contract price and total contract costs will produce the most accurate annual reporting of income and costs and will minimize discrepancies that could necessitate paying look-back interest. See Tutor-Saliba Corp. v. Commissioner , 115 T.C. No. 1 (July 17, 2000). However, in response to comments and questions concerning the contingent income rule, the final regulations provide that contingent income is includible in total contract price not later than when it is included in income for financial reporting purposes under generally accepted accounting principles.

One commentator suggested that the final regulations incorporate the rule under § 1.451-3(a)(1) that allows a taxpayer to account for long-term contracts of less-than-substantial duration using a method of accounting other than a long-term contract method of accounting. The IRS and Treasury Department did not adopt this suggestion because such a rule would be inconsistent with the statutory definition of “long-term contract.”

One commentator asked how a contractor should account for the subject matter of a long-term contract when the customer breaches that contract before the contractor has transferred title to the customer but after the contractor has reported taxable income from that contract under the PCM ( e.g. , unfinished condominium unit). In response to this comment, the final regulations include new § 1.460-4(b)(7), which provides that if a long-term contract is terminated before completion and, as a result, the taxpayer retains ownership of the property that is the subject matter of that contract, the taxpayer must reverse the previously reported gross income (loss) from the transaction in the taxable year of termination. As a result of reversing its previously reported gross income under this rule, a taxpayer generally will have an adjusted basis in the retained property equal to its previously deducted allocable contract costs. The look-back method does not apply to any terminated contract to the extent it is subject to this rule. The IRS and Treasury Department request suggestions for rules that will apply when the customer acquires ownership of some, but not all, of the property that is the subject matter of the contract.

The proposed and final regulations provide that a taxpayer generally must allocate costs to a contract subject to section 460(a) in the same manner as direct and indirect costs are capitalized to property produced by a taxpayer under section 263A. The regulations provide exceptions, however, that reflect the differences in the cost allocation rules of sections 263A and 460.

One commentator argued that the final regulations should contain a single standard for determining when the cost of a direct material is allocable to a long-term contract. In response to this comment, the final regulations contain a single standard linked to the uniform capitalization (UNICAP) rules of section 263A. The final regulations also clarify that, among other methods, a taxpayer dedicates direct materials by associating them with a specific contract ( e.g. , by purchase order, entry on books and records, shipping instructions).

One commentator suggested that the final regulations clarify that taxpayers should not treat software development and software implementation costs as customization costs for the purposes of the proposed 5-percent safe harbor. The IRS and Treasury Department did not adopt this suggestion because we believe that software costs are allocable contract costs (and thus customization costs) to the extent they are incident to or necessary for the manufacture of the subject matter of the contract.

This commentator also suggested that the final regulations clarify that taxpayers should not treat guarantee, warranty, and maintenance costs as customization costs for the purposes of the proposed 5-percent safe harbor. The IRS and Treasury Department modified § 1.460-1(d)(2) to clarify that these types of costs are not allocable contract costs.

The proposed regulations generally permit a taxpayer to elect to allocate contract costs using the simplified cost-to-cost method. Under the simplified cost-to-cost method, a taxpayer must determine a contract's completion factor based upon only direct material costs; direct labor costs; and depreciation, amortization, and cost recovery allowances on equipment and facilities directly used to manufacture or construct property under the contract.

One commentator suggested that the final regulations clarify whether a taxpayer using the simplified cost-to-cost method is allowed or required to include subcontracted costs in a contract's completion factor. In response to this comment, the final regulations clarify that subcontracted costs represent either direct material or direct labor costs and thus must be allocated to a contract under the simplified cost-to-cost method when incurred under § 1.461-4(d)(2)(ii). In addition, a taxpayer must allocate subcontracted costs for all section 460 purposes ( e.g. , applying the 10-percent safe harbor under § 1.460-2(b)(2)(ii)).

One commentator requested guidance concerning the statute of limitations applicable to payments of, and claims for, look-back interest. The final regulations amend § 1.460-6(f)(1) and (2) to clarify the reporting requirements and add new § 1.460-6(f)(3). New § 1.460-6(f)(3) provides guidance on the statute of limitations applicable to the assessment and collection of look-back interest owed by a taxpayer. In addition, new § 1.460-6(f)(3) provides that a taxpayer's claim for credit or refund of look-back interest previously paid by or collected from the taxpayer is a claim for credit or refund of an overpayment of tax for federal income tax purposes, which is subject to the section 6511 statute of limitations. In contrast, new § 1.460-6(f)(3) provides that a taxpayer's claim for look-back interest (or interest payable on look-back interest) that is not attributable to an amount previously paid by or collected from the taxpayer is a general claim against the federal government, which is subject to the statutes of limitations found in 28 U.S.C. sections 2401 and 2501.

These final regulations apply to any contract entered into on or after January 11, 2001.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Pursuant to section 7805(f) of the Internal Revenue Code, this Treasury decision was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. It is hereby certified that the collection of information in this Treasury decision will not have a significant economic impact on a substantial number of small entities. The regulations require a taxpayer to attach a statement to its original federal income tax return if the taxpayer severs or aggregates a long-term contract. The statement is needed so the Commissioner can determine whether the taxpayer properly severed or aggregated the contract. It is uncommon for a taxpayer that has a long-term contract to sever or aggregate that contract. In addition, if a contract is severed or aggregated and a statement is required, it is estimated that it will, on average, require only 15 minutes to complete.

The principal author of these regulations is Leo F. Nolan II, Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1676. Responses to this collection of information are mandatory to obtain the benefit described under section 132(f).

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The estimated average annual recordkeeping burden per recordkeeper is 26.5 hours. The estimated annual reporting burden per respondent is .8 hours.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

This document contains amendments to 26 CFR part 1 (Income Tax Regulations). On January 27, 2000, a proposed regulation (REG-113572-99) relating to qualified transportation fringes was published in the Federal Register (65 FR 4388). A public hearing was held on June 1, 2000. Written or electronic comments responding to the notice of proposed rulemaking were received. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury decision. The revisions are discussed below.

In general, comments received on the proposed regulations were favorable and, accordingly, the final regulations retain the general structure of the proposed regulations, including the question and answer format and a variety of examples illustrating the substance of the final regulations. However, commentators made a number of specific recommendations for modifications and clarifications of the regulations. In response to these comments, the final regulations incorporate the modifications and clarifications described below.

Section 132(f)(3) provides that qualified transportation fringes include cash reimbursement for transit passes “only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.” Thus, if vouchers are readily available, the employer must use vouchers and cash reimbursement of a mass transit expense would not be a qualified transportation fringe.

Most of the comments received addressed the issue of whether vouchers are “readily available.” Commentators representing employers generally favored rules permitting cash reimbursement. Commentators representing transit operators and voucher providers generally favored rules not permitting cash reimbursement. The following discusses three issues raised by commentators: first, whether the proposed regulations' 1 percent safe harbor should be retained; second, whether internal administrative costs should be considered in applying the 1 percent test; and third, whether other nonfinancial restrictions should be considered in determining whether vouchers are readily available.

Under Notice 94-3, 1994-1 C.B. 327, and the proposed regulations, a voucher is readily available if an employer can obtain it on terms no less favorable than those available to an individual employee and without incurring a significant administrative cost. Under the proposed regulations, administrative costs relate only to fees paid to fare media providers, and the determination of whether obtaining a voucher would result in a significant administrative cost is made with respect to each transit system voucher. The proposed regulations provide a rule under which administrative costs are treated as significant if the average monthly administrative costs incurred by the employer for a voucher (disregarding delivery charges imposed by the fare media provider to the extent not in excess of $15 per order) are more than 1 percent of the average monthly value of the vouchers for a system.

Commentators, in particular those representing fare media providers and transit operators, suggested that the fare media provider fee percentage causing vouchers to not be readily available should be raised because many fare media providers charge fees in excess of the 1 percent limit and, thus, under this test, transit vouchers would not be considered readily available in some large metropolitan areas. These commentators assert that the 1 percent test is therefore contrary to the intent of the statute. Commentators suggested that the 1 percent test, particularly if combined with inadequate cash reimbursement substantiation requirements, may result in taxpayer abuse, with the result that the benefit might not be used for the purpose for which it is intended, which is to increase the use of mass transit. In addition, commentators testified at the public hearing that the mandatory use of vouchers (with no ability to use cash reimbursement if vouchers are readily available) would increase the use of vouchers and promote the development of advanced technologies that minimize the burden on employers while ensuring that the benefit is used for mass transit. These new technologies might allow an employer to make payment directly to the transit operator, who in turn credits fare to the employee's magnetic media fare card, thus eliminating the need for employers to incur the expense of distributing vouchers.

Other commentators, in particular groups representing employers, generally favored the 1 percent test, but suggested that internal costs be considered in applying the test (discussed below). These commentators took the position that an increase in the percentage might affect the market charge for such services. There was also a concern that a strict voucher-use requirement would result in fewer employers adopting transit pass programs, thus frustrating the purpose of section 132(f) to increase the use of mass transit.

The final regulations retain the 1 percent test. The 1 percent test, applicable for years beginning after December 31, 2003, is appropriate in light of the rule (discussed below) that only voucher provider fees are considered in determining availability. It is intended that the delayed application of this rule would provide sufficient time for those affected by this rule to modify their systems and procedures appropriately. The 1 percent threshold, coupled with the exclusion of internal administrative costs from the readily available determination, represents a balanced approach that will promote the growth of voucher programs in most transportation areas. In addition, raising the percentage threshold could curtail the growth in transit benefit programs, which would be contrary to the goal of increasing the use of mass transit. Finally, in cases where cash reimbursement is allowed, adequate substantiation requirements will ensure that transit pass benefits will actually go toward mass transportation usage. In this regard, the proposed regulations provide that employers must implement reasonable procedures to ensure that an amount equal to the reimbursement was incurred for transit passes. For example, the final regulations clarify that in circumstances when employee certification is a reasonable reimbursement procedure, it must occur after the expense is incurred.

The final regulations also clarify the application of the 1 percent rule if multiple vouchers for a transit system are available for distribution by an employer to employees, and if multiple transit system vouchers are required in an area to meet the transit needs of an employer's employees. The final regulations provide that if multiple transit system vouchers are available for direct distribution to employees, the employer must consider the lowest cost voucher for purposes of determining whether the voucher provider fees cause vouchers to not be readily available. However, if multiple vouchers are required in an area to meet the transit needs of the individual employees in that area, the employer has the option of averaging the costs applied to vouchers from each system for purposes of determining whether the voucher provider fees cause vouchers to not be readily available.

Several commentators representing employers recommended that, in addition to fare media provider fees, internal administrative costs, especially security and distribution costs, should be considered in determining whether vouchers are readily available. These commentators noted that administrative costs are increased when an employer must maintain both a voucher system and a reimbursement system to provide qualified transportation fringes. For example, the employer may maintain a cash reimbursement system for transportation in a commuter highway vehicle and qualified parking, and also maintain a voucher system for transit passes. In addition, several commentators suggested that the increased costs and administrative burden for employers that maintain offices in multiple cities should also be considered in determining whether vouchers are readily available.

The final regulations retain the test considering only fees paid to voucher providers in determining availability based on a plain reading of the terms of the statute. The language “readily available for direct distribution by the employer to the employee” under section 132(f)(3) in its plain, ordinary sense means that vouchers are easily obtainable for direct distribution to the employer's employees. The determination of availability bears no relationship with costs that may be incurred after vouchers have been obtained. The service fees charged by voucher providers and delivery costs can reasonably be viewed as affecting whether vouchers are easily obtainable; an employer's internal costs of subsequently administering a voucher program would not. Thus, based upon the plain language of section 132(f), internal administrative costs do not affect whether vouchers are readily available.

Moreover, the test considering only voucher provider fees is a comparatively simple bright line test. A test that depends on the employer's internal administrative costs would necessarily be complex, requiring complex rules that would be difficult for employers to apply.

Commentators representing employers suggested that nonfinancial factors should be considered in determining whether vouchers are readily available. They suggested that factors such as whether there are reasonable advance purchase and minimum purchase requirements, and whether vouchers can be purchased in appropriate denominations, should be considered in determining availability. The final regulations adopt this suggestion because nonfinancial restrictions would reasonably affect whether vouchers are available for distribution by an employer to an employee.

The final regulations provide guidance on the types of nonfinancial restrictions that cause vouchers to not be readily available. The final regulations provide that certain nonfinancial restrictions, such as a voucher provider not making vouchers available for purchase at reasonable intervals or failing to provide the vouchers within a reasonable period after receiving payment for the voucher, cause vouchers to not be readily available. In addition, if a voucher provider does not provide vouchers in reasonably appropriate quantities, or in reasonably appropriate denominations, vouchers may not be readily available.

When and as the standards in these final regulations go into effect, they will supercede the current law standards in Notice 94-3.

Commentators suggested that the administrability of transit pass programs would be improved if vouchers were permitted to be distributed in advance for more than one month. The final regulations adopt this suggestion.

In October of this year, the IRS issued Announcement 2000-78 (2000-43 I.R.B. 428) to notify taxpayers that, when finalized, the regulations will clarify that transit passes may be distributed in advance for more than one month (such as for a calendar quarter) by taking into account the monthly limits for all months for which the transit passes are distributed. The announcement further provides, however, that if an employee receives advance transit passes, and the employee's employment terminates before the beginning of the last month of the period for which the transit passes were provided, the employer must include in the employee's wages, for income and for employment tax purposes (FICA, FUTA, and income tax withholding), the value of the passes provided for those month(s) beginning after the employee's employment terminates to the extent the employer does not recover those transit passes or the value of those passes. The announcement provides that pending the issuance of these final regulations, employers may rely on the announcement.

The final regulations differ from the announcement in one respect. In any case in which transit passes are provided in advance for a period of no more than three months (such as for a calendar quarter), but the recipient ceases to be an employee before the beginning of the last month in that period, the final regulations provide that the value of a transit pass provided in advance for a month is excluded from wages for employment tax (FICA, FUTA, and income tax withholding) purposes (but not for income tax purposes) unless at the time the transit passes were distributed there was an established termination date that was before the beginning of the last month of that period and the employee does in fact terminate employment before the beginning of the last month of that period.

The final regulations address whether reimbursement paid to an employee for parking at a work location away from the employee's permanent work location is excludable from wages for income and employment tax purposes under section 132(f). Section 132(f)(5)(C) defines qualified parking, in part, as “parking provided to an employee on or near the business premises of the employer * * * .” The final regulations provide that qualified parking includes parking on or near a work location at which the employee performs services for the employer. However, qualified parking does not include reimbursement for parking that is otherwise excludable from gross income as a reimbursement treated as paid under an accountable plan under § 1.62-2 of the Income Tax Regulations, or parking provided in kind to an employee that is excludable from the employee's gross income as a working condition fringe under section 132(a)(3). Thus, if the exclusion at § 1.62-2 or section 132(a)(3) is available (even if not reimbursed by the employer), then section 132(f) does not apply.

Whether a reimbursement for local transportation expenses, including parking at a work location away from the employee's permanent work location, is excludable from the employee's gross income under § 1.62-2, or whether parking provided in kind to an employee is excludable from the employee's gross income under section 132(a)(3), is determined based upon whether the parking expenses would be deductible if paid or incurred by the employee under section 162(a) as an expense incurred in the employee's trade or business of being an employee for the employer. §§ 1.62-2(d); 1.132-5(a)(2). Revenue Ruling 99-7 (1999-1 C.B. 361) addresses under what circumstances daily transportation expenses, including parking, incurred by a taxpayer in going between the taxpayer's residence and a work location are deductible by the taxpayer under section 162(a).

The final regulations provide the minimum requirements to ensure that transportation benefits are qualified transportation fringes under section 132(f). An employer may have a transit benefit program that is more restrictive than a program meeting the minimum requirements under the regulations. In addition, these regulations do not affect the application of authorities outside the Internal Revenue Code which may restrict a transportation benefit program. Federal Government agencies, for example, may be required by other federal law to implement restrictions beyond those required under these regulations.

The regulations are generally applicable for taxable years beginning after December 31, 2001. However, in order to provide a transition period for those affected by the 1 percent rule (described under “The 1 percent safe harbor” in this preamble), that rule is applicable for taxable years beginning after December 31, 2003.

The following document is obsolete as of January 11, 2001: Announcement 2000-78 (2000-43 I.R.B. 428).

The following document is modified as of the date these regulations become applicable (see Q/A-25): Notice 94-3 (1994-1 C.B. 327).

It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. A final regulatory flexibility analysis has been prepared for the collection of information in this Treasury decision under 5 U.S.C. 604. A summary of the analysis is set forth in this preamble under the heading “Summary of Final Regulatory Flexibility Analysis.”

