[Federal Register Volume 60, Number 57 (Friday, March 24, 1995)]
[Rules and Regulations]
[Pages 15457-15463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7310]



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  Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules 
and Regulations  

[[Page 15457]]

DEPARTMENT OF AGRICULTURE

Food and Consumer Service

7 CFR Part 235

RIN 0584-AB31


State Administrative Expense Funds: National School Lunch 
Program, Special Milk Program for Children, School Breakfast Program, 
Child and Adult Care Food Program, Food Distribution Program

AGENCY: Food and Consumer Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This rulemaking incorporates in the regulations the 
requirements in the Child Nutrition and WIC Reauthorization Act of 
1989, which concern State Administrative Expense (SAE) funds. SAE funds 
are Federal funds provided to State agencies to assist with the 
administrative costs of the National School Lunch Program (NSLP), the 
School Breakfast Program (SBP), the Special Milk Program for Children 
(SMP) and the Child and Adult Care Food Program (CACFP) and the 
administrative costs of the Food Distribution Program (FDP) in 
conjunction with these programs. The SAE provisions of the 1989 
legislation included in this final rulemaking do the following: 
Establish limits on the level of SAE funds that may be retained by the 
State from one fiscal year to another and specify how SAE funds that 
are returned by the State are to be redistributed. Finally, the 
legislation provides that alternate State agencies which administer the 
CACFP receive the funds to which they are entitled. In practical 
effect, this provision concerns the ``adult care component'' of the 
CACFP since the Department already provides funds directly to the State 
agencies administering the CACFP. This final regulation reflects this 
statutory provision. These changes to the SAE provisions are designed 
to ensure that adequate funds are available for the purposes specified.

EFFECTIVE DATE: This final regulation is effective April 24, 1995.

FOR FURTHER INFORMATION CONTACT: Mr. Robert Eadie, Chief, Policy and 
Program Development Branch or Mr. Charles Heise, Child Nutrition 
Division, Food and Consumer Service, USDA, 3101 Park Center Drive, 
Alexandria, Virginia 22302 or by telephone at (703) 305-2620.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be not significant for purposes of 
Executive Order 12866 and, therefore, has not been reviewed by the 
Office of Management and Budget.

Regulatory Flexibility Act

    This final rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (5 U.S.C. 601-612). The Administrator 
of the Food and Consumer Service (FCS) has certified that this final 
rule will not have a significant economic impact on a substantial 
number of small entities, since the regulation pertains entirely to the 
funding of State agencies, and these are not small entities.

Paperwork Reduction Act

    The proposed rule contained information collections. However, the 
provisions that contained reporting and recordkeeping burdens are not 
included in this final rule. Therefore, this final rule does not 
contain information collections which are subject to review by the 
Office of Management and Budget (OMB) under the Paperwork Reduction Act 
of 1980 (44 U.S.C. Chapter 35).

Executive Order 12778

    This final rule has been reviewed under Executive Order 12778, 
Civil Justice Reform. This rule 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 otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' section of this preamble. 
Prior to any judicial challenge to the provisions of this rule or the 
application of the provision, all applicable administrative procedures 
must be exhausted. In the National School Lunch Program, the 
administrative procedures for State agency appeals of State 
Administrative Expense funds sanctions (7 CFR 235.11(b)) are set forth 
in 7 CFR 235.11(f).

Executive Order 12372

    The FDP, SBP, NSLP, SMP, CACFP, and SAE are listed in the Catalog 
of Federal Domestic Assistance under No. 10.550, No. 10.553, No. 
10.555, No. 10.556, No. 10.558, and No. 10.560, respectively. These 
programs are subject to the provisions of Executive Order 12372, which 
requires intergovernmental consultation with State and local officials. 
(See 7 CFR part 3015, subpart V, and final rule related to notice 
published at 49 FR 29114, June 24, 1983.)