This analysis is required under the Regulatory Flexibility Act (5 U.S.C. chapter 6). The collection of information under this rule is based upon the requirements under section 132(f). We estimate that approximately 265,000 employers that provide qualified transportation fringes to their employees will be affected by the recordkeeping requirements of this rule. None of the comments received in response to the notice of proposed rulemaking specifically addressed the initial regulatory flexibility analysis.

Section 132(f)(3) provides that qualified transportation fringes may be provided in the form of cash reimbursement. The legislative history indicates that an employer providing cash reimbursement to the employer's employees for qualified transportation fringes must establish a bona fide reimbursement arrangement. As a condition to providing cash reimbursement for qualified transportation fringes, this rule provides that employers must receive substantiation from employees. The objective of this rule is to ensure that reimbursements are made for qualified transportation fringes.

Whether an arrangement constitutes a bona fide reimbursement arrangement varies depending on the facts and circumstances, including the method or methods of payment utilized within a mass transit system. An employee certification in either written or electronic form may be sufficient depending upon the facts and circumstances. For example, if receipts are not provided in the ordinary course of business, such as with respect to metered parking or used transit passes that cannot be returned to the user, an employee certification that expenses have been incurred constitutes a reasonable reimbursement procedure. A certification that expenses will be incurred in the future, by itself, is not a reasonable reimbursement procedure. There are no particular professional skills required to maintain these records.

In addition, section 132(f)(4) provides that an employee may choose between cash compensation and qualified transportation fringes. This rule provides that an employer may allow an employee the choice to receive either a fixed amount of cash compensation at a specified future date or a fixed amount of qualified transportation fringes to be provided for a specified future period (such as qualified parking to be used during a future calendar month). This rule provides that employers must keep records with respect to employee compensation reduction elections. An employee's election must be in writing or some other permanent and verifiable form, and include the date of the election, the amount of compensation to be reduced, and the period for which the qualified transportation fringes will be provided. The objective of this rule is to ensure against recharacterization of taxable compensation after it has been paid to the employee. There are no particular professional skills required to maintain these records.

A less burdensome alternative for small organizations would be to exempt those entities from the recordkeeping requirements under this rule. However, it would be inconsistent with the statutory provisions and legislative history to exempt those entities from the recordkeeping requirements imposed under this rule.

This rule provides several options which avoid more burdensome recordkeeping requirements for small entities. This rule provides that (1) there are no substantiation requirements if the employer distributes transit passes in kind; (2) a compensation reduction election may be made electronically; (3) an election to reduce compensation may be automatically renewed; (4) an employer may provide for deemed compensation reduction elections under its qualified transportation fringe benefit plan; and (5) a requirement that a voucher be distributed in-kind by the employer is satisfied if the voucher is distributed by the employer or by another person on behalf of the employer (for example, if a transit operator credits amounts to the employee's fare card as a result of payments made to the operator by the employer).

The principal author of these regulations is John Richards, Office of the Assistant Chief Counsel (Exempt Organizations/Employment Tax/Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1639. Responses to these collections of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

The estimated annual burden per respondent varies from .5 hour to 5 hours, depending on individual circumstances, with an estimated average of 1 hour.

Comments concerning the accuracy of these burden estimates and suggestions for reducing these burdens should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

On December 20, 1999, the IRS published proposed regulations (REG-106012-98) in the Federal Register (64 FR 71082) inviting comments under section 118(c). A public hearing was held April 27, 2000. Numerous comments have been received. After consideration of all the comments, the proposed regulations are adopted as revised by this Treasury decision.

Under section 118(a), gross income does not include any contribution to the capital of the taxpayer. Section 118(c)(1) provides that a contribution to the capital of a taxpayer includes any amount of money or other property received from any person (whether or not a shareholder) by a regulated public utility that provides water or sewerage disposal services if the amount is a contribution in aid of construction, satisfies the expenditure rule, and is not included in rate base for ratemaking purposes. Pursuant to the authority granted to the Secretary under section 118(c)(3)(A), the proposed regulations define a contribution in aid of construction as any amount of money or other property contributed to a regulated public utility that provides water or sewerage disposal services to the extent that the purpose of the contribution is to provide for the expansion, improvement, or replacement of the utility's water or sewerage disposal facilities.

The proposed regulations define nontaxable contributions in aid of construction to exclude customer connection fees. Customer connection fees are defined in the proposed regulations to include amounts paid for the cost of installing a connection or service line (including the cost of meters and piping) from the utility's main lines to the lines owned by the customer, unless the connection or service line serves, or is designed to serve, more than one customer. Customer connection fees also are defined in the proposed regulations to include any amounts paid as service charges for starting or stopping services.

Several commentators contend that connection and service lines should not be treated as taxable customer connection fees for a number of reasons. For example, these commentators argue that the omission from the current law of the language included in former section 118(b)(3)(A) that directed the Secretary to define a contribution in aid of construction to exclude amounts paid to connect the customer's line to a main water or sewer line signals congressional intent to include connection and service lines in the definition of a nontaxable contribution in aid of construction. In addition, some of these commentators believe that the inclusion of connection and service lines as taxable customer connection fees is inconsistent with the judicial interpretation of a contribution in aid of construction, which arguably would treat contributions for main lines and connection and service lines as taxable prerequisites for services under the Supreme Court's decision in United States v. Chicago, Burlington & Quincy R.R. , 412 U.S. 401 (1973) (1973-2 C.B. 428). Some of these commentators also contend that the exclusion of connection and service lines from the definition of a nontaxable contribution in aid of construction is inconsistent with regulatory accounting treatment, which does not distinguish between main lines and connection and service lines for purposes of classifying property or for purposes of ratemaking. Finally, a few of these commentators point out that the inclusion of connection and service lines as taxable customer connection fees will result in customers being required to gross-up their contributions of connection and service lines for taxes, increasing the cost of housing and development and creating a competitive disadvantage for investor-owned utilities.

The IRS and Treasury Department do not agree with the commentators' position with respect to connection and service lines. As explained in the preamble to the proposed regulations, the inclusion of connection and service lines in the definition of taxable customer connection fees is consistent with the legislative history explanation that section 118(c) was intended to restore the contribution in aid of construction provision of former section 118(b) that was repealed by The Tax Reform Act of 1986 for regulated public utilities that provide water or sewerage disposal services. H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess. 316 (1996) (1996-3 C.B. 741, 1056). While the language regarding the definition of a contribution in aid of construction did change from the language in former section 118(b), Congress did not explicitly include connection and service lines in the definition of a contribution in aid of construction but instead directed the Secretary to define a contribution in aid of construction, presumably aware of the IRS’ and Treasury Department's position that connection and service lines are taxable customer connection fees based on Rev. Rul. 75-557 (1975-2 C.B. 33), and the proposed regulations under former section 118(b) (43 FR 22997 (May 30, 1978)). Moreover, the IRS and Treasury Department continue to believe that the exclusion of connection and service lines from a nontaxable contribution in aid of construction is more consistent with the judicial and regulatory interpretation of a contribution in aid of construction and with the Supreme Court's directive that exclusions be narrowly construed. See, for example, Edwards v. Cuba R.R. , 268 U.S. 628 (1925) (IV-2 C.B. 122); Detroit Edison Co. v. Commissioner , 319 U.S. 98 (1943) (1943 C.B. 1019); Chicago, Burlington & Quincy R.R. , 412 U.S. at 401; Florida Progress Corp. v. United States , No. 93-246-CIV-T-25A (M.D. Fla. July 2, 1998), appeal docketed, No. 99-15389-FF (11th Cir. Dec. 29, 1999); Commissioner v. Schleier , 515 U.S. 323, 328 (1995); and Rev. Rul. 75-557. As explained by the court in Teco Energy, Inc. v. United States , No. 98-430-Civ-J-TJC (M.D. Fla. Oct. 21, 1999), “former [section] 118(b) codifies the principles of Edwards that payments made by a government or other group to a utility to encourage the extension of facilities into new areas benefiting a large number of people are given tax free status, while also affirming the reasoning of Detroit Edison Revenue Ruling 75-557, that payments made by an individual or business entity to a utility as a prerequisite to receiving water or sewage services would be treated as taxable income to the utility.” Further, the IRS and Treasury Department believe that the definition of a contribution in aid of construction used for regulatory accounting purposes should not control for tax purposes. See, for example, Thor Power Tool Co. v. Commissioner , 439 U.S. 522, 541-45 (1979) (1979-1 C.B. 167). Accordingly, the final regulations retain the exclusion of connection and service lines from the definition of a nontaxable contribution in aid of construction.

Some commentators state that, before the proposed regulations were published, some utilities took the position that payments for connection and service lines were not taxable and did not charge their contributors a sufficient amount to cover their tax liabilities. The IRS and Treasury Department understand that there was uncertainty before the proposed regulations were published and that some utilities may have reasonably interpreted section 118(c)(3)(A) to mean that connection and service lines should not be treated as taxable. It is clear that these final regulations apply to money and other property received on or after January 11, 2001 and do not apply to transactions entered into prior to that date. In addition, the IRS will take into account all the facts and circumstances in applying section 118(c) to such transactions.

Commentators suggest that customer connection fees relating to services provided to public authorities, such as schools, hospitals, public libraries, and governmental entities, should be included in the definition of nontaxable contributions in aid of construction because these services provide a broad public benefit. In addition, commentators recommend that customer connection fees relating to fire protection services should qualify as nontaxable contributions in aid of construction because a utility receives no revenue for public fire protection services and only a nominal standby fee for private fire protection services. The IRS and Treasury Department believe that, regardless of whether the activities of public authorities provide a public benefit, connection and service lines that serve these customers should be treated in the same manner as connection or service lines to any paying customer—as a prerequisite for services. Consequently, the final regulations continue to treat amounts paid for connection and service lines with respect to public authorities as customer connection fees. However, the IRS and the Treasury Department agree with commentators that amounts paid with respect to fire protection services should not be considered customer connection fees.

Several commentators suggest that connection and service lines that serve more than one user, such as lines for apartment houses, condominium projects, shopping malls, and office buildings, should be considered to serve more than one customer and, thus, be excluded from taxable customer connection fees, regardless of whether the utility treats the facility as one customer or many. The final regulations do not adopt this suggestion because whether connection or service lines are designed to serve more than one customer does not depend on the number of users but upon the number of customers. Thus, for example, if a water or sewerage disposal utility treats an apartment or office building as one utility customer, then the cost of connecting the utility's main lines to the connection or service lines serving that single customer is a taxable customer connection fee.

The proposed regulations provide that if a water or sewerage disposal facility is placed in service by the utility before an amount is contributed to the utility, the contribution is not a nontaxable contribution in aid of construction unless, at the time the facility is placed in service by the utility, there is an agreement, binding under local law between the prospective contributor and the utility, that the utility is to receive the amount as reimbursement for the cost of acquiring or constructing the facility.

Commentators suggest that the binding agreement rule should be expanded to include enforceable public utility commission orders and tariffs. The final regulations adopt this suggestion by treating an order or a tariff, issued or approved by the applicable public utility commission, that requires a current or prospective customer to reimburse the utility for the cost of acquiring or constructing the facility as a binding agreement. Because public utility commission orders or tariffs may be issued or approved before or after the facility is placed in service, the final regulations also extend the time for entering into a binding agreement or the issuance or approval of an order or a tariff to no later than 8 1/2 months after the close of the taxable year (the usual due date with extensions for a taxpayer's return) in which the facility is placed in service.

One commentator suggests adding an example demonstrating that payments made pursuant to a binding agreement qualify as a contribution in aid of construction under section 118(c). The final regulations adopt this suggestion.

The proposed regulations provide that the basis of a water or sewerage facility acquired or constructed with a contribution under a binding agreement must be reduced by the amount of the contribution at the time the facility is placed in service. Several commentators suggest that if the receipt of all of the expected contributions under the agreement occurs more than one or two years after a facility is placed in service, the utility should be permitted to claim the full cost of the facility as basis for depreciation purposes, subject to adjustment as the contributions are received. The final regulations do not adopt this comment because section 118(c)(4) disallows any depreciation deductions for a water or sewerage disposal facility that is fully paid with a nontaxable contribution in aid of construction under section under section 118(c). This result is consistent with similar rules that either exclude expected contributions from basis or deny a deduction to the extent the taxpayer has a right to, or reasonable prospect of, reimbursement. See, for example, § 1.110-1(b)(4)(ii)(B); § 1.165-1(d)(2)(i); and Rev. Rul. 79-263 (1979-2 C.B. 82).

The proposed regulations provide that, if a contribution in aid of construction treated as a contribution to the capital of the taxpayer is repaid to the contributor, either in whole or in part, then the repayment amount is a capital expenditure in the taxable year in which it is paid or incurred, resulting in an increase in the property's adjusted basis in such year. A couple of commentators suggest that the repayment should be depreciated over the remaining life of the property. The final regulations adopt this suggestion.

The proposed regulations provide that a taxpayer treating a contribution in aid of construction as a contribution to capital must file a statement with its tax returns to report the amount of the contribution in aid of construction the taxpayer: (1) Expended during the taxable year for property described in section 118(c)(2)(A) (qualified property); (2) does not intend to expend for qualified property; and (3) failed to expend for qualified property. Several commentators express concern that the reporting requirement in the proposed regulations exceeds the intent of the statute because section 118(c)(2)(C) only requires the maintenance of adequate records. However, section 118(d)(1) provides that if the taxpayer for any taxable year treats an amount as a contribution to the capital of the taxpayer described in section 118(c), then the statutory period for the assessment of any deficiency attributable to any part of the amount does not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe) of the amount of the expenditure referred to in section 118(c)(2)(A), of the taxpayer's intention not to make the expenditures referred to in section 118(c)(2)(A), or of a failure to make the expenditure within the period described in section 118(c)(2)(B). Thus, the regulations do not impose an additional reporting requirement but merely provide the time and manner in which taxpayers must notify the Secretary under section 118(d)(1) of amounts treated as contributions in aid of construction.

Two comments were sent to OMB on the collection of information contained in the proposed regulations, with copies of the comments sent to the IRS Reports Clearance Officer. The commentators estimate that complying with the recordkeeping requirements of section 118(c)(2)(C) involves more hours and that the number of respondents is greater than estimated. The collection of information burden under the proposed regulations is based only upon the time for notifying the IRS of the required information under section 118(d)(1) and is not required to include the time for maintaining accurate books and records. Thus, the individual time to comply with the collection of information burden was not increased to reflect these commentators concerns. However, the estimated number of annual respondents has been increased to 300 and the estimated total annual reporting burden has been increased to 300 hours.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that any burden on taxpayers is minimal. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

The principal author of these regulations is Paul F. Handleman, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

On January 24, 2000, the IRS and Treasury issued final regulations under section 367(b) of the Internal Revenue Code (Code). At the same time, the IRS and Treasury also modified temporary regulation § 7.367(b)-12(a). The final regulations and modified temporary regulation were effective as of February 23, 2000.

As modified, § 7.367(b)-12(a) addresses distributions with respect to, or a disposition of, stock that was subject to certain provisions of the temporary section 367(b) regulations that were in effect before February 23, 2000. This document finalizes the rule stated in § 7.367(b)-12(a) in order to insure its continued application. See section 7805(e)(2) (stating a “sunset rule” applicable to temporary regulations).

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the notice of proposed rulemaking preceding the regulations was issued prior to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact of the proposed regulations on small business.

The principal author of these regulations is Mark Harris of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development.

This document contains amendments to the Regulations on Procedure and Administration (26 CFR part 301) under section 7502 relating to timely mailing treated as timely filing and paying. A notice of proposed rulemaking (REG-115433-98) was published in the Federal Register (64 FR 2606) on January 15, 1999. Temporary regulations (TD 8807) relating to electronic postmarks for electronically filed income tax returns were published in the Federal Register for the same day (64 FR 2568). No public hearing was requested or held. No comments were received from the public in response to the notice of proposed rulemaking. The proposed regulations under section 7502 are adopted as revised by this Treasury decision and the corresponding temporary regulations are removed. The revisions are discussed below.

In the notice of proposed rulemaking, the IRS and the Treasury Department requested comments regarding whether section 7502 should apply to claims for credit or refund made on late filed original income tax returns. No comments were received on this issue. However, the IRS and the Treasury Department have determined that, in certain situations, a claim for credit or refund made on a late filed original income tax return should be treated under section 7502 as timely filed on the postmark date for purposes of section 6511(b)(2)(A). This is consistent with the opinion of the United States Court of Appeals for the Second Circuit in Weisbart v. United States Department of Treasury and Internal Revenue Service, 222 F.3d 93 (2d Cir. 2000), rev'g 99-1 USTC (CCH) ¶ 50,549 (E.D.N.Y. 1999), AOD-CC-2000-09 (Nov. 13, 2000).

The IRS and the Treasury Department have further determined that claims for credit or refund made on late filed original tax returns other than income tax returns should also be treated under section 7502 as timely filed on the postmark date for purposes of section 6511(b)(2)(A). This would include returns such as Form 720, Quarterly Federal Excise Tax Return, and Form 706, U.S. Estate Tax Return. Moreover, the IRS and the Treasury Department have determined that the late filed original tax return, as well as the claim for credit or refund, should also be treated as filed on the postmark date. These changes, which are reflected in § 301.7502-1(f), will assist taxpayers in filing timely claims for credit or refund, and will be applied retroactively to certain previously disallowed claims for credit or refund.

These changes are effective for any claim for credit or refund on a late filed tax return described in § 301.7502-1(f)(1) except for those claims for credit or refund which (without regard to paragraph (f) of this section) were barred by the operation of section 6532(a) or any other law or rule of law (including res judicata) as of January 11, 2001. See § 301.7502-1(g)(2), which provides the effective date rules for § 301.7502-1(f).

Consistent with the effective date rules for § 301.7502-1(f), the IRS will attempt to identify as many claims as possible that were filed on untimely original individual income tax returns and that were previously disallowed based on the Government's position in Weisbart . In these cases, the IRS intends to issue a refund, or credit the overpayment against a liability as provided in section 6402, without the need for the taxpayer to contact the IRS. Such automatic reconsideration of the claim will generally occur if the claim was filed on an individual income tax return for 1995 or a subsequent calendar year. Claims filed on other types of original returns will not receive automatic reconsideration under this program, e.g., individual returns for years prior to 1995.

Because the IRS will be undertaking the automatic reconsideration program described above and intends to complete the program by June 30, 2001, taxpayers who have filed income tax refund claims for tax year 1995 and later years that qualify under § 301.7502-1(f) need not contact the IRS regarding their claims unless the two-year period for filing a refund suit under section 6532(a) for their denied claim will expire prior to June 30, 2001. In such cases, taxpayers are advised to file a request for reconsideration with the appropriate IRS Service Center. Such a request should include a notation on the top of the first page that it is a “ Weisbart Claim.” Such taxpayers are also advised to file a refund suit to protect their legal rights with respect to the claim. The IRS will respond to the requests for reconsideration after the IRS has finished identifying eligible claims under the automatic reconsideration program and paying those refunds. Taxpayers whose two-year period for filing a refund suit under section 6532(a) does not expire until after June 30, 2001, and who have not received a refund by that date, are advised to file a request for reconsideration with the appropriate IRS Service Center at that time.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

The principal author of these regulations is Charles A. Hall of the Office of Associate Chief Counsel, Procedure and Administration (Administrative Provisions and Judicial Practice Division). However, other personnel from the IRS and Treasury Department participated in their development.

Section 18 of the Occupational Safety and Health Act of 1970 (the “OSH Act”), 29 U.S.C. 667, provides that a State which desires to assume responsibility for the development and enforcement of occupational safety and health standards relating to any occupational safety and health issue with respect to which a Federal standard has been promulgated may submit a State plan to the Assistant Secretary of Labor for Occupational Safety and Health (“Assistant Secretary”) documenting in detail the proposed program. Regulations promulgated pursuant to the OSH Act at 29 CFR part 1956 provide that a State may submit a State plan for the development and enforcement of standards applicable only to employees of the State and its political subdivisions (“public employees”). State and local government workers are excluded from Federal coverage under the OSH Act and are provided protection only through the vehicle of a State Plan approved pursuant to Section 18 of the Act.

Under these regulations, the Assistant Secretary will approve a State plan for public employees if the plan provides for the development and enforcement of standards relating to hazards in employment covered by the plan which are, or will be, at least as effective in providing safe and healthful employment and places of employment for public employees as standards promulgated and enforced under section 6 of the OSH Act, giving due consideration to differences between public and private sector employment. In making this determination the Assistant Secretary will consider, among other things, the criteria and indices of effectiveness set forth in 29 CFR Part 1956, Subpart B. A State plan for public employees may receive initial approval even though, upon submission, it does not fully meet the criteria set forth in §§ 1956.10 and 1956.11, if it includes satisfactory assurances by the State that it will take the necessary steps, and establishes an acceptable developmental schedule, to meet the criteria within a 3-year period (29 CFR 1956.2(b)). The Assistant Secretary publishes a notice of “certification of completion of developmental steps” when all of a State's developmental commitments have been met satisfactorily (29 CFR 1956.23; 1902.33 and 1902.34) and the plan is structurally complete. After certification of a State plan for public employees, OSHA may initiate a period of at least one year of intensive monitoring, after which OSHA may make a determination under the procedures of §§ 1902.38, 1902.39, 1902.40 and 1902.41 as to whether, on the basis of actual operations, the criteria set forth in §§ 1956.10 and 1956.11 for “at least as effective” State plan performance are being applied under the plan—a determination of “operational effectiveness.”

In 1973, the New Jersey Department of Labor and Industry obtained OSHA approval of a State plan for the enforcement of occupational safety and health standards covering private sector workplaces as well as a program for public employees in New Jersey. That plan was approved by the Assistant Secretary on January 22, 1973 ((37 FR 2426); 29 CFR 1952.140 et seq). That plan was subsequently withdrawn by the State of New Jersey effective June 30, 1975, after the State was unable to gain enactment of the necessary State OSHA legislation (40 FR 27655).

In 1984, the New Jersey State Legislature passed the New Jersey Public Employees Occupational Safety and Health (PEOSH) Act, N.J.S.A. 34:6A (the “State Act”), which was signed into law by the Governor, and which provided the basis for establishing a comprehensive occupational safety and health program applicable to the public employees in the State.

The State formally submitted for Federal approval a plan applicable only to public employees in February 1988. OSHA's review findings were detailed in an October 1988 letter to the State in which OSHA determined that the New Jersey statute, as then structured, and the proposed State plan failed to meet Federal Public Employee Only State plan approval criteria.

A revised plan was submitted by the State on February 19, 1992. On March 27, 1992, OSHA informed the State of its findings, identifying areas of the proposed plan which needed to be addressed or needed clarification. Amended enabling legislation was signed into law on July 25, 1995, to conform the proposed State plan to OSHA requirements. On October 11, 1995, the New Jersey State Labor Commissioner submitted a newly revised State plan which OSHA determined was conceptually approvable as a developmental State plan, but which could not be approved until additional Federal matching grant funds, necessary for approval of a new State plan, were appropriated under section 23(g) of the OSH Act. (The OSH Act provides for funding “up to 50%” of the State plan costs, but longstanding language in OSHA's appropriation legislation further provides that OSHA must fund “* * * no less than 50% of the costs required to be incurred” by an approved State plan. Thus Federal matching grant funds must be available before a State plan can be approved.)

On August 1, 2000, current New Jersey Commissioner of Labor, Mark B. Boyd, and Commissioner of Health and Senior Services, Christine Grant, submitted a further revised plan document, with subsequent amendments submitted on August 15, August 29, September 1, September 22, September 28, and October 5, 2000. On December 21, 2000, the President signed the appropriation act for FY 2001 for the Department of Labor, as approved by the Congress, which includes funding for the Occupational Safety and Health Administration specifically designated for initial approval of the New Jersey State plan.

On November 13, 2000, OSHA published notice in the Federal Register (65 FR 67672) concerning the submission of the New Jersey Public Employee Only State plan, announcing that initial Federal approval of the plan was at issue, and offering interested parties an opportunity to review the plan and submit data, views, arguments or requests for a hearing concerning the plan. The New Jersey Department of Labor published similar notices throughout the State from November 15-17, 2000, in the following New Jersey newspapers: The Newark Star-Ledger, The South Jersey Courier-Post, The Trenton Times, The Atlantic City Press, and The Bergen Record. (Ex. #5)

To assist and encourage public participation in the initial approval process, copies of the New Jersey State plan were maintained as Docket No. T-034 in the Docket Office, Department of Labor, Occupational Safety and Health Administration, Third Street and Constitution Avenue, NW, Room N-2625, Washington, DC 20210; Office of the New York Regional Administrator, U.S. Department of Labor, Occupational Safety and Health Administration, 201 Varick Street, Room 670, New York, New York 10014; and the New Jersey Department of Labor, Division of Public Safety and Occupational Safety and Health, Office of Public Employees' Safety, P.O. Box 386, 225 East State Street, 8th Floor West, Trenton, New Jersey 08625-0386.

In response to OSHA's November 13, 2000, Federal Register notice, which announced submission of the New Jersey State plan and its availability for public comment, three (3) written public comments were submitted by: (1) Peter P. Guzzo, Executive Director/Legislative Agent, for Consumers for Civil Justice (OSHA Docket #T-034, Exhibit 3-1.); (2) Rick Engler, Director, New Jersey Work Environment Council, cosigned by the following 15 organizations: Harold Schaitberger, General President, for International Association of Fire Fighters, AFL-CIO; Thomas Canzanella, President, for Professional Firefighters Association of New Jersey, IAFF; William J. Lavin, for New Jersey Firemen's Mutual Benevolent Association; Michael Johnson, President, for New Jersey Education Association; David Legrande, Director of Occupational Safety and Health, for Communications Workers of America (CWA), AFL-CIO; Robert Pursell, New Jersey Area Director, for CWA District 1; Carla Katz, President, for CWA Local 1034; Michael Lohman, Staff Representative, for CWA, Local 1033, and Chairman, CWA New Jersey State Worker Locals Health and Safety Coordinating Committee; Bill Borwegan, Director of Occupational Safety and Health, for Service Employees International Union, AFL-CIO; Daryl Alexander, Associate Director for Occupational Safety and Health, for American Federation of Teachers (AFT), AFL-CIO; Nicholas C. Yovnello, President, for Council of New Jersey State College Locals, AFT; Ken Carlson, President for Rutgers Council of American Association of University Professors; Gerald Newsome, Trustee, for International Federation of Professional and Technical Engineers Local, 195, AFL-CIO; Edward II Lennon, President, for State Troopers Fraternal Association of New Jersey; Mark Dudzie, President, for Paper, Allied-Industrial, Chemical, and Energy Workers Local 2-149, AFL-CIO (OSHA Docket # T-034, Exhibit 3-2.); and; (3) Verri Andrea, student, University of Wisconsin-Madison. (OSHA Docket # T-034, Exhibit #4-1.)

All of the commenters listed above indicated their support for OSHA approval of the New Jersey Public Employee Only State plan. None has requested a public hearing or raised any issues for consideration.

As required by 29 CFR 1956.2 in considering the granting of initial approval to a State public employee only plan, OSHA must determine whether the State plan meets or will meet the criteria in 29 CFR 1956.10 and the indices of effectiveness in 29 CFR 1956.11. Findings and conclusions in each of the major State plan areas addressed by 29 CFR part 1956 are as follows:

Section 18(c)(1) of the OSH Act provides that a State occupational safety and health plan must designate a State agency or agencies responsible for administering the plan throughout the State (29 CFR 1956.10(b)(1)). The plan must describe the authority and responsibilities of the designated agency and provide assurance that other responsibilities of the agency will not detract from its responsibilities under the plan (29 CFR 1956.10(b)(2)). The New Jersey Department of Labor is designated by revised N. J. S. A. 34:6A-25 et seq. , as the sole agency responsible for administering and enforcing the New Jersey Public Employee Occupational Safety and Health (PEOSH) plan. (New Jersey State plan, p. 15.) The plan also describes the authority of the New Jersey Department of Labor and its other responsibilities. (New Jersey State plan, pp.16-16.2.) The New Jersey Department of Health and Senior Services has responsibility for conducting inspections with regard to occupational health hazards but all standards adoption and enforcement authority rests with the New Jersey Department of Labor. (N.J.S.A. 34:6A-30(e))

Section 18(c)(6) of the OSH Act provides that the State, to the extent permitted by its law, shall under its plan establish and maintain an effective and comprehensive occupational safety and health program applicable to all employees of the State and its political subdivisions. Only where a State is constitutionally precluded from regulating occupational safety and health conditions in certain political subdivisions may the State exclude such political subdivision employees from coverage (29 CFR 1956.2(c)(1)). Further, the State may not exclude any occupational, industrial or hazard grouping from coverage under its plan unless OSHA finds that the State has shown there is no necessity for such coverage (29 CFR 1956.2(c)(2)).

The scope of the New Jersey State plan includes any employee of the State and any political subdivision thereof, including a public authority or any other governmental agency or authority. No employees of any political subdivision of the State or local government are excluded from the plan. (New Jersey State plan, pp 10-11.) The New Jersey Department of Labor adopts all Federal OSHA occupational safety and health standards, and the plan excludes no occupational, industrial or hazard grouping. (New Jersey State plan, p. 10)

Consequently, OSHA finds that the New Jersey plan contains satisfactory assurances that no employees of the State and its political subdivisions are excluded from coverage, and the plan excludes no occupational, industrial or hazard grouping.

Section 18(c)(2) of the OSH Act requires State plans to provide for occupational safety and health standards which are at least as effective as Federal OSHA standards. A State plan for public employees must therefore provide for the development or adoption of such standards and must contain assurances that the State will continue to develop or adopt such standards (29 CFR 1956.10(c); 1956.11(b)(2)(ii)). A State may establish the same standards as Federal OSHA (29 CFR 1956.11(a)(1)), or alternative standards that are at least as effective as those of Federal OSHA (29 CFR 1956.11(a)(2)). Where a State's standards are not identical to Federal OSHA, they must meet the following criteria: they must be promulgated through a procedure allowing for consideration of all pertinent factual information and participation of all interested persons (29 CFR 1956.11(b) (2)(iii)); must, where dealing with toxic materials or harmful physical agents, assure employee protection throughout his or her working life (29 CFR 1956. 11(b)(2)(i)); must provide for furnishing employees appropriate information regarding hazards in the workplace through labels, posting, medical examinations, etc. (29 CFR 1956.11(b)(2)(vi)); and, must require suitable protective equipment, technological control, monitoring, etc. (29 CFR 1956.11(b)(2)(vii)).

In addition, the State plan must provide for prompt and effective standards setting actions for protection of employees against new and unforeseen hazards, by such means as authority to promulgate emergency temporary standards (29 CFR 1956.11(b)(2)(v)).

The PEOSH Act, 34:6A-30 et seq. , mandates that the Commissioner of Labor (the “Commissioner”) shall adopt all safety and health standards promulgated under the OSH Act which are in effect on the effective date of the State Act (January 17, 1984, as amended July 25, 1995), and incorporate future revisions. (New Jersey State plan, p.19) The procedures for State adoption of Federal occupational safety and health standards include publication in the New Jersey Register in accordance with N.J.S.A. 52:14B-5. New Jersey has adopted State standards identical to Federal occupational safety and health standards promulgated as of December 7, 1998, with the exception of the hazard communication and fire protection standards. The State plan includes a commitment to bring those standards into conformance with OSHA requirements and to update all standards within one year after plan approval. (The State intends to incorporate appropriate provisions of the New Jersey Right to Know Act into its public sector occupational hazard communication standard.) The State plan also provides that future OSHA standards and revisions will be adopted by the State in accordance with 29 CFR 1953.21.

Under the New Jersey State plan, the Commissioner of Labor, in consultation with the Commissioner of Health and Senior Services, and the Commissioner of Community Affairs, and with the advice of the Public Employees' Safety and Health Advisory Board may adopt alternative or different occupational safety and health standards where no federal standards are applicable or where more stringent standards are deemed advisable. (N.J.S.A. 34:6A-30(c); New Jersey State plan, pp.21-28). Such standards will be adopted in accordance with the State Act and the New Jersey Administrative Procedures Act, N.J.S.A. 52-148-1 et seq. , which include provisions for interested persons to petition the State for a new or revised standard and which give interested persons the opportunity to participate in any hearing for the development, modification or establishment of standards.