Background

    Public Law 101-147, entitled the Child Nutrition and WIC 
Reauthorization Act of 1989 (103 Stat. 877), was enacted on November 
10, 1989. Section 122 of this legislation included changes to some of 
the statutory provisions governing the use of State Administrative 
Expense (SAE) funds provided by the Federal government to assist States 
with meeting the administrative costs of many of the programs 
authorized under the National School Lunch Act (NSLA) and the Child 
Nutrition Act of 1966 (CNA).
    On December 6, 1991, the Department published a proposed rulemaking 
at 56 FR 63882 to incorporate these statutory changes into the SAE 
regulations and to make discretionary changes to the funding of Food 
Distribution Programs. This proposal included the following provisions: 
(1) The maximum amount of SAE which a State could carry over from one 
fiscal year to the next was limited to 25 per cent for Fiscal Year 1991 
and 20 per cent for subsequent years; (2) a minimum of $3 million of 
any excess SAE funds recovered by the Department in Fiscal Year 1992 
and $4 million of SAE recovered in each of the next two years must be 
made available to demonstration projects authorized under section 107 
of Public Law 101-147 to provide food service to homeless children 
under the age of 6 in [[Page 15458]] emergency shelters; (3) if a State 
elects to have an agency other than the agency administering the child 
care component of the CACFP administer the adult care component of that 
Program, the Department will ensure that a share of the SAE funds 
generated by the CACFP is made available to this other agency; (4) a 
portion of the nondiscretionary SAE funds made available to a State 
would be designated exclusively for the Food Distribution Program's 
administrative expenses associated with providing commodities to the 
NSLP, SBP, and CACFP; and (5) beginning with Fiscal Year 1993, 
expenditures from State sources for applicable food distribution 
administrative costs would have to be no less than the amount of State 
funds expended or obligated in Fiscal Year 1991, in order to ensure 
continued State support for food distribution activities. Readers are 
referred to the proposed rule for a more complete explanation of these 
provisions.
    During the official comment period, the Department received 53 
comments. Most of these were from State agencies which administer one 
or more of the child nutrition programs and/or the Food Distribution 
Program, but three comments were received from State or national 
associations and one comment was submitted by a State governor's 
office. Most of the commenters addressed the provisions relating to the 
transfer of funding to food distribution activities and the maintenance 
of State funding levels for these activities. The overwhelming majority 
opposed these provisions; in fact, only four commenters approved wholly 
of the proposed provisions on transfer of funds to the FDP. The major 
concerns of those opposed to the transfer/exclusive use provisions were 
as follow:
     The provision is inconsistent with either the statutory 
language or the intent of Congress;
     The total prohibition against transferring funds from the 
FDP to the other child nutrition programs is inconsistent with the 
statutory provision which permits a 10 per cent transfer of 
administrative funds among programs;
     The proposal would divert administrative funds away from 
the child nutrition programs at the same time that additional 
administrative requirements such as coordinated review and breakfast 
outreach are being imposed;
     The requirement that the food distribution portion of 
funds be used exclusively for these activities would interfere with 
States' flexibility to provide funding where it is most needed, 
especially in those States in which one agency administers both the 
child nutrition programs and the FDP;
     Tracking and accounting for separate funds will create a 