Section 34:6A-30(b) of the amended State Act provides for coordination of the provisions of the State uniform construction code and the uniform fire safety code with State occupational safety and health standards. The Commissioner of Community Affairs is charged with amending the uniform construction or fire codes to reflect any more stringent applicable provisions of the State OSHA standards and with preparing an application to the Assistant Secretary for approval of any equally effective provision of the uniform construction or fire codes for incorporation into the State plan. In response to OSHA's concerns that building or fire codes may not appropriately address employee protection, New Jersey amended its State Act and provided assurance that Federal approval will be obtained prior to the incorporation of building or fire codes as State occupational safety and health standards into the State plan. (New Jersey State plan, p.27)

The New Jersey State plan also provides for the adoption of Federal emergency temporary standards within 30 days of Federal promulgation. State regulations will be amended to reflect this. (New Jersey State plan, p. 27)

Based on the foregoing plan provisions and assurances and commitments, OSHA finds the New Jersey State plan to have met the statutory and regulatory requirements for initial plan approval with respect to occupational safety and health standards.

A State plan must provide authority for the granting of variances from State standards upon application of a public employer or employers which corresponds to variances authorized under the OSH Act, and for consideration of the views of interested parties, by such means as giving affected employees notice of each application and an opportunity to request and participate in hearings or other appropriate proceedings relating to applications for variances (29 CFR 1956.11(b)(2)(iv)).

The State Act provides for the granting of permanent and temporary variances from State standards (N.J.S.A., Section 34:6A-39; New Jersey State Plan, pp. 35-51) in terms substantially similar to the variance provisions of the OSH Act. The State provisions require employee notification of variance applications as well as employee rights to participate in hearings held on variance applications. Variances may not be granted unless it is established that adequate protection is afforded employees under the terms of the variance. However, the State's variance procedures at N.J.A.C. 12:110-6.5(c) require revision. The State has provided assurance in its developmental schedule that within two years of initial plan approval it will amend its regulations to reflect variance provisions contained in the Federal 29 CFR Part 1905. (New Jersey State Plan p. 38.)

Accordingly, OSHA finds that the New Jersey State plan effectively provides or will provide opportunity and procedures for variances from its occupational safety and health standards.

Section 18(c)(2) of the OSH Act and 29 CFR 1956.10(d)(1) require a State plan to include provisions for enforcement of State standards which are or will be at least as effective in providing safe and healthful employment and places of employment as the Federal program, and to assure that the State's enforcement program for public employees will continue to be at least as effective as the Federal program in the private sector.

(a) Legal Authority. The State must require public employer and employee compliance with all applicable standards, rules and orders (29 CFR 1956.10(d)(2)) and must have the legal authority for standards enforcement (section 18(c)(4)) including compulsory process (29 CFR 1956.11(c)(2)(viii)).

Section 34:6A-33 of the State Act requires public employers to comply with the New Jersey Department of Labor's occupational safety and health standards; section 34:6A-34 requires employees to comply with all standards and regulations applicable to their own actions and conduct. Section 34:6A-31 of the revised State Act also provides that space leased by a public employer must be in conformance with current occupational safety and health requirements at the time a lease is executed.

(b) Inspections. A State plan must provide for inspection of covered workplaces, including in response to complaints, where there are reasonable grounds to believe a hazard exists (29 CFR 1956.11(c)(2)(i)).

When no compliance action results from inspection of violations alleged by employee complaints, the State must notify the complainant of its decision not to take compliance action by such means as written notification and opportunity for informal review (29 CFR 1956.11(c)(2)(iii)).

The State Act provides for inspections of covered workplaces including inspections in response to employee complaints by the Commissioner of Labor, and with regard to health hazards, by the Commissioner of Health and Senior Services (N.J.S.A., Sections 34:6A-35, 36, and 38.) The New Jersey State plan (Section 1, pp. 73-75) provides that when a determination has been made that a complaint does not warrant an inspection, the complainant shall be notified in writing of the determination and given an opportunity to request a review of that determination. In response to OSHA comments, New Jersey revised its regulations and procedures to allow complainants to elect anonymity in the process.

(c) Employee Notice and Participation in Inspection. In conducting inspections, the State plan must provide an opportunity for employees and their representatives to point out possible violations through such means as employee accompaniment or interviews with employees (29 CFR 1956.11(c) (2)(ii)).

The State Act provides the opportunity for an employer and employee representative to accompany a Department of Labor or Department of Health and Senior Services inspector for the purpose of aiding in the inspection. (N.J.S.A., Section 34:6A-36 and -38.) Where there is no authorized employee representative, the inspectors are required to consult with a reasonable number of employees concerning matters of safety and health in the workplace. Any employee who accompanies an inspector representing either Commissioner on an inspection shall receive payment of normal wages for the time spent on the inspection. (N.J.S.A. Sec 34:6A-35,-36, -38)

In addition, the State plan must provide that employees be informed of their protections and obligations under the Act by such means as the posting of notices (29 CFR 1956.11(c)(2)(iv)); and provide that employees have access to information on their exposure to regulated agents and access to records of the monitoring of their exposure to such agents (29 CFR 1956.11(c)(2)(vi)).

The State Act provides that the Commissioner of Labor must issue regulations requiring that employers, through posting of notices, training or other appropriate means, keep their employees informed of their protections. (N.J.S.A., Section 34:6A-31.) A poster, which outlines employee protections and obligations under the Act, has been designed and distributed to public employers. Specific regulations as well as the poster have been submitted by the State. (New Jersey State Plan, Attachments 3 and 9.)

Information on employee exposure to regulated agents (in the public sector), access to medical and exposure records, and provision and use of suitable protective equipment is provided through State standards. New Jersey has adopted all Federal standards as of December 7, 1998 with the exception of 29 CFR part 1910, subpart L—Fire protection, and 29 CFR 1910.1200 Hazard Communication. The State plan contains an assurance that the State intends to adopt all applicable Federal standards either identically or submit alternative standards which are at least as effect as the Federal standards within one year of plan approval as a part of the 3-year developmental schedule. (New Jersey State Plan, pp. 28-32)

(d) Nondiscrimination. A State is expected to provide appropriate protection to employees against discharge or discrimination for exercising their rights under the State's program, including provision for employer sanctions and employee confidentiality (29 CFR 1956.11(c) (2)(v)).

The State Act provides that no person shall discharge, or otherwise discipline, or in any manner discriminate against any employee because such employee has filed a complaint or instituted or caused to be instituted any proceeding under or related to this section or has testified or is about to testify in any such proceeding, or because of the exercise by such employee on behalf of the employee or others of any right under this section. (N.J.S.A., Section 34:6A-45.)

The State Act provides that an employee who believes that he or she has been discharged, disciplined or otherwise discriminated against by any person in violation of this section, may within 180 days after the employee first has knowledge such a violation did occur, file a complaint with the Commissioner of Labor alleging that discrimination. (N.J.S.A., Section 34:6A-45b.) The Commissioner shall investigate such complaints as appropriate and make a determination within 90 days which shall include an order for all appropriate relief. The monetary penalty established for repeated violations may also be applied to repeated discriminatory acts. (N.J.S.A. 34:6A-41(d))

New Jersey will amend its regulations on nondiscrimination procedures, N.J.A.C. 12:110-7, to conform with Federal guidelines within two years after plan approval. (New Jersey State Plan, p. 80; Attachment 3.)

e. Restraint of Imminent Danger. A State plan is required to provide for the prompt restraint of imminent danger situations (29 CFR 1956.11(c)(2)(vii)).

Section 34:6A.44 of the State Act provides that the Attorney General, at the request of and on behalf of the Commissioner of Labor, may bring an action in the Superior Court to restrain any conditions or practices in any workplace which the Commissioner determines, in accordance with the State Act ( N.J.S.A. 34:6A-41), are such that a danger exists which could reasonably be expected to cause death or serious physical harm immediately or before the danger could be eliminated through the enforcement process. (New Jersey State plan, pp. 66-69.)

(f) Right of Entry; Advance Notice. A State program is required to have authority for right of entry to inspect and compulsory process to enforce such right equivalent to the Federal program (section 18(c)(3) of the Act and 29 CFR 1956.10(e)). Likewise, a State is expected to prohibit advance notice of inspection, allowing exception thereto no broader than in the Federal program (29 CFR 1956.10(f)).

The State Act provides that the Commissioner of Labor and the Commissioner of Health and Senior Services both have the right of immediate entry of any premises occupied by a public employer at reasonable hours, and without advance notice if there is reason to believe that a violation of this section of State law has occurred. (N.J.S.A., 34:3A-35.)

The New Jersey State plan ( p.63-64) describes its general policy and procedures prohibiting advance notice of inspections and allowing exception thereto. Any person who gives advance notice of any inspection to be conducted under this act, without authority from the Commissioner of Labor or the Commissioner of Health and Senior Services or their designees, shall upon conviction, be punished by a fine of not more than $1,000 or by imprisonment for not more than six (6) months, or by both. (N.J.S.A. 34:6A-35(g)).

(g) Citations, Sanctions, and Abatement. A State plan is expected to have authority and procedures for promptly notifying employers and employees of violations, including proposed abatement requirements, identified during inspection, for the proposal of effective first-instance sanctions against employers found in violation of standards, and for prompt employer notification of any such sanctions. In lieu of monetary penalties as a sanction, a complex of enforcement tools and rights, including administrative orders and employee right to contest citations (as well as abatement dates), may be demonstrated to be as effective as monetary penalties in achieving compliance in public employment (29 CFR 1956.11(c)(2)(ix) and (x)).

The State Act describes the authority and general procedures of the Commissioner of Labor to promptly notify public employers and employees of violations, and abatement requirements and to compel compliance therewith. The Commissioner of Labor must issue a written order to comply with reasonable promptness which is in no case no more than six months after determination of the existence of a safety violation or certification from the Commissioner of Health and Senior Services of a health violation. (N.J.S.A., Section 34:6A-35 and -41.)

The New Jersey State plan (pp. 87-90) provides that when an inspection of an establishment has been made, and the Commissioner of Labor has issued an order to comply, the employer shall post such order or a copy thereof at or near each location of the violation cited in the order so that it is clearly visible to affected employees. The Commissioner must make such order available to employee representatives, affected employees and the public. A written citation (Order to Comply) will be issued, citing the sections of the law, standards, rules or regulations alleged to be violated, the location of the violation, the abatement period, posting requirements and will also include the employer's and employee's right to contest any or all orders.

Although the State Plan does not provide for first instance sanctions, it does provide for monetary penalties for failures-to-abate and willful and repeated violations. The State Act (N.J.S.A., Section 34:6A-41(d)) provides that if the time for compliance with an order has elapsed, and the employer has not contested and has not made a good faith effort to comply, the Commissioner of Labor shall impose a civil administrative penalty of up to $7,000 per day for each violation. In addition, any employer who willfully or repeatedly violates the requirements of any standard, rule, order or regulation shall be assessed a civil administrative penalty of up to $70,000 for each violation. Penalties may be recovered with costs in a civil action commenced by the Commissioner by a summary proceeding under the Penalty Enforcement Law. (N.J.S.2A:58-1 et seq. ) The State has given an assurance that it will adopt appropriate penalty procedures that will include gravity-based penalties (severity and probability) as well as penalty adjustment factors (size, history, and good faith) as a part of its developmental step commitment to adopt amendments to regulations regarding inspections, citations, and proposed penalties equivalent to 29 CFR 1903 within one year after state plan approval. Specific regulations and detailed procedures on compliance orders, abatement and sanctions will be submitted by New Jersey in accordance with its developmental schedule. (New Jersey State plan, pp. 96-96.)

(h) Contested Cases. A State plan must have authority and procedures for employer contest of violations alleged by the State, penalties/sanctions and abatement requirements at full administrative or judicial hearings. Employees must also have the right to contest abatement periods and the opportunity to participate as parties in all proceedings resulting from an employer's contest (29 CFR 1956.11(c)(2)(xi)).

The State Act provides that any employer, employee or employee representative affected by a determination of the Commissioner of Labor may file with the Commissioner, within fifteen working days of the issuance of an order to comply, a notice to contest any provision of the order. (N.J.S.A. Sections 34:6A-36, 41 and N.J.A.C. 12:110-4.13.) The Commissioner must immediately advise the Occupational Safety and Health Review Commission of the notification and the Commission will afford an opportunity for a hearing. The Review Commission will issue an order, based on a finding of fact, affirming, modifying, or vacating the Commissioner's order to comply or the proposed penalty, or directing other appropriate relief, and the order shall become final 45 days after its issuance. (N.J.S.A. 34:6A-42) N.J.A.C. 12:110, establishes the opportunity for the Commissioner of Labor to hold an informal conference. Such a conference would be for the purpose of discussing any issue raised by an inspection, order to comply, a notice of proposed penalty, or notice of intention to contest. No such conference or request for such conference will serve as a stay of any 15 working day period for filing a notice of intention to contest as prescribed in N.J.A.C. 12:110-4.14. Appeals from decisions of the Review Commission are to the Appellate Division of the Superior Court. (N.J.S.A. 34:6A-43)

(i) Enforcement Conclusion. Accordingly, OSHA finds that the enforcement provisions of the New Jersey State plan as described above meet or will meet the statutory and regulatory requirements for initial State plan approval.

Section 18(c)(4) of the OSH Act requires State plans to provide the qualified personnel necessary for the enforcement of standards. In accordance with 29 CFR 1956.10(g), one factor which OSHA must consider in considering a plan for initial approval is whether the State has or will have a sufficient number of adequately trained and competent personnel to discharge its responsibilities under the plan.

The New Jersey State plan (pp. 150-154) provides assurances of a fully trained, adequate staff, including 20 safety and 7 health compliance officers for enforcement inspections, and 4 safety and 3 health consultants to perform consultation services in the public sector, and 2 safety and 3 health training and education staff. The compliance staffing requirements (or benchmarks) for State plans covering both the private and public sectors are established based on the “fully effective” test established in AFL-CIO v. Marshall , 570 F.2d 1030 (D.C. Cir., 1978). This staffing test, and the formula used to derive benchmarks for complete private/public sector plans, is not intended, nor is it appropriate, for application to the staffing needs of public employee only plans. However, the State has given satisfactory assurance (New Jersey State plan, p.156) that it will meet the staffing requirements of 29 CFR 1956.10.

Section 18(c)(5) of the OSH Act requires that the State plan devote adequate funds to administration and enforcement of its standards (29 CFR 1956.10(h)). New Jersey has funded its public employee occupational safety and health program since 1984 solely utilizing State funds. The State plan will be funded at $5,118,360 ($1,771,000 Federal 50% share; $1,771,000 State 50% matching share; $1,576,360 100% State funds) during federal fiscal year 2001.

Accordingly, OSHA finds that the New Jersey State plan has provided for sufficient, qualified personnel and adequate funding for the various activities to be carried out under the plan.

State plans must assure that employers in the State submit reports to the Secretary in the same manner as if the plan were not in effect (section 18(c)(7)) of the OSH Act). Under a public employee State plan, public employers must maintain records and make reports on occupational injuries and illnesses in a manner similar to that required of private sector employers under the OSH Act and (29 CFR 1956.10(i)). The plan must also provide assurances that the designated agency will make such reports to the Secretary in such form and containing such information as he may from time to time require (section 18(c)(8) of the OSH Act and 29 CFR 1956.10(j)).

New Jersey has provided assurance in its State plan (pp. 139-144) that all jurisdictions covered by the State plan will maintain valid records and make timely reports on occupational injuries and illnesses as required for private employers under the OSH Act. Specific regulations on this aspect of the State plan will be submitted by New Jersey in accord with its developmental schedule in which the State has agreed to adopt amendments to regulations regarding recordkeeping equivalent to 29 CFR part 1904 within two years after state plan approval. Current State recordkeeping regulations, at N.J.A.C. 12:110-5., infer that employees' names may be considered confidential. As this conflicts with the Federal requirement at 29 CFR 1904.7 which provides for full access to the OSHA Log including Column C, “Employee's Name,” for compliance staff, employees, former employees and employee representatives, the State has provided assurance that it will comply with § 1904.7 upon plan approval and will amend its regulation accordingly. (New Jersey State Plan, p. 140)

New Jersey has also provided assurance in its State plan (pp. 144 and 148) that it will continue its participation in the Bureau of Labor Statistics Annual Survey of Injuries and Illnesses (for the private sector) and will similarly continue its statistical survey of the public sector under its approved plan. The New Jersey State plan also contains assurances that it will provide reports to OSHA in the desired form and participate in OSHA's Integrated Management Information System. (New Jersey State plan, pp. 145-148)

OSHA finds that the New Jersey State plan has met the requirements of section 18(c)(7) and (8) of the OSH Act on employer and State reports to the Secretary.

A State plan must undertake programs to encourage voluntary compliance by employers by such means as conducting training and consultation with employers and employees (29 CFR 1956.11(c)(2)(xii)).

The New Jersey State plan (pp.125-130) provides that the State Labor and Health Departments will include voluntary compliance as an essential component of its program. Training will be provided to public employers and employees; seminars will be conducted to familiarize affected individuals with OSHA standards and requirements, and safe work practices; and, an on-site consultation program in the public sector parallel to New Jersey State's existing private sector on-site consultation program (under section 21(d) of the OSH Act) will be established. The public employee consultation program will have both safety and health consultants available to employers who request such service. All State agencies and political subdivisions will also be encouraged to develop and maintain self-inspection programs and to develop internal safety and health programs in accordance with the State public employee safety and health program guidelines. The State has committed under its developmental schedule to fully implement public employer/employee consultation, training and education program equivalent to 29 CFR part 1908 within three years after state plan approval.

OSHA finds that the New Jersey State plan provides for the establishment and administration of an effective voluntary compliance program.

OSHA, after carefully reviewing the New Jersey State plan for the development and enforcement of State standards applicable to State and local government employees and the record developed during the above described proceedings, has determined that the requirements and criteria for initial approval of a developmental plan have been met. The plan is hereby approved as a developmental plan under section 18 of the Act and 29 CFR part 1956. This decision incorporates the requirements of the Act and of regulations applicable to State plans generally.

The initial approval of a State plan for public employees in New Jersey is not a significant regulatory action as defined in Executive Order 12866.

OSHA certifies pursuant to the Regulatory Flexibility Act of 1980 (5 U.S.C. 601 et seq. ) that the proposed initial approval of the New Jersey State Plan will not have a significant economic impact on a substantial number of small entities. By its own terms, the plan will have no effect on private sector employment, but is limited to the State and its political subdivisions. Moreover, the New Jersey legislation has been in effect since 1984, when the State first established a safety and health program for State and local government employees. Since that time, the New Jersey program has been in operation with State funding and most public sector employers in the State, including small units of local government, have been subject to its terms. Compliance with State OSHA standards is required by State law; Federal approval of a State plan imposes regulatory requirements only on the agency responsible for administering the State plan. Accordingly, no new obligations would be placed on public sector employers as a result of Federal approval of the plan.

Executive Order 13132, “Federalism,” emphasizes consultation between Federal agencies and the States and establishes specific review procedures the Federal government must follow as it carries out policies which affect state or local governments. OSHA has consulted extensively with New Jersey throughout the development, submission and consideration of its proposed State plan. Although OSHA has determined that the requirements and consultation procedures provided in Executive Order 13132 are not applicable to initial approval decisions under the Act, which have no effect outside the particular State receiving the approval, OSHA has reviewed the New Jersey initial approval decision proposed today, and believes it is consistent with the principles and criteria set forth in the Executive Order.

Intergovernmental relations, Law enforcement, Occupational Safety and Health, Reporting and recordkeeping requirements.

OSHA's decision granting initial Federal approval to the New Jersey State plan for public employees only is effective January 11, 2001. The program described in the plan has been in effect for many years and no immediate modifications of the program are required by today's decision. Federal 50% matching funds have been explicitly provided in the Department of Labor's FY 2001 appropriation. Notice of proposed initial approval of the plan was published both in the Federal Register and in several newspapers throughout the State with requests for comment. No comments opposing initial approval of the plan were received, and OSHA believes that no party is adversely affected by initial approval of the plan. OSHA therefore finds, pursuant to section 553(d) of the Administrative Procedures Act, that good cause exists for making Federal approval of the New Jersey Public Employee Only State plan effective upon publication in the Federal Register .

This document was prepared under the direction of Charles N. Jeffress, Assistant Secretary of Labor for Occupational Safety and Health. It is issued under Section 18 of the OSH Act, (29 U. S. C. 667), 29 CFR parts 1902 and 1956, and Secretary of Labor's Order No. 3-2000 (65 FR 50017).

The regulated entities are public water systems. All large community and non-transient non-community water systems serving more than 10,000 persons are required to monitor. A community water system (CWS) means a public water system which serves at least 15 service connections used by year-round residents or regularly serves at least 25 year-round residents. Non-transient non-community water system (NTNCWS) means a public water system that is not a community water system and that regularly serves at least 25 of the same persons over 6 months per year. Only a national representative sample of community and non-transient non-community systems serving 10,000 or fewer persons will be required to monitor. Transient non-community systems (i.e., systems that do not regularly serve at least 25 of the same persons over six months per year) will not be required to monitor. States, Territories, and Tribes, with primacy to administer the regulatory program for public water systems under the Safe Drinking Water Act, sometimes conduct analyses to measure for contaminants in water samples and are regulated by this action. Categories and entities potentially regulated by this action include the following:

You may be affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. Potentially affected categories and entities may include, but are not limited to:

This listing is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be affected by this action. Other types of entities not listed in the table could also be affected. The North American Industrial Classification System (NAICS) codes have been provided to assist you and others in determining whether or not this action might apply to certain entities. If you have questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT .

1. Electronically . You may obtain electronic copies of this document, and certain other related documents that might be available electronically, from the EPA Internet Home Page at http://www.epa.gov/. To access this document, on the Home Page select “Laws and Regulations”, “Regulations and Proposed Rules,” and then look up the entry for this document under the “ Federal Register —Environmental Documents.” You can also go directly to the Federal Register listings at http://www.epa.gov/fedrgstr/. To access the OPPTS Harmonized Guidelines referenced in this document, go directly to the guidelines at http://www.epa.gov/opptsfrs/home/guidelin.htm.

2. In person . The Agency has established an official record for this action under docket control number OPP-301099. The official record consists of the documents specifically referenced in this action, and other information related to this action, including any information claimed as Confidential Business Information (CBI). This official record includes the documents that are physically located in the docket, as well as the documents that are referenced in those documents. The public version of the official record does not include any information claimed as CBI. The public version of the official record, which includes printed, paper versions of any electronic comments submitted during an applicable comment period is available for inspection in the Public Information and Records Integrity Branch (PIRIB), Rm. 119, Crystal Mall #2, 1921 Jefferson Davis Hwy., Arlington, VA, from 8:30 a.m. to 4 p.m., Monday through Friday, excluding legal holidays. The PIRIB telephone number is (703) 305-5805.

In the Federal Register of February 9, 1999 (64 FR 6351) (FRL-6058-3), EPA issued a notice pursuant to section 408 of the Federal Food, Drug, and Cosmetic Act (FFDCA), 21 U.S.C. 346a as amended by the Food Quality Protection Act of 1996 (FQPA) (Public Law 104-170) announcing the filing of a pesticide petition (PP 8F3600) for tolerance by Dow AgroSciences LLC, 9330 Zionsville Road, Indianapolis, IN 46268. This notice included a summary of the petition prepared by Dow AgroSciences LLC, the registrant. There were no comments received in response to the notice of filing.

The petition requested that 40 CFR 180.431 be amended by establishing tolerances for residues of the herbicide clopyralid (3,6-dichloro-2-pyridinecarboxylic acid) in or on sugar beet roots at 2.0 parts per million (ppm), sugar beet tops at 3.0 ppm, and sugar beet molasses at 16.0 ppm.

Section 408(b)(2)(A)(i) of the FFDCA allows EPA to establish a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the tolerance is “safe.” Section 408(b)(2)(A)(ii) defines “safe” to mean that“ there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Section 408(b)(2)(C) requires EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue....”

EPA performs a number of analyses to determine the risks from aggregate exposure to pesticide residues. For further discussion of the regulatory requirements of section 408 and a complete description of the risk assessment process, see the final rule on Bifenthrin Pesticide Tolerances (62 FR 62961, November 26, 1997) (FRL-5754-7).

Consistent with section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action. EPA has sufficient data to assess the hazards of and to make a determination on aggregate exposure, consistent with section 408(b)(2), for tolerances for residues of clopyralid (3,6-dichloro-2-pyridinecarboxylic acid) on sugar beet roots at 2.0 ppm, sugar beet tops at 3.0 ppm, and sugar beet molasses at 10.0 ppm. EPA's assessment of exposures and risks associated with establishing the tolerance follows.

EPA has evaluated the available toxicity data and considered its validity, completeness, and reliability as well as the relationship of the results of the studies to human risk. EPA has also considered available information concerning the variability of the sensitivities of major identifiable subgroups of consumers, including infants and children. The nature of the toxic effects caused by clopyralid are discussed in the following Table 1 as well as the no observed adverse effect level (NOAEL) and the lowest observed adverse effect level (LOAEL) from the toxicity studies reviewed.

The dose at which no adverse effects are observed (the NOAEL) from the toxicology study identified as appropriate for use in risk assessment is used to estimate the toxicological level of concern (LOC). However, the lowest dose at which adverse effects of concern are identified (the LOAEL) is sometimes used for risk assessment if no NOAEL was achieved in the toxicology study selected. An uncertainty factor (UF) is applied to reflect uncertainties inherent in the extrapolation from laboratory animal data to humans and in the variations in sensitivity among members of the human population as well as other unknowns. An UF of 100 is routinely used, 10X to account for interspecies differences and 10X for intraspecies differences.

For dietary risk assessment (other than cancer) the Agency uses the UF to calculate an acute or chronic reference dose (acute RfD or chronic RfD) where the RfD is equal to the NOAEL divided by the appropriate UF (RfD = NOAEL/UF). Where an additional safety factor is retained due to concerns unique to the FQPA, this additional factor is applied to the RfD by dividing the RfD by such additional factor. The acute or chronic Population Adjusted Dose (aPAD or cPAD) is a modification of the RfD to accommodate this type of FQPA Safety Factor.

For non-dietary risk assessments (other than cancer) the UF is used to determine the LOC. For example, when 100 is the appropriate UF (10X to account for interspecies differences and 10X for intraspecies differences) the LOC is 100. To estimate risk, a ratio of the NOAEL to exposures (margin of exposure (MOE) = NOAEL/exposure) is calculated and compared to the LOC.

The linear default risk methodology (Q * ) is the primary method currently used by the Agency to quantify carcinogenic risk. The Q * approach assumes that any amount of exposure will lead to some degree of cancer risk. A Q * is calculated and used to estimate risk which represents a probability of occurrence of additional cancer cases (e.g., risk is expressed as 1 × 10 - 6 or one in a million). Under certain specific circumstances, MOE calculations will be used for the carcinogenic risk assessment. In this non-linear approach, a “point of departure” is identified below which carcinogenic effects are not expected. The point of departure is typically a NOAEL based on an endpoint related to cancer effects though it may be a different value derived from the dose response curve. To estimate risk, a ratio of the point of departure to exposure (MOE cancer = point of departure/exposures) is calculated. A summary of the toxicological endpoints for clopyralid used for human risk assessment is shown in the following Table 2:

1. Dietary exposure from food and feed uses . Tolerances have been established (40 CFR 180.431) for the residues of clopyralid, in or on a variety of raw agricultural commodities. Risk assessments were conducted by EPA to assess dietary exposures from clopyralid (3,6-dichloro-2-pyridinecarboxylic acid) in food as follows:

i. Acute exposure . Acute dietary risk assessments are performed for a food-use pesticide if a toxicological study has indicated the possibility of an effect of concern occurring as a result of a one day or single exposure. The Dietary Exposure Evaluation Model (DEEM®) analysis evaluated the individual food consumption as reported by respondents in the USDA 1989-1992 nationwide Continuing Surveys of Food Intake by Individuals (CSFII) and accumulated exposure to the chemical for each commodity. The following assumptions were made for the acute exposure assessments: For all commodities, 100% crop treated was assumed and those residues will be at the level of the tolerance (with one exception: refined sugar from sugar-beet). The above assumptions result in an overestimate of human dietary exposure. All Section 18 tolerances (canola, cranberries, flax seed, peaches, and nectarines) are included in this dietary risk assessment. With the exception of sugar beets, default processing factors were used for processed commodities. The empirical processing factor of 0.1X was used for sugar-beet representing the 10-fold reduction in residues for refined sugar. The aPAD for the U.S. population is 0.25 mg/kg/day. For acute dietary risk estimates, the level of concern is > 100% aPAD. The population subgroup with the highest dietary exposure from food is children 1-6 years. The percentage of dietary exposure for this subgroup is 13% of the aPAD. The acute dietary risk estimates from residues in food which result from the established and proposed uses of clopyralid are below the level of concern for the U.S. population and all population subgroups.

ii. Chronic exposure . In conducting this chronic dietary risk assessment the Dietary Exposure Evaluation Model (DEEM ) analysis evaluated the individual food consumption as reported by respondents in the USDA 1989-1992 nationwide Continuing Surveys of Food Intake by Individuals (CSFII) and accumulated exposure to the chemical for each commodity. The following assumptions were made for the chronic exposure assessments: For all commodities, 100% crop treated was assumed and those residues will be at the level of the tolerance (with one exception: refined sugar from sugar-beet). The empirical processing factor of 0.1X was used for sugar-beet representing the 10-fold reduction in residues for refined sugar. The cPAD for the general U.S. population and all subgroups is 0.05 mg/kg/day. For chronic dietary risk estimates, the Agency's level of concern is greater than 100% of the cPAD. The subgroup with the highest chronic dietary exposure from food is children 1-6 years. The percentage of dietary exposure for this subgroup is 34% of the cPAD. The chronic dietary risk estimates from residues in food resulting from the established and proposed uses of clopyralid are below the Agency's level of concern for the U.S. population and all population subgroups.

iii. Cancer . The Agency concluded that clopyralid was negative for carcinogenic potential in mice and rats and classified clopyralid as “not likely” to be a human carcinogen. Therefore, a cancer dietary exposure analysis was not performed.

iv. Anticipated residue and percent crop treated information . Section 408(b)(2)(E) authorizes EPA to use available data and information on the anticipated residue levels of pesticide residues in food and the actual levels of pesticide chemicals that have been measured in food. If EPA relies on such information, EPA must require that data be provided 5 years after the tolerance is established, modified, or left in effect, demonstrating that the levels in food are not above the levels anticipated. Following the initial data submission, EPA is authorized to require similar data on a time frame it deems appropriate. As required by section 408(b)(2)(E), EPA will issue a data call-in for information relating to anticipated residues to be submitted no later than 5 years from the date of issuance of this tolerance.

2. Dietary exposure from drinking water . The Agency lacks sufficient monitoring exposure data to complete a comprehensive dietary exposure analysis and risk assessment for clopyralid in drinking water. Because the Agency does not have comprehensive monitoring data, drinking water concentration estimates are made by reliance on simulation or modeling taking into account data on the physical characteristics of clopyralid.

The Agency uses the Generic Estimated Environmental Concentration (GENEEC) or the Pesticide Root Zone/Exposure Analysis Modeling System (PRZM/EXAMS) to estimate pesticide concentrations in surface water and SCI-GROW, which predicts pesticide concentrations in groundwater. In general, EPA will use GENEEC (a tier 1 model) before using PRZM/EXAMS (a tier 2 model) for a screening-level assessment for surface water. The GENEEC model is a subset of the PRZM/EXAMS model that uses a specific high-end runoff scenario for pesticides. GENEEC incorporates a farm pond scenario, while PRZM/EXAMS incorporate an index reservoir environment in place of the previous pond scenario. The PRZM/EXAMS model includes a percent crop area factor as an adjustment to account for the maximum percent crop coverage within a watershed or drainage basin.

None of these models include consideration of the impact processing (mixing, dilution, or treatment) of raw water for distribution as drinking water would likely have on the removal of pesticides from the source water. The primary use of these models by the Agency at this stage is to provide a coarse screen for sorting out pesticides for which it is highly unlikely that drinking water concentrations would ever exceed human health levels of concern.

Since the models used are considered to be screening tools in the risk assessment process, the Agency does not use estimated environmental concentrations (EECs) from these models to quantify drinking water exposure and risk as a %RfD or %PAD. Instead, drinking water levels of comparison (DWLOCs) are calculated and used as a point of comparison against the model estimates of a pesticide's concentration in water. DWLOCs are theoretical upper limits on a pesticide's concentration in drinking water in light of total aggregate exposure to a pesticide in food, and from residential uses. Since DWLOCs address total aggregate exposure to clopyralid they are further discussed in the aggregate risk sections below.

Based on the GENEEC and SCI-GROW models the estimated environmental concentrations (EECs) of clopyralid for acute exposures are estimated to be 27.0 parts per billion (ppb) for surface water and 9.7 ppb for ground water. The EECs for chronic exposures are estimated to be 9 ppb for surface water, (based on a 56-day concentration of 27 ppb and a 3x adjustment factor allowed by Agency policy for 56-day GENEEC values) and 9.7 ppb for ground water.

3. From non-dietary exposure . The term “residential exposure” is used in this document to refer to non-occupational, non-dietary exposure (e.g., for lawn and garden pest control, indoor pest control, termiticides, and flea and tick control on pets).