burden, especially for those agencies which administer both programs 
and must, therefore, document the exclusive use of funds for food 
distribution activities;
     The FDP already has a source of funding through assessment 
fees, and any additional funds should be appropriated separately rather 
than transferred at the expense of the child nutrition programs.
    Commenters opposed to the maintenance of effort provision raised 
the following concerns and issues:
     This provision exceeds Congressional intent;
     This provision would penalize those States which have been 
providing funds voluntarily for food distribution purposes;
     Since most States do not currently track food distribution 
funds separately, it will be difficult to establish the exact level of 
funding to be maintained;
     Because of cutbacks in State funding since 1991, some 
States will be unable to comply with the maintenance of effort 
requirement.
    As noted in the preamble to the December 6, 1991 proposed 
rulemaking, section 122(a)(1)(D) of Pub. L. 101-147 added a new 
paragraph (8) to section 7(a) of the CNA which directs each State to 
ensure (in accordance with regulations issued by the Secretary) that 
the State agency administering the distribution of donated food (the 
``distributing agency'') is provided an appropriate amount of SAE for 
the administrative costs incurred in distributing donated commodities 
to the NSLP, SBP and CACFP. The law further authorized the Secretary to 
consider the value of commodities when developing regulations to 
implement this provision. Currently, the Department provides SAE funds 
directly to the distributing agency in the State that administers the 
FDP for the NSLP, SBP, and CACFP. Therefore, no change to the SAE 
regulation was required to implement this provision.
    However, in order to further improve the administration of SAE 
funds in connection with the FDP, the Department proposed a number of 
discretionary changes to the SAE regulations regarding funding of the 
FDP. First, the Department proposed a methodology for distributing a 
portion of the nondiscretionary SAE allocation for the FDP's 
administrative costs. Second, clarifications to the formula for 
determining the level of discretionary SAE funds to be used for the FDP 
were proposed. Third, since the Department has always intended that SAE 
funds designated for food distribution purposes be so used, the 
proposed rule prohibited using the food distribution portion of SAE for 
any other purposes, even when the same agency administers the FDP and 
the child nutrition programs. Finally, the legislative history of 
section 122 makes it clear that distributing agencies were expected to 
reduce or eliminate current assessment fees, wherever possible, in 
response to their receipt of SAE funds. The ``maintenance of effort'' 
provision of the proposal was designed to promote this goal by ensuring 
that States would continue to provide the same level of State funds 
derived from sources other than assessment fees. Since the total of 
State and Federal funds provided for food distribution would, in many 
cases, increase, assessment fees could be reduced or eliminated.
    Nevertheless, the Department recognizes the concerns raised by 
commenters and has no desire to adopt provisions that could potentially 
have a negative impact on operations in some States. For these reasons, 
the Department wishes to reconsider these discretionary issues 
regarding FDP funding and review available options, including possible 
alternatives to the proposal. Therefore, these provisions are not 
included in this final regulation; rather, they will be treated in a 
separate, future rulemaking. The Department is, however, proceeding to 
finalize those provisions required by Public Law 101-147. The remainder 
of this preamble discusses commenters' questions and concerns on these 
issues.