Clopyralid is currently registered for use on the following residential non-dietary sites: Turf and ornamentals (including golf courses). The risk assessment was conducted using the following residential exposure assumptions: the 75 mg/kg/day NOAEL was used in the inhalation, short-term, and intermediate-term hand-to-mouth, and episodic granular ingestion risk assessments of the residential exposure. As no dermal endpoint was selected, a dermal risk assessment was not required for residential exposure. For residential oral and inhalation risk assessments, the target margin of exposure (MOE) was 300, which incorporates the FQPA Safety Factor of 3x. MOEs calculated for residential handler's inhalation exposure and children's oral exposures were well above the target of 300; and therefore, do not exceed the Agency's level of concern.

4. Cumulative exposure to substances with a common mechanism of toxicity . Section 408(b)(2)(D)(v) requires that, when considering whether to establish, modify, or revoke a tolerance, the Agency consider “available information” concerning the cumulative effects of a particular pesticide's residues and “other substances that have a common mechanism of toxicity.”

EPA does not have, at this time, available data to determine whether clopyralid has a common mechanism of toxicity with other substances or how to include this pesticide in a cumulative risk assessment. Unlike other pesticides for which EPA has followed a cumulative risk approach based on a common mechanism of toxicity, clopyralid does not appear to produce a toxic metabolite produced by other substances. For the purposes of this tolerance action, therefore, EPA has not assumed that clopyralid has a common mechanism of toxicity with other substances. For information regarding EPA's efforts to determine which chemicals have a common mechanism of toxicity and to evaluate the cumulative effects of such chemicals, see the final rule for Bifenthrin Pesticide Tolerances (62 FR 62961, November 26, 1997).

1. In general . FFDCA section 408 provides that EPA shall apply an additional tenfold margin of safety for infants and children in the case of threshold effects to account for prenatal and postnatal toxicity and the completeness of the data base on toxicity and exposure unless EPA determines that a different margin of safety will be safe for infants and children. Margins of safety are incorporated into EPA risk assessments either directly through use of a margin of exposure (MOE) analysis or through using uncertainty (safety) factors in calculating a dose level that poses no appreciable risk to humans.

2. Prenatal and postnatal sensitivity . No increased quantitative or qualitative susceptibility was seen following pre- and/or post-natal exposures. In rabbit and rat developmental toxicity studies, the effects seen in fetuses are at dose levels equal to or greater than doses where maternal toxicity is seen. In a 2-generation reproductive toxicity study in rats, the effects seen in offspring were at dose levels equal to or greater than doses where parental toxicity is seen.

3. Conclusion . EPA determined that an additional factor to protect infants and children was appropriate because of a data gap for a developmental neurotoxicity study in rats. This study was required due to the concern for malformations (hydrocephalus) seen in the prenatal developmental toxicity study in rabbits; EPA decided on an additional factor of 3 rather than the statutory default factor of 10 because the existing toxicology database, which is complete except for the newly required developmental neurotoxicity study, revealed no quantitative or qualitative evidence of increased susceptibility following in utero exposure to rats and rabbits and/or following prenatal/postnatal exposure to rats; and dietary (food and drinking water) and residential exposure assessments will not underestimate the potential exposures for infants, children, and/or women of childbearing age from the use of clopyralid.

To estimate total aggregate exposure to a pesticide from food, drinking water, and residential uses, the Agency calculates DWLOCs which are used as a point of comparison against the model estimates of a pesticide's concentration in water (EECs). DWLOC values are not regulatory standards for drinking water. DWLOCs are theoretical upper limits on a pesticide's concentration in drinking water in light of total aggregate exposure to a pesticide in food and residential uses. In calculating a DWLOC, the Agency determines how much of the acceptable exposure (i.e., the PAD) is available for exposure through drinking water e.g., allowable chronic water exposure (mg/kg/day) = cPAD - (average food + residential exposure). This allowable exposure through drinking water is used to calculate a DWLOC.

A DWLOC will vary depending on the toxic endpoint, drinking water consumption, and body weights. Default body weights and consumption values as used by the USEPA Office of Water are used to calculate DWLOCs: 2L/70 kg (adult male), 2L/60 kg (adult female), and 1L/10 kg (child). Default body weights and drinking water consumption values vary on an individual basis. This variation will be taken into account in more refined screening-level and quantitative drinking water exposure assessments. Different populations will have different DWLOCs. Generally, a DWLOC is calculated for each type of risk assessment used: acute, short-term, intermediate-term, chronic, and cancer.

When EECs for surface water and groundwater are less than the calculated DWLOCs, OPP concludes with reasonable certainty that exposures to the pesticide in drinking water (when considered along with other sources of exposure for which OPP has reliable data) would not result in unacceptable levels of aggregate human health risk at this time. Because OPP considers the aggregate risk resulting from multiple exposure pathways associated with a pesticide's uses, levels of comparison in drinking water may vary as those uses change. If new uses are added in the future, OPP will reassess the potential impacts of residues of the pesticide in drinking water as a part of the aggregate risk assessment process.

1. Acute risk . Using the exposure assumptions discussed in this unit for acute exposure, the acute dietary exposure from food to clopyralid will occupy 8% of the aPAD for the U.S. population, 5% of the aPAD for females 13-50 years, 9% of the aPAD for all infants < 1 year and 13% of the aPAD for children between 1 and 6 years old. In addition, there is potential for acute dietary exposure to clopyralid in drinking water. After calculating DWLOCs and comparing them to the EECs for surface and ground water, EPA does not expect the aggregate exposure to exceed 100% of the aPAD, as shown in the following Table 3:

2. Chronic risk . Using the exposure assumptions described in this unit for chronic exposure, EPA has concluded that exposure to clopyralid from food will utilize 14% of the cPAD for the U.S. population, 11% of the cPAD for all infants < 1 year and 34% of the cPAD for children between 1 and 6 years old. Based on the use pattern, chronic residential exposure to residues of clopyralid is not expected. In addition, there is potential for chronic dietary exposure to clopyralid in drinking water. After calculating DWLOCs and comparing them to the EECs for surface and ground water, EPA does not expect the aggregate exposure to exceed 100% of the cPAD, as shown in the following Table 4:

3. Short-term risk . Short-term aggregate exposure takes into account residential exposure plus chronic exposure to food and water (considered to be a background exposure level).

Clopyralid is currently registered for use that could result in short-term residential exposure and the Agency has determined that it is appropriate to aggregate chronic food and water and short-term exposures for clopyralid.

Using the exposure assumptions described in this unit for short-term exposures, EPA has concluded that food and residential exposures aggregated result in aggregate MOEs of 10,000 (U.S. population, food and residential), 14,000 (females 13-50, food and residential) and 3,100 (children 1-6 years old, food and residential). These aggregate MOEs do not exceed the Agency's level of concern for aggregate exposure to food and residential uses. In addition, short-term DWLOCs were calculated and compared to the EECs for chronic exposure of clopyralid in ground and surface water. After calculating DWLOCs and comparing them to the EECs for surface and ground water, EPA does not expect short-term aggregate exposure to exceed the Agency's level of concern, as shown in the following Table 5:

4. Intermediate-term risk . Intermediate-term aggregate exposure takes into account residential exposure plus chronic exposure to food and water (considered to be a background exposure level).

Clopyralid is currently registered for use(s) that could result in intermediate-term residential exposure and the Agency has determined that it is appropriate to aggregate chronic food and water and intermediate-term exposures for clopyralid.

Using the exposure assumptions described in this unit for intermediate-term exposures, EPA has concluded that food and residential exposures aggregated result in aggregate MOEs of 10,000 (U.S. Population, food only), 14,000 (females 13-50, food only) and 3,800 (children 1-6 years, food and residential). These aggregate MOEs do not exceed the Agency's level of concern for aggregate exposure to food and residential uses. In addition, intermediate-term DWLOCs were calculated and compared to the EECs for chronic exposure of clopyralid in ground and surface water. After calculating DWLOCs and comparing them to the EECs for surface and ground water, EPA does not expect intermediate-term aggregate exposure to exceed the Agency's level of concern, as shown in the following Table 6:

5. Aggregate cancer risk for U.S. population . The Agency concluded that clopyralid was negative for carcinogenicity potential in rats and mice and classified clopyralid as “not likely” to be a human carcinogen according to EPA Draft Guidelines for Carcinogen Risk Assessment. Therefore, a cancer risk assessment was not performed.

6. Determination of safety . Based on these risk assessments, EPA concludes that there is a reasonable certainty that no harm will result to the general population, and to infants and children from aggregate exposure to clopyralid residues.

An adequate residue analytical method is available for enforcement of the proposed tolerances. This method, ACR 75.6, determines clopyralid as the methyl ester by gas chromatography using electron capture detection. This method has been successfully validated by the Biological and Economic Analysis Division's (BEAD) Analytical Chemistry Branch and has been published in FDA's Pesticide Analytical Manual, Vol-II (PAM II).

An adequate residue analytical method is also available for the enforcement of the proposed tolerance on animal commodities. This method, ACR 86.1, determines clopyralid as the methyl ester by gas chromatography using electron capture detection. This method has been successfully validated by BEAD's Analytical Chemistry Branch and has been published in FDA's Pesticide Analytical Manual, Vol-II (PAM II).

There are no Codex or Mexican maximum residue limits (MRLs). Canada has set a maximum residue limit of 2.0 ppm for barley, oats, and wheat, and 7.0 ppm for the milled fractions of barley, oats, and wheat (excluding flour).

A revised label is needed to specify (1) a 48-hour restricted entry interval, and (2) whether plantback intervals for crops not listed in the crop rotation table will be 10.5 months or whether rotation to crops not listed will be prohibited. As a condition of registration, the registrant also needs to submit a developmental neurotoxicity study (870.6300) because neuropathology or central nervous system malformations were seen in the rabbit developmental toxicity study.

Therefore, tolerances are amended for residues of clopyralid (3,6-dichloro-2-pyridinecarboxylic acid), in or on sugar beet roots at 2.0 ppm and sugar beet tops at 3.0. In addition, a tolerance is established for residues of clopyralid in or on sugar beet molasses at 10 ppm. Finally, the established tolerances for barley forage at 9 ppm and milled fractions (except flour) of barley, oats and wheat at 12 ppm are being added back to the tolerance expression for clopyralid after being inadvertently deleted.

Under section 408(g) of the FFDCA, as amended by the FQPA, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. The EPA procedural regulations which govern the submission of objections and requests for hearings appear in 40 CFR part 178. Although the procedures in those regulations require some modification to reflect the amendments made to the FFDCA by the FQPA of 1996, EPA will continue to use those procedures, with appropriate adjustments, until the necessary modifications can be made. The new section 408(g) provides essentially the same process for persons to “object” to a regulation for an exemption from the requirement of a tolerance issued by EPA under new section 408(d), as was provided in the old FFDCA sections 408 and 409. However, the period for filing objections is now 60 days, rather than 30 days.

You must file your objection or request a hearing on this regulation in accordance with the instructions provided in this unit and in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket control number OPP-301099 in the subject line on the first page of your submission. All requests must be in writing, and must be mailed or delivered to the Hearing Clerk on or before March 12, 2001.

1. Filing the request . Your objection must specify the specific provisions in the regulation that you object to, and the grounds for the objections (40 CFR 178.25). If a hearing is requested, the objections must include a statement of the factual issues(s) on which a hearing is requested, the requestor's contentions on such issues, and a summary of any evidence relied upon by the objector (40 CFR 178.27). Information submitted in connection with an objection or hearing request may be claimed confidential by marking any part or all of that information as CBI. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2. A copy of the information that does not contain CBI must be submitted for inclusion in the public record. Information not marked confidential may be disclosed publicly by EPA without prior notice.

Mail your written request to: Office of the Hearing Clerk (1900), Environmental Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460. You may also deliver your request to the Office of the Hearing Clerk in Rm. C400, Waterside Mall, 401 M St., SW., Washington, DC 20460. The Office of the Hearing Clerk is open from 8 a.m. to 4 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Office of the Hearing Clerk is (202) 260-4865.

2. Tolerance fee payment . If you file an objection or request a hearing, you must also pay the fee prescribed by 40 CFR 180.33(i) or request a waiver of that fee pursuant to 40 CFR 180.33(m). You must mail the fee to: EPA Headquarters Accounting Operations Branch, Office of Pesticide Programs, P.O. Box 360277M, Pittsburgh, PA 15251. Please identify the fee submission by labeling it “Tolerance Petition Fees.”

EPA is authorized to waive any fee requirement “when in the judgement of the Administrator such a waiver or refund is equitable and not contrary to the purpose of this subsection.” For additional information regarding the waiver of these fees, you may contact James Tompkins by phone at (703) 305-5697, by e-mail at tompkins.jim@epa.gov, or by mailing a request for information to Mr. Tompkins at Registration Division (7505C), Office of Pesticide Programs, Environmental Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460.

If you would like to request a waiver of the tolerance objection fees, you must mail your request for such a waiver to: James Hollins, Information Resources and Services Division (7502C), Office of Pesticide Programs, Environmental Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460.

3. Copies for the Docket . In addition to filing an objection or hearing request with the Hearing Clerk as described in Unit VI.A., you should also send a copy of your request to the PIRIB for its inclusion in the official record that is described in Unit I.B.2. Mail your copies, identified by docket control number OPP-301099, to: Public Information and Records Integrity Branch, Information Resources and Services Division (7502C), Office of Pesticide Programs, Environmental Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460. In person or by courier, bring a copy to the location of the PIRIB described in Unit I.B.2. You may also send an electronic copy of your request via e-mail to: opp-docket@epa.gov. Please use an ASCII file format and avoid the use of special characters and any form of encryption. Copies of electronic objections and hearing requests will also be accepted on disks in WordPerfect 6.1/8.0 or ASCII file format. Do not include any CBI in your electronic copy. You may also submit an electronic copy of your request at many Federal Depository Libraries.

A request for a hearing will be granted if the Administrator determines that the material submitted shows the following: There is a genuine and substantial issue of fact; there is a reasonable possibility that available evidence identified by the requestor would, if established resolve one or more of such issues in favor of the requestor, taking into account uncontested claims or facts to the contrary; and resolution of the factual issues(s) in the manner sought by the requestor would be adequate to justify the action requested (40 CFR 178.32).

This final rule establishes a tolerance under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled Regulatory Planning and Review (58 FR 51735, October 4, 1993). This final rule does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501 et seq. , or impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Public Law 104-4). Nor does it require any prior consultation as specified by Executive Order 13084, entitled Consultation and Coordination with Indian Tribal Governments (63 FR 27655, May 19, 1998); special considerations as required by Executive Order 12898, entitled Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations (59 FR 7629, February 16, 1994); or require OMB review or any Agency action under Executive Order 13045, entitled Protection of Children from Environmental Health Risks and Safety Risks (62 FR 19885, April 23, 1997). This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA), Public Law 104-113, section 12(d) (15 U.S.C. 272 note). Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the tolerance in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ) do not apply. In addition, the Agency has determined that this action will not have a substantial direct effect on States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132, entitled Federalism (64 FR 43255, August 10, 1999). Executive Order 13132 requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” This final rule directly regulates growers, food processors, food handlers and food retailers, not States. This action does not alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4).

The Congressional Review Act, 5 U.S.C. 801 et seq. , as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of this final rule in the Federal Register . This final rule is not a “major rule” as defined by 5 U.S.C. 804(2).

Generally, in determining financial eligibility of individuals for the Medicaid program, State agencies must apply the financial methodologies and requirements of the cash assistance program that is most closely categorically related to the individual's status. Our regulations at 42 CFR 435.601 set forth the requirements for State agencies applying less restrictive income and resource methodologies when determining Medicaid eligibility under the authority of section 1902(r)(2) of the Social Security Act (the Act). Current regulations at 42 CFR 435.1007 provide that when States use less restrictive income and resource methodologies under section 1902(r)(2), the limits on Federal Financial Participation (FFP) in section 1903(f) of the Act apply before application of any less restrictive income methodologies. We are amending that regulation to change this requirement so that the 133 1/3 percent FFP limit contained in section 1903(f)(1) of the Social Security Act would apply after application of any less restrictive income methodologies under section 1902(r)(2) of the Act.

The adoption of this policy gives States additional flexibility in setting Medicaid eligibility requirements. Also, we believe adoption of this policy reflects the intent of Congress to move the Medicaid program away from cash assistance program rules, as evidenced by enactment of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which severed the link between the Aid to Families with Dependent Children (AFDC) program and Medicaid.

Section 2373(c) of the Deficit Reduction Act of 1984 (DRA) established a moratorium period beginning on October 1, 1981, during which the Secretary was prohibited from taking any compliance, disallowance, penalty, or other regulatory action against a State because a State's Medicaid plan included a standard or methodology for determining financial eligibility for the medically needy that the Secretary determined was less restrictive than the standard or methodology required under the related cash assistance program.

The provisions of the DRA moratorium were clarified by section 9 of the Medicare and Medicaid Patient Program Protection Act of 1987. Section 9 amended section 2373(c) of DRA to specify that the moratorium applied to the Secretary's compliance, disallowance, penalty, or other regulatory actions against a State because the State plan is determined to be in violation of provisions of the Act for coverage, as optional categorically needy, of certain aged, blind, and disabled individuals who were in institutions or receiving home and community-based services, as well as methodologies for determining financial eligibility of the medically needy.

The moratorium applied to an amendment or other changes in Medicaid State plans, or operation or program manuals, regardless of whether the Secretary had approved, disapproved, acted upon, or not acted upon the amendment or other change, or operation or program manual.

Authority to adopt less restrictive financial methodologies as part of a State's Medicaid plan was added to the law in 1988. Section 303(e) of the Medicare Catastrophic Coverage Act of 1988, enacted on July 1, 1988 (and amended by section 608(d)(16)(C) of the Family Support Act of 1988), amended the Act to permit States to use less restrictive financial methodologies in determining eligibility not only for the medically needy eligibility group at section 1902(a)(10)(C) of the Act, but also for specified categorically needy groups of individuals. These categorically needy groups include qualified pregnant women and children (section 1902(a)(10)(A)(i)(III) of the Act), poverty level pregnant women and infants (section 1902(a)(10)(A)(i)(IV) of the Act), qualified Medicare beneficiaries (section 1905(p) of the Act), all of the optional categorically needy groups specified in section 1902(a)(10)(A)(ii) of the Act, and individuals in States that have elected, under section 1902(f) of the Act, to apply more restrictive eligibility criteria than are used by the Supplemental Security Income (SSI) program. This provision of the Medicare Catastrophic Coverage Act was effective for medical assistance furnished on or after October 1, 1982. This authority was codified in a new section 1902(r)(2) of the Act.

The application of FFP limits prior to the use of more liberal income methodologies under section 1902(r)(2) of the Act was based on the Senate Report accompanying the 1987 amendment to the DRA moratorium (Senate Report No. 109, 100th Congress, 1st session at 24-25) which stated that:

Since, as the legislative history indicates, section 1902(r)(2) of the Act is essentially the codification of the DRA moratorium, we continued to apply the 133 1/3 percent FFP limit at section 1903(f)(1) of the Act when developing the implementing regulations for section 1902(r)(2) of the Act.

However, subsequent experience has shown that the policy we adopted restricted the flexibility Congress intended States to have when it enacted section 1902(r)(2) of the Act in ways we did not foresee when we published the current regulations. The real effect of the policy we adopted was to make it almost impossible for States to actually use less restrictive income methodologies for many eligibility groups, including the medically needy, because use of such methodologies would violate the 133 1/3 percent FFP limit. States have noted that the application of the 133 1/3 percent FFP limit prior to use of less restrictive income methodologies unnecessarily limits their flexibility to provide health coverage under Medicaid and to simplify program administration by modifying cash assistance financial methodologies that do not work well in the Medicaid context.

Further, the passage of Pub. L. 104-193, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, leads us to believe that the current application of the FFP income limits under section 1902(r)(2) of the Act no longer reflects Congressional intent. In enacting this legislation, Congress clearly expressed its intent that States should have the flexibility to depart from cash assistance program-based income criteria to define Medicaid eligibility. Given that Congress chose to sever the link between cash assistance and Medicaid under this legislation, we believe it is valid to conclude that Congress did not actually intend that FFP limits, which are based on cash assistance standards, apply prior to use of less restrictive financial methodologies under section 1902(r)(2) of the Act for those eligibility groups to which section 1902(r)(2) of the Act applies.

Also, section 1903(f) of the Act was enacted prior to section 1902(r)(2) of the Act. Had Congress intended that the 133 1/3 percent FFP limit apply prior to use of less restrictive income methodologies, it could have amended section 1903(f)(1) of the Act or section 1902(r)(2) of the Act to so state. The fact that section 1903(f)(1) of the Act was not so amended indicates that Congress intended that the 133 1/3 percent FFP limit apply after, not before, use of less restrictive income methodologies.

Thus, the change in this regulation gives States needed additional flexibility in setting Medicaid eligibility requirements. Even though section 1902(r)(2) of the Act was derived from the DRA moratorium, its own legislative history did not contain any similar discussion of its interaction with the section 1903(f) of the Act FFP limits. As such, we do not believe it is necessary to consider the legislative history of DRA to be determinative of Congressional understanding of the operation of section 1902(r)(2) of the Act.

We are amending § 435.1007 to change the requirement that the 133 1/3 percent FFP limit applies prior to use of any less restrictive income methodologies under section 1902(r)(2) of the Act.

In § 435.1007(b), we are deleting the phrase “does not exceed” and replace it with the word “exceeds”. This is purely an editorial and technical change to correct an error in wording in the current regulation which is contrary to statute. This change is necessary in order to conform the regulation to the statute's requirement. This change was explained in the proposed rule. We received no public comments on this change.

In § 435.1007, we are amending paragraph (e) by removing the phrase “are applied and before the less restrictive income deductions under § 435.601(c)” and replacing it with the following language: “and any income disregards in the State plan authorized under section 1902(r)(2)”.

We are further amending § 435.1007 by adding a new paragraph (f) to read: “A State may use the less restrictive income methodologies included under its State plan as authorized under § 435.601 in determining whether a family's income exceeds the limitation described in paragraph (b) of this section.”

We received a total of 37 comments from States, advocacy groups, associations and a few individuals on the proposed regulation that was published on October 31, 2000 (65 FR 64919). All of the comments we received expressed support for the proposed change. A number chose not to offer any suggestions or other comments beyond an expression of support. Some offered examples, similar to those we included in the preamble to the NPRM, of ways States could use the proposed change to alleviate current problems with their Medicaid programs. These included such things as raising low medically needy income levels, reducing institutional bias, and administrative simplification. We appreciate the overwhelming show of support for the proposed change.

In addition to expressing support for the proposed rule, a number of commenters offered comments on five separate issues concerning the proposed change. Those comments, and our responses, are discussed below.

Comment: One commenter expressed concern that unless changes are also made to a number of subsections of 42 CFR 435, HCFA will not be bound by the proposed policy change. The commenter expressed further concern that unless additional changes are made, States might still be subject to FFP penalties if an individual's income prior to application of the less restrictive methodologies adopted pursuant to section 1902(r)(2) of the Act exceeds the FFP limitation in section 1903(f) of the Act.

Response: We do not agree that additional changes to the regulations are needed. We believe that the proposed change makes it clear that income remaining after application of any less restrictive methodologies adopted pursuant to section 1902(r)(2) of the Act is the income used to determine whether the 133 1/3 percent limitation on FFP is exceeded under all circumstances. States will not be subject to FFP penalties because income prior to application of the less restrictive methodologies exceeds the 133 1/3 percent limitation in section 1903(f)(1) of the Act. We proposed this change with the express intent that States would not be subject to such FFP penalties, and we believe that the changes adopted here accomplish that goal. We are clearly bound by this regulation as we are bound by all regulations that we promulgate.

Comment: Several commenters urged that the proposed change go into effect as soon as possible; some requested an effective date of January 1, 2001.

Response: We agree that the change should be effective at the earliest possible date. However, this regulation is considered to be a major rule and the statute governing congressional review of agency rulemaking requires that final regulations that are major rules cannot be effective sooner than 60 days after publication in the Federal Register unless a showing of good cause to dispense with the notice and public comment procedures that were included in the rule. To make this showing the agency must find that notice and public comment procedures are impracticable, unnecessary, or contrary to the public interest. We do not believe we can satisfy this test since the rule is being adopted after notice and public comment. The effective date of this change is set forth in the Effective Date section of this final rule.

Comment: Several commenters suggested that the preamble be expanded to include such things as a clear explanation and list of the eligibility groups to which the proposed change would apply, a similar list of the groups to which section 1902(r)(2) of the Act applies but which were not subject to the FFP limits under the old regulation, and discussions of steps States can take to make their income eligibility policies more supportive of efforts to integrate people with disabilities in the mainstream of community life. One commenter also suggested providing ongoing guidance on this general subject in a publicly visible place such as the HCFA website.

Response: In general, the new rule applies to all of the optional categorically needy eligibility groups cited in the statute at section 1902(a)(10)(A)(ii) of the Act except for those groups which were already exempt from the FFP limits under existing statute (section 1903(f)(4) of the Act). Also, the new rule applies to the medically needy.

We agree that more information about the various topics listed above would be of considerable value to States and other interested parties. However, this final rule is not a technical assistance document, and for that reason we believe that much of the detailed programmatic information and advice suggested by the commenters is best provided through other venues. Rather than include this kind of extensive material regarding more general Medicaid eligibility topics in the preamble to this final rule, we will provide guidance on these and similar issues to States and others through an administrative issuance, such as a letter to all State Medicaid Directors. Administrative guidance issued in such a form would also be available to the public on HCFA's website.

Comment: One commenter suggested that in addition to our proposed revision of the regulations at § 435.1007, we should similarly revise the regulations at § 435.1005 to allow the use of less restrictive income methodologies before applying the FFP limits for the special income level group (section 1902(a)(10)(A)(ii)(V) of the Act). This would enable States to disregard additional income for individuals eligible under this group.

Response: We understand the commenter's interest in not having the FFP limits apply to less restrictive income disregards for the special income level group. However, the Medicaid statute precludes our doing so.

Most of the eligibility groups to which the FFP limits apply are subject to a limit that is defined in section 1903(f)(1)(B)(i) of the Act as 133 1/3 percent of the State's AFDC payment standard. The special income level group, however, is subject to a different FFP limit which is defined in section 1903(f)(4)(C) of the Act as 300 percent of the SSI Federal Benefit Rate. Further, this section of the statute includes specific requirements for how a person's income is to be counted in determining whether his or her income exceeds the 300 percent FFP limit. Under the statute, the person's income is determined under section 1612 of the Act, but without regard to the exclusions and disregards listed in subsection 1612(b) of the Act.

In other words, the person's gross income, without the application of any disregards normally used by the SSI program to determine eligibility, must be used to determine whether the person's income exceeds the 300 percent FFP limit. By contrast, the sections of the statute pertaining to the 133 1/3 percent FFP limit do not include similar specific requirements for how income is to be counted in determining whether a person's income exceeds the FFP limit.

Because section 1903(f)(4)(C) of the Act specifies how income is to be counted in determining whether a person's income exceeds the 300 percent FFP limit, the statute precludes our being able to permit, via regulation, the use of less restrictive income methodologies prior to application of that FFP limit. The statute itself would have to be changed to permit the use of less restrictive income methodologies in that manner.

Comment: Three commenters suggested that we make the use of less restrictive methodologies mandatory for States rather than their use being optional as is now the case. One commenter further suggested that provision of home and community-based waiver services should also be made mandatory for States.

Response: Use of less restrictive methodologies and provision of home and community-based waiver services is optional for States because the Medicaid statute gives States the choice of using such methodologies and providing such services. Given the language of the statute itself, we have no authority to require through regulations that States use less restrictive methodologies or provide home and community-based waiver services.

This final rule incorporates in their entirety the provisions of the proposed rule.

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 35).

We and the Office of Management and Budget have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354). Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any one year). This rule is considered to be a major rule with economically significant effects.

The cost impact of this final rule is extremely difficult to project, given the broad discretion and flexibility that States will have in implementing its provisions. In the proposed rule we cited a projected cost to the Federal government of $860 million over 5 years for Medicaid and $100 million for Medicare. As those estimates were based on information from only two States, we solicited feedback on the potential financial impact this rule might have. We received no comments specifically related to cost issues in the responses to the proposed rule; nevertheless, we are providing additional detail concerning the original cost estimates. The table below summarizes our estimated 5-year costs to Medicaid and Medicare.

As stated in the proposed rule, these estimates were developed from cost information about two States (Utah and California) which expressed interest in using the regulation to expand their Medicaid programs. Estimated costs for these States were related to their aggregate Medicaid spending for the medically needy and projected to the national level assuming that states representing one-fourth of Medicaid expenditures would implement changes of a similar magnitude. The one-fourth assumption was based on our belief that the potential costs of broader expansions would serve to limit State participation, at least during the 5-year budget window. The Medicare cost results from increased payments under the Medicare disproportionate share hospital (DSH) program and results from the anticipated increase in Medicaid enrollment accompanying the Medicaid costs shown above. Projected Medicare DSH cost per Medicaid beneficiary were applied to this increased enrollment to obtain the $100 million 5-year Medicare DSH cost.

Arriving at the Medicaid and Medicare costs was difficult due to the fact that implementation of the option under this rule is entirely at the discretion of the State. Further, States that choose to exercise the option have great latitude in establishing the extent to which, and the eligibility groups for which, the option would be applied under their State Medicaid plans.

We believe this change will benefit both States and individuals in a number of ways. For example, under normal eligibility rules, States are required to count many kinds of income. Some of these types of income are administratively burdensome to deal with, and often do not materially affect the outcome of the eligibility determination. Some examples are the value of food or shelter provided to an applicant (called in-kind support and maintenance), income belonging to a parent of a child, or a spouse who is not applying for benefits (called deemed income), and low amounts of income such as interest earned on savings accounts. This final rule will allow States to use income disregards to simplify the process of determining eligibility by not counting types of income that primarily impose an administrative burden.

Under a medically needy program, States can choose to cover under Medicaid individuals with income that is too high to otherwise be eligible, but who, by subtracting incurred medical expenses from their income, could reduce their income to the State's medically needy income standard. This process is known as spending down excess income, or “spenddown”.

However, in many States the medically needy income standard is very low; in at least 22 States, the medically needy income standard is actually lower than the income standard for SSI benefits ($512 a month for an individual in 2000). In four States, the medically needy income standard is less than $200 a month. This creates a situation where individuals whose income is just slightly over the limit that would allow them to receive Medicaid as SSI recipients must spend down a certain amount of “excess” income to reach the medically needy income level.

For example, a person with $512 a month in countable income can be eligible for SSI and receive Medicaid coverage in most States. A person with just $1 more cannot be eligible for SSI, and thus cannot receive Medicaid health coverage based on receiving SSI benefits. Depending on a particular State's medically needy income level, such an individual with $513 in countable monthly income may have to spend over $300 on medical care each month just to reach a medically needy income limit that is that far below the SSI level.

Under the Medicaid statute, States cannot just increase their medically needy income levels to deal with this problem. However, under this final rule, a State could use section 1902(r)(2) of the Act to disregard additional amounts of income under its medically needy program, effectively reducing or even eliminating the large spenddown liability described in the example above.

The medically needy spenddown problem described above can also have adverse effects for people in medical institutions who would like to receive care in community settings. Since Medicaid will pay for room and board expenses in a medical institution, the individual needs to retain relatively little income after application of the medically needy spenddown requirement. However, Medicaid will not pay for room or board expenses in a community setting. Few individuals will be able to move from a medical institution to the community if they are permitted to retain only $200-$400 after meeting Medicaid spenddown requirements.

The practical effect of this is that many people in institutions who would like to move to the community, and who would normally be able to manage in a community setting, remain in the institution because they literally cannot leave. This final rule gives States opportunities to correct spenddown problems so that more people could leave institutional settings and live in the community.

While legislation enacted in the last few years has given States new options for providing Medicaid to individuals with disabilities who want to work, States may want to encourage work effort among individuals eligible under other groups such as the medically needy, or among individuals who may not readily fit into one of the new work incentives groups. One way to encourage work effort is to allow people to keep more of the income they earn without forcing them to either spend more for medical care under a medically needy spenddown, or risk losing Medicaid altogether.

Under section 1902(r)(2) of the Act a State could do that by increasing the amount of earned income that is not counted in determining a person's eligibility. However, the current application of the FFP limits to the use of less restrictive income disregards effectively precludes States from offering that kind of encouragement for many eligibility groups. This final rule removes that restriction, giving States another way to encourage work effort.

In addition to the specific examples described above, section 1902(r)(2) of the Act gives States the option of extending health coverage to more individuals by disregarding additional types and amounts of income, thereby allowing people who could not otherwise meet the program's eligibility requirements to become eligible. However, the current application of the FFP limits to the use of less restrictive income disregards greatly reduces the options States have to implement that kind of health coverage expansion. This final rule will give States the full flexibility provided by section 1902(r)(2) of the Act to expand their base of eligible individuals if they choose to do so.