Limits on Funds Retained From the Previous Fiscal Year

    The Department proposed to amend Sec. 235.5(e) and Sec. 235.6(a) to 
incorporate the mandate of section 7(a)(5)(A) of the CNA as amended by 
section 122(a)(1)(C) of Public Law 101-147, which limits the amount of 
unobligated SAE funds that may be retained and carried over into the 
next fiscal year to a maximum of 25 per cent for Fiscal Year 1991 and a 
maximum of 20 per cent for subsequent fiscal years. The proposed 
amendment also specified how the limit would be calculated and how the 
limit would be compared at the end of the first fiscal year to the 
amount of unobligated SAE funds. Essentially, the Department would 
apply the appropriate percentage to the State's initial allocation to 
establish the maximum amount of SAE that may be carried over. To 
determine the total amount of unobligated funds, the Department would 
subtract the amount reported by the State agency on Line k (Total 
Federal share of outlays [[Page 15459]] and unliquidated obligations) 
of the fourth quarter Standard Form (SF) 269 from the total amount of 
SAE funds granted for the fiscal year. The Department would then 
recover any of these funds in excess of the maximum amount of SAE that 
can be carried over. For an example of how the process would work, 
interested parties should refer to the discussion on page 63885 of the 
preamble to the proposed rule.
    Twenty-three commenters addressed the limitation provisions of the 
proposed rule, with most of them believing that such a limitation would 
have a negative impact on Program administration, although one State 
agency reported that its carryover has been well below 20 per cent, so 
compliance was not perceived to be a problem. One commenter, however, 
was concerned that the carryover limit will lead to the elimination of 
funds for reallocation, with the result that small States in particular 
will have difficulty funding their activities with only the minimum 
grant available to them. One commenter suggested that an arbitrary 
percentage is inequitable to those States with allocations below the 
national mean, and another stated that basing the carryover amount only 
on the initial allocation does not conform with the language of the 
statute, which allows the carryover of 20 per cent of the funds 
available for the fiscal year. Two commenters were concerned about 
including reallocated funds as part of the year-end balance subject to 
the carryover limitation, since these funds are sometimes received late 
in the fiscal year and returning any or all of these monies due to the 
carryover limit would defeat the purpose of reallocation. One commenter 
believed the carryover limit should apply on an agency-by-agency basis 
rather than being calculated using the total amount of SAE allocated to 
the State as a whole, and another commenter suggested that States 
should be allowed to use excess funds for demonstration projects in 
lieu of returning the monies to the Federal Government. Some commenters 
requested clarification on whether the carryover limit applies to the 
funds designated for food distribution activities, and several 
commenters noted that the last word in Sec. 235.5(e)(2) should be 
``unobligated'' rather than ``unexpended.''
    The Department recognizes commenters' concerns about the impact of 
the carryover limitation on their operations. However, section 
7(a)(5)(B) of the CNA specifically established carryover limits of 25 
per cent for Fiscal Year 1991 and 20 per cent for succeeding fiscal 
years, and the Department has no authority to waive or modify this 
mandate. Moreover, as discussed in the preamble to the proposed 
rulemaking, this limitation is applied to the initial allocation rather 
than to the total administrative funds made available during the fiscal 
year because the Department wished to simplify the overall process of 
calculation and to enable State agencies to know at the beginning of 
the fiscal year exactly what the maximum amount of their carryover 
would be. To this end, the Department believes Congress' overriding 
intent was to reduce the amount of carryover funds available as much as 
possible while still allowing States flexibility in obligating and 
expending funds. The Department believes that the proposal to base the 
carryover limit on the initial allocation is consistent with this 
intent.
    The Department does not believe this provision will adversely 
affect the overall reallocation process. Funds are reallocated to 
States on the basis of need. Consequently, States receiving 
reallocations should generally have few, if any, unobligated funds 
remaining from their initial allocations. Moreover, States will often 
request reallocations for specific expenses and can, therefore, 
obligate these funds relatively quickly. The Department recognizes that 
some small State agencies, particularly those receiving minimum grants, 
could receive reallocations which are large relative to the States' 
carryover limit, and in these instances a State's reallocation might be 
affected. These situations should not be common, however, and the 
Department will make every effort to provide reallocations well in 
advance of the end of the fiscal year in order to facilitate the 
States' ability to obligate a major portion of their reallocations 
before the funds become subject to the carryover limit.
    This limitation applies to all SAE funds received by any State 
agency for the administration of any aspect of the child nutrition 
programs. Funding for food distribution activities, therefore, is 
subject to the carryover limit, regardless of whether the State 
education agency or another State agency performs these activities. 
Moreover, under the proposed regulation the limitation would be applied 
on an agency-by-agency basis, since the Department receives separate 
SF-269's from each administering agency and has no feasible means of 
making the necessary year-end comparison for the State as a whole. With 
respect to allowing States to retain excess funds for demonstration 
projects, the statute is specific about requiring the return of excess 
funds and how the recovered funds may be used, and the Department does 
not have the authority to authorize alternate uses. Further discussion 
of this issue appears later in this preamble.
    Finally, proposed Sec. 235.5(e)(2) reads as follows:

    (2) At the end of the fiscal year following the fiscal year for 
which funds were allocated, each State agency shall return any funds 
made available which are unexpended.

    Several commenters believed that the last word of this paragraph 
should read ``unobligated'' rather than ``unexpended.'' The Department 
notes, however, that this provision clearly refers to the recovery made 
at the end of the second fiscal year for which SAE has been available, 
not the return of funds in excess of the carryover limits. Proposed 
Sec. 235.5(e)(2) merely restated the requirement that has always been 
in effect. Previously, this requirement for the recovery of unexpended 
funds at the end of the second fiscal year was stated in Sec. 235.5(e).
    For these reasons, this final rulemaking adopts the provisions 
limiting the amount of SAE that may be carried over from one fiscal 
year to the next as proposed. The Department emphasizes, however, that 
this carryover limit does not apply to funds made available to State 
agencies which agree to assume responsibility for programs previously 
administered directly by FCS, as authorized under the newly 
redesignated Sec. 235.4(d). These funds are intended to assist States 
with costs associated with start-up operations when assuming 
responsibility for a program formerly administered by FCS.
    As such, they are made infrequently and are intended for a specific 
purpose. Consequently, the Department does not consider that this 
funding is subject to the carryover limit and is amending 
Sec. 235.5(e)(1) to specify that start-up funds are excluded from the 
amount subject to the retention limit. In addition, the reference in 
Sec. 235.5(e) to Sec. 235.4 (a) through (e) is revised from the 
proposal to Sec. 235.4 (a) through (c) to reflect the deletion of the 
proposed new Sec. 235.4 (d) and (e). These latter paragraphs provided 
for pro rata shares of SAE funds for FDP administrative purposes which 
are not included in this final regulation. This same change is made to 
the references in Sec. 235.6(a).

Use of Returned SAE Funds

    The Department proposed to add a new paragraph--Sec. 235.6(h) to 
incorporate the mandate of Public Law 101-147 regarding how any excess 
carryover funds recovered by the Department were to be used. Section 
7(a)(5)(B) as amended by section [[Page 15460]] 122(a)(1)(C) of Public 
Law 101-147 stipulated that in Fiscal Year 1992, a minimum of $3 
million of recovered monies be made available for the purpose of 
providing grants to private nonprofit organizations participating in 
demonstration projects to provide food service to homeless children 
under the age of 6 in emergency shelters. The law also mandated that a 
minimum of $4 million be made available for this purpose in each of the 
next two fiscal years. Any funds in excess of the amount made available 
to these demonstration projects would be reallocated to States which 
need SAE funds. The Department emphasized, however, that any disbursal 
of funds to homeless shelters or the States would be subject to 
availability of recovered monies.
    Commenters did not generally discuss this provision except to 
recognize that the use of recovered funds for this purpose is mandated 
by the statute. One commenter, however, expressed concern that SAE 
plans might be disapproved or significantly modified to ensure that 
sufficient funding is available to fund these projects. The Department 
wishes to emphasize that there will be no change in the procedures 
currently in place to review and approve SAE plans. The Department 
acknowledges that the disallowance of outlays stated in the plan could 
result in additional funds being carried over and, hence, subject to 
the limitation and possible recovery. The Department considers, 
however, that the primary purpose of SAE is to ensure that States have 
adequate funds available to administer the child nutrition programs 
effectively. To this end, the Department will continue to negotiate 
these plans with the States to ensure that outlays are appropriate but 
has no intention of artificially reducing the funding available to 
States in order to provide funds for the homeless demonstration 
projects.
    Since publication of the proposed rule, additional legislation was 
passed which impacts upon the use of recovered SAE funds. On September 
30, 1992, Public Law 102-512, the Children's Nutrition Assistance Act 
of 1992, was enacted which further amended the provision on the use of 
excess carryover funds for demonstration projects for the homeless. 
Public Law 102-512 amended section 7(a)(5)(B)(i) of the CNA to require 
that a minimum of $1,000,000 in Fiscal Years 1993 and 1994 be available 
at the beginning of the fiscal year, based on Departmental estimates of 
the funds expected to be recovered as a result of the limit on funds 
that can be carried over. The Department is, therefore, incorporating 
the language of Public Law 102-512 on the use of returned funds into 
Sec. 235.6(h) to comply with this most recent statutory requirement.

Alternate State Agencies for the CACFP

    Section 7(a)(3) of the CNA as amended by section 122(a)(1)(A) of 
Public Law 101-147 requires that if an agency other than the State 
educational agency administers the CACFP, the State must ensure that 
such State agency which administers the CACFP is provided an amount 
equal to no less than the SAE funds due to the State for the CACFP. 
Since the Department already provides funds directly to State agencies 
administering the CACFP, the practical effect of the applicability of 
this provision concerns the ``adult care component'' of the CACFP. 
Accordingly, the Department proposed to add a new paragraph, to be 
designated as Sec. 235.4(c), to allow a prorated portion of the State's 
SAE allocation for the CACFP to be made available directly to another 
agency in the State when that agency administers the adult care 
component of the CACFP. The Department further proposed to calculate 
the prorated share by determining what percentage of total CACFP monies 
expended by that State in the second preceding fiscal year was 
generated by the adult care component of the CACFP and applying that 
percentage to the State's total SAE allocation for the CACFP. To 
accommodate this change, the Department also proposed a number of 
technical amendments and proposed to delete the word ``agency'' where 
it appears in Sec. 235.4 (b)(1) and (4) to clarify that it is the State 
which earns the total CACFP grant.
    The Department received eight comments on this proposal. Three of 
the commenters argued that the $30,000 discretionary grant made 
available to assist in administering the CACFP should be redirected to 
help fund the monitoring requirements of the NSLP. Three commenters 
from one State (which has designated an alternate agency to administer 
the adult care component of the CACFP) maintained that the prorated 
share is insufficient and recommended a minimum level of $50,000 per 
year, while another State suggested that the provision be eliminated 
entirely, since redirecting of finite SAE funds would weaken overall 
Program administration. Finally, one commenter recommended adjusting 
the SAE nondiscretionary allocation for the CACFP based on growth in 
the Program between the second preceding year and the current year.
    As noted in the preamble to the proposed rule, the Department 
believes this amendment to section 7(a)(3) of the CNA must be read in 
the context of section 17(p)(6) of the National School Lunch Act as 
amended by section 105(b)(3)(B) of Public Law 101-147, which authorizes 
governors to designate alternate agencies to administer the adult care 
component of the CACFP. In those instances in which a governor decides 
that an agency other than the CACFP agency is better able to serve the 
adult community, the Department believes it is consistent with the 
alternate State agency legislation to ensure that a portion of SAE 
funds is provided to that agency. However, the Department continues to 
stress that the total SAE allocation is earned by the CACFP as a whole. 
Moreover, the total amount of SAE available for all of the child 
nutrition programs is limited. Consequently, if the Department were to 
guarantee a minimum level of funding for the adult care component of 
the CACFP, the amount of funds available to administer the other child 
nutrition programs would be diminished. Finally, the Department notes 
that nationally, the adult care component accounts for only slightly 
more than 1 per cent of the total funding for the CACFP, and 
designating a large pool of administrative funding strictly for this 
purpose would not be justified. Therefore, it would not be reasonable 
to provide a minimum grant of $50,000 to an alternate agency solely to 
administer the adult care component of the CACFP. The Department does 
wish to emphasize, however, that in those States which do elect to 
administer the adult care component through an alternate agency, the 
agency administering the child care component of the CACFP may elect to 
transfer a portion of its SAE funds to the alternate agency in 
accordance with established FCS procedures. This would be in addition 
to the amount required by the regulations to be provided the agency 
administering the adult care component of the CACFP.
    Secondly, the Department does not agree with those commenters who 
wish to redirect the CACFP discretionary grant to cover the costs of 
monitoring the school nutrition programs. The Department makes these 
grants available to CACFP agencies in recognition of the fact that this 
Program has heavy monitoring responsibilities, which actually exceed 
the requirements for monitoring of schools, as well as other 
administrative requirements, such as the oversight of approval when 
licensing or approval is not otherwise available, [[Page 15461]] which 
are unique to the CACFP. If States could redirect the entire 
discretionary money from the CACFP to school programs, the overall 
management of the CACFP could be weakened. The Department also provides 
States with $4 million for the specific purpose of conducting reviews 
of the NSLP. For these reasons, the Department could not justify 
redirecting monies from the CACFP to NSLP.
    The Department recognizes the concern about possible fragmentation 
of the SAE grant for the CACFP if funding is made available to an 
alternate agency to administer the adult care component. As the above 
discussion makes clear, the Department is anxious to maintain 
sufficient funding to ensure proper management of the Program. Under 
the proposal, a portion of the SAE grant is designated for an alternate 
agency only when the State, itself, has decided to split the 
administration of the CACFP. Since this action would be voluntary on 
the part of the State, the Department assumes that the State has 
determined that the advantages, both financial and administrative, of 
shifting the adult care component outweigh any reduction the agency 
administering the CACFP may experience in its SAE grant. For these 
reasons, the Department is adopting as proposed the provision to 
designate a pro rata share of the CACFP's SAE grant for an alternate 
agency administering the adult care component.
    The final comment to address on this provision is the 
recommendation that the SAE nondiscretionary allocation for the CACFP 
be adjusted based on growth in the Program between the second preceding 
year and the current year. The Department is unable to adopt this 
recommendation because the time frame for determining the level of 
nondiscretionary funds for the CACFP is statutory.

Miscellaneous Provisions

    In addition to the changes described above, the Department proposed 
a number of amendments intended to remove obsolete references, provide 
clarification and incorporate the provision in Public Law 101-147 
mandating cooperation with studies authorized by the Secretary. In 
Sec. 235.1 and Sec. 235.2(s), the references to the Food Service 
Equipment Assistance Program were deleted, as were references to Fiscal 
Year 1986 in Sec. 235.5(b) and Fiscal Year 1980 in Sec. 235.7(c). Also, 
the definition of ``State'' in Sec. 235.2(r) was revised by deleting 
references to the Trust Territories and American Samoa and replacing 
them with references to the Commonwealth of the Northern Marianas 
Islands and the Republic of Palau, respectively. The Department notes 
that separate SAE funds are no longer made available to the 
Commonwealth of the Northern Marianas Islands; it is not necessary, 
therefore, to include that entity in the definition at all. 
Consequently, in this final regulation, the old references are replaced 
by the single reference to the Republic of Palau.
    To distinguish more clearly between nondiscretionary and 
discretionary SAE funding, the proposed rule amended Sec. 235.4 by 
redesignating paragraph (a) as paragraph (a)(1), adding new 
introductory text to paragraph (a), redesignating paragraph (b) as 
paragraph (a)(2) and adding new introductory text to paragraph (b) to 
indicate the additional discretionary SAE funding designations. The 
Department also proposed to delete the second sentence of 
Sec. 235.4(b)(3)(iv) and add a new paragraph (i) to Sec. 235.4 to 
clarify that funds allotted to State agencies under Sec. 235.4 are 
subject to the reallocation provisions in Sec. 235.5(d).
    Finally, the Department proposed changes to Sec. 235.7(c) to comply 
with section 122(a)(2) of Public Law 101-147, which amended section 
7(g) of CNA to require that SAE funds cannot be distributed unless the 
State agrees to participate fully in any studies authorized by the 
Secretary. The proposal deleted the phrase ``studies directed by 
Congress and requested'' (by the Secretary) and replaced it with the 
word ``authorized'' as well as deleted the reference to Fiscal Year 
1980.
    The Department received only one comment on these provisions, and 
that commenter observed that the requirement to participate in studies 
authorized by the Secretary should not be imposed unless there is 
specific authorizing legislation. As noted in the preamble to the 
proposed rule and in this preamble above, the change was in response to 
the specific mandate of Public Law 101-147. Therefore, the Department 
is adopting this provision and the other miscellaneous amendments as 
proposed. However, because of changes in the final rule in Sec. 235.4, 
the proposed new Sec. 235.4(i) is now designated as Sec. 235.4(g).
    The Department is also taking this opportunity to correct an 
erroneous reference which was discovered subsequent to the publication 
of the proposed rule. Section 235.7(b) contains a reference to 
Sec. 235.4(c). In the proposed rule, Sec. 235.4(c) was redesignated 
Sec. 235.4(f) because three new paragraphs were being inserted after 
Sec. 235.4(b), and the reference was changed in Sec. 235.7(b) to 
accommodate this redesignation. The Department notes, however, that the 
original reference was incorrect, since Sec. 235.4(c) did not address 
carryover. The correct reference should have been Sec. 235.6(a), and 
this reference is being incorporated into Sec. 235.7(b) of this final 
rule.
    Changes are also made to Sec. 235.4(b)(4) to revise references to 
reflect other changes made by this regulation