This change provides State flexibility to offer health coverage to youth 19 and 20 years of age consistent with the health coverage options available under Federal law to children under 19 years of age as described in section 1902(l) of the Act. Such youth are often at a high risk of being uninsured because they are still in school or beginning employment. To clarify, youth 19 and 20 years of age are included in the group described in section 1902(a)(10)(A)(ii)(I) of the Act. Under current statutory and regulatory authority, States are able to effectively expand eligibility of all children under 19 years of age to whatever level they choose. However, the eligibility of youth 19 to 20 years of age (as children) is limited to the group noted above, and that group is currently subject to the FFP cap. This final regulation allows States to expand eligibility for these older children to the same level that they use for children under 19 years of age.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $5 million or less annually. Individuals and States are not included in the definition of a small entity.

We expect that small entities will be indirectly impacted by this final rule. We expect that any indirect impact will be positive. States will decide individually whether to take advantage of the options that this final rule makes available. If a State exercises the options under this final rule, small entities such as small businesses, nonprofit organizations, and governmental agencies may receive additional Medicaid payments as a result of their service to the increased number of individuals who would be eligible under the program. We invited comments in this area and received none. Because the indirect impact on small entities depends on the extent and degree to which States exercise the options under this rule and the number of small entities that may be indirectly impacted, we are unable with any degree of certainty to estimate the fiscal impact on small entities.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 50 beds.

This final rule will have only indirect impact on small rural hospitals. We believe that any indirect impact will be positive. This final rule primarily affects States and each State will make its own decision regarding acceptance of the options presented in these regulations. As a result, small rural hospitals are in no way involved in the decision-making process and would be impacted only to the extent that a State's use of less restrictive income methodologies could result in some increase in the number of individuals eligible for Medicaid. This in turn could result in a slight increase in utilization of rural hospital services which could increase the Medicaid payment received by these hospitals. We invited comments in this area and received none. Because the indirect impact on small rural hospitals depends on the extent and degree to which States exercise the options under this rule and the number of small rural hospitals that may be indirectly impacted, we are unable with any degree of certainty to estimate the fiscal impact on small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure by State, local, or tribal governments, in the aggregate, or by the private sector, of $100 million in any one year. This final rule will have no impact on the private sector. The rule imposes no requirements on State, local or tribal governments. Rather, it offers State governments additional flexibility in operating their Medicaid programs, but does not require that they make any changes in their programs.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that would impose substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. This final rule imposes no requirement costs on governments, nor does it preempt State law or otherwise have Federalism implications.

We have had discussions of this issue with a number of State governments since approximately 1990. Those discussions have taken place both with individual States and with groups of States, including HCFA's Medicaid Eligibility Technical Advisory Group and the National Association of State Medicaid Directors Executive Committee. Based on the many discussions we have had, and comments we received as discussed elsewhere in this final rule, we believe States are overwhelmingly in favor of the change.

This final rule gives States greater flexibility in designing and operating their Medicaid programs.

Providers will only be indirectly affected by this rule and we expect any indirect impact will be positive. Each State will decide whether to take advantage of the options the regulations make available. To the extent that States decide to exercise their options under this final rule, we expect the ultimate indirect impact on providers to be positive due to the added Medicaid revenues that providers may garner.

This rule may increase Medicare costs by about $100 million over 5 years. Since the rule may increase the number of individuals eligible for Medicaid who receive inpatient hospital services, it may affect the calculation of hospitals' disproportionate share hospital (DSH) calculations under the Medicare program. We estimate that Medicare DSH payments could increase by $100 million over 5 years due to changes in this rule.

Under Medicaid, it is projected that the Federal cost of this rule could be as much as $860 million over 5 years. However, because actual implementation of the provisions of the rule is strictly at the option of each State, actual Federal program costs would depend on whether, and to what degree, States choose to take advantage of the flexibility provided by this final rule.

There were few alternatives to the proposed rule to consider. One alternative was to maintain the requirement that the FFP limits apply prior to use of less restrictive income methodologies under § 435.601, but allow additional disregards at a somewhat higher level than is possible under the current regulations. However, this would not provide States the level of flexibility to operate their Medicaid programs that is provided under the proposed rule, and thus would be of only limited value. We rejected this alternative because it would not give States what they need to effectively operate their Medicaid programs.

We also considered pursuing a legislative option that would have changed the Medicaid statute itself to clarify that the FFP limits at section 1903(f) of the Act should apply after, rather than before, the use of any less restrictive income methodologies under section 1902(r)(2) of the Act. However, as explained previously the current policy concerning application of the FFP limits to less restrictive income methodologies does not reflect a clear statutory requirement, but rather is an administrative interpretation of the statute. Since the statute as written will support this change in policy, we believed the issue should be addressed via a change in the regulations rather than a change in the statute. Also, we believe that this rule is the most efficient and expedient way of accomplishing the desired change.

We expect this rule to benefit State Medicaid programs and Medicaid beneficiaries by giving States additional flexibility in designing and operating their programs. In turn, this would allow States to make individuals eligible for Medicaid who otherwise could not be eligible under the current regulations.

Because this rule is considered major rule that is economically significant, we have prepared a regulatory impact statement. We believe that this rule will have an estimated cost of $960 million dollars over 5 years based on best available data. In addition, we certify that this rule will not have a significant economic impact on a substantial number of small entities or a significant impact on the operations of a substantial number of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

This is a summary of the First Report and Order in WT Docket No. 99-217, the Fifth Report and Order and Memorandum Opinion and Order in CC Docket No. 96-98, and the Fourth Report and Order and Memorandum Opinion and Order in CC Docket No. 88-57 (collectively, the “Order”), FCC 00-366, adopted October 12, 2000 and released October 25, 2000. This summary also reflects errata issued in this proceeding subsequent to the release of this Order. The Commission seeks further comments on the issues in this proceeding in a Further Notice of Proposed Rulemaking, available at the addresses listed below and summarized separately in the Federal Register . The complete text of the document is available for inspection and copying during normal business hours in the FCC Reference Center, 445 12th Street, SW., Washington, DC, and also may be purchased from the Commission's copy contractor, International Transcription Services, (202) 857-3800, 445 12th Street, SW., CY-B400, Washington, D.C. 20554. This document is also available via the Internet at http://fcc.gov/Bureaus/Wireless/Orders/2000/fcc00366.pdf.

This Order contains a new information collection as described in Section D of the Final Regulatory Flexibility Analysis set forth below. The Commission, as part of its continuing effort to reduce paperwork burdens, invites the general public, Office of Management and Budget (OMB), and other federal agencies to comment on the information collection(s) contained in this Order as required by the Paperwork Reduction Act of 1995, Public Law 104-13. It will be submitted to the OMB for review under section 3507(d) of the PRA. Public, OMB, and other agency comments are due March 12, 2001. Comments should address: (a) Whether the new collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission's burden estimates; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology.

A copy of any comments on the information collections contained herein should be submitted to Judy Boley, Federal Communications Commission, Room 1-C804, 445 12th Street, SW., Washington, DC 20554, or via the Internet to jboley@fcc.gov, and to Edward C. Springer, OMB Desk Officer, Room 10236 NEOB, 725 17th Street, NW., Washington, DC 20503 or via the Internet to edward.springer@omb.eop.gov.

OMB Control Number: 3060-XXXX.

Title: Promotion of Competitive Networks in Local Telecommunications Markets; Wireless Communications Association International, Inc. Petition for Rulemaking to Amend section 1.4000 of the Commission's Rules to Preempt Restrictions on Subscriber Premises Reception or Transmission Antennas Designed to Provide Fixed Wireless Services; Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Review of Sections 68.104 and 68.213 of the Commission's Rules Concerning Connection of Simple Inside Wiring to the Telephone Network

Form No.: NA.

Type of Review: New collection.

Respondents: Business or other for-profit.

Number of Respondents: 5983.

Estimated Time per Response: .5 hrs. for the first information collection, 10 hrs. for the second information collection.

Total Annual Burden: 571,350 hrs.

Total Annual Costs: $11,427,000.

Needs and Uses: The first information collection relates to the revisions of the Commission's demarcation point rules, 47 CFR 68.3. Under these revisions, the LEC shall make available information on the location of the demarcation point within ten business days of a request from the premises owner. In addition, at the time of installation, the LEC shall fully inform the premises owner of its options and rights regarding the placement of the demarcation point or points. The availability of this information will facilitate efficient interaction between premises owners and LECs regarding the placement of the demarcation point, which marks the end of wiring under control of the LEC and the beginning of wiring under the control of the premises owner or subscriber. The demarcation point is a critical point of interconnection where competitive LECs can gain access to the inside wiring of the building to provide service to customers in the building.

The second information collection relates to the revisions of the Commission's rules on Over-the-Air Reception Devices, 47 CFR 1.4000. Under these revisions, as a condition of invoking protection under 47 CFR 1.4000 from government, landlord, and association restrictions, a licensee must ensure that subscriber antennas are labeled to give notice of potential radiofrequency safety hazards of these antennas. Labeling information should include minimum separation distances required between users and radiating antennas to meet the Commission's radiofrequency exposure guidelines. Labels should also include reference to the Commission's applicable radiofrequency exposure guidelines and should use the ANSI-specified warning symbol for radiofrequency exposure. In addition, the instruction manuals and other information accompanying subscriber transceivers should include a full explanation of the labels, as well as a reference to the applicable Commission radiofrequency exposure guidelines.

1. In this document, the Commission took action furthering its ongoing efforts under the Telecommunications Act of 1996 to foster competition in local communications markets. The Commission implemented measures to enhance the ability of competing telecommunications providers to provide services to customers in residential and commercial buildings or other MTEs.

2. In the Notice of Proposed Rulemaking in WT Docket No. 99-217, 64 FR 41887, August 2, 1999, and a Third Further Notice of Proposed Rulemking in CC Docket No. 96-98, 64 FR 41884, August 2, 1999 (together, “Competitive Networks NPRM”), the Commission requested comment on the ability of competitive telecommunications providers to access MTEs and on a variety of potential measures to improve such access. Based on the extensive record compiled in response to the Competitive Networks NPRM, the Commission adopts the following four measures to remove obstacles to competitive access in MTEs:

• First, the Commission forbids telecommunications carriers from entering into contracts to serve commercial properties that restrict or effectively restrict the property owner's ability to permit entry by other carriers.

• Second, in order to reduce competitive carriers' dependence on the incumbent LECs to gain access to on-premises wiring, while at the same time recognizing the varied needs of carriers and building owners, the Commission establishes procedures to facilitate moving the demarcation point to the minimum point of entry (MPOE) at the building owner's request, and requires incumbent LECs to timely disclose the location of existing demarcation points where they are not located at the MPOE.

• Third, the Commission determines that under Section 224 of the Communications Act, utilities, including LECs, must afford telecommunications carriers and cable service providers reasonable and nondiscriminatory access to conduits and rights-of-way located in customer buildings and campuses, to the extent such conduits and rights-of-way are owned or controlled by the utility.

• Fourth, the Commission extends to antennas that receive and transmit telecommunications and other fixed wireless signals its existing prohibition of restrictions that impair the installation, maintenance or use of certain video antennas on property within the exclusive use or control of the antenna user, where the user has a direct or indirect ownership or leasehold interest in the property.

3. Contemporaneous with this document, the Commission is publishing a Further Notice of Proposed Rulemaking that seeks comment on several potential actions related to competition in MTEs. In addition, subsequent to this document, the Commission will publish a Report and Order (FCC 00-400) that steamlines and privatizes many of the functions in part 68 of the Commission's rules and, in connection with this streamlining, makes a nonsubstantive amendment to the part 68 demarcation point definition set forth.

4. As required by the Regulatory Flexibility Act (RFA), 1 an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the Notice of Proposed Rulemaking in WT Docket No. 99-217 and Third Further Notice of Proposed Rulemaking in CC Docket No. 96-98, released July 7, 1999 (Competitive Networks NPRM). 2 The Commission sought written public comment on the proposals in the Competitive Networks NPRM, including comment on the IRFA. The comments received are discussed below. In addition, an IRFA was incorporated in the Second Further Notice of Proposed Rulemaking in CC Docket No. 88-57 (1997 Demarcation Point Order on Reconsideration). 3 This present Final Regulatory Flexibility Analysis (FRFA) conforms to the RFA. 4

4. In this Competitive Networks First Report and Order, 5 the Commission furthers its ongoing efforts under the Telecommunications Act of 1996 6 to foster competition in local communications markets by implementing measures to ensure that competing telecommunications providers are able to provide services to customers in multiple tenant environments (MTEs). MTEs include apartment buildings, office buildings, office parks, shopping centers, and manufactured housing communities. Based on the extensive record compiled in response to the Competitive Networks NPRM, the Commission adopts several measures to remove obstacles to competitive access in this important portion of the telecommunications market. Specifically the Commission: (1) Prohibits carriers from entering into contracts in commercial buildings that prevent access by competing carriers; (2) clarifies its demarcation point rules 7 governing control of in-building wiring and facilitates exercise of building owner options regarding that wiring; (3) concludes that the access mandated by section 224 of the Communications Act (the “Pole Attachments Act”) 8 includes access to poles, ducts, conduits or rights-of-way that are owned or controlled by a utility within MTEs; and (4) concludes that tenants in MTEs should have the ability to place antennas one meter or less in diameter used to receive or transmit any fixed wireless service in areas within their exclusive use or control, and prohibits most restrictions on their ability to do so by extending the Commission's rules governing Over-the-Air Reception Devices (OTARDs). 9

5. Comments in response to the Competitive Networks NPRM IRFA were filed by the Community Associations Institute, et al. (CAI), 10 the National Association of Counties, et al. (NACO), 11 the Real Access Alliance (RAA), 12 and the Office of Advocacy of the U.S. Small Business Administration (SBA). 13

6. CAI states that community associations ( i.e., condominiums, cooperatives and planned communities) would incur undue expense and disruptions if the Commission provides telecommunications carriers so-called “forced access” to association property. 14 Similarly, RAA states that the Commission's “proposals will interfere with the ability of landlords to insure compliance with safety codes; provide for the safety of tenants, residents, and visitors; coordinate among tenants and service providers; and manage limited physical space.” 15 CAI requests that community associations be exempted from any “forced access” rules adopted by the Commission, 16 while RAA requests that all affected “small businesses” be exempted. 17 RAA also states that the Competitive Networks NPRM should be withdrawn and reissued with a revised IRFA. 18

7. The actions taken in the Competitive Networks First Report and Order today do not impair the authority of property owners or managers, including community associations, under state law to exclude telecommunications carriers from their property. 19 Rather, the Competitive Networks First Report and Order makes clear that “the right of access granted under section 224 lies only against utilities,” 20 as defined in section 224(a)(1) of the Act. 21 We also note that our authorization of small antennas for the provision of non-video services is limited to antennas situated on property under the control of a community association member rather than common property of the association, and therefore will not impose undue burdens or expense on community associations or small building owners. 22 CAI also states that prohibiting exclusive telecommunications contracts would adversely impact community associations. 23 The Competitive Networks First Report and Order does not prohibit such contracts for residential properties. 24 Accordingly, even assuming that such a prohibition would significantly impact community associations, no such impact will result from the actions taken in the Competitive Networks First Report and Order today. 25

8. In its comments filed August 27, 1999, NACO states that the Commission's proposals “for building owners and managers represent the federalizing of what is currently a growing local market in site leasing.”  26 We have deferred to the Competitive Networks Further Notice of Proposed Rulemaking (FNPRM) the issue of whether the Commission should impose a nondiscriminatory access requirement on building owners and managers. 27 NACO also states that “[l]ocal communities would be * * * deprived of a revenue stream that could reduce local tax burdens * * * .”  28 In later filed comments, NACO reiterates its concern over “the impact of lost right-of-way and tax revenues and the impact on infrastructure of loss of management control over the public right of way.”  29 Although we sought comment on issues related to access to public rights-of-way and franchise taxes in the Competitive Networks Notice of Inquiry, we take no action in this regard today.

9. SBA states that the IRFA “inappropriately excludes small incumbent LECs from the definition of small business,” and requests that the Commission reconcile its definition of small incumbent LEC with SBA's definition. 30 SBA states that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not “national” in scope. 31 In the Competitive Networks NPRM IRFA, we determined that, for the purposes of the IRFA, we would use the term “small incumbent LECs” to refer to incumbent LECs that might be defined by the SBA as small business concerns, 32 and would explicitly include small incumbent LECs in the analysis. In this present FRFA, infra, we have included small incumbent LECs within the definition of small business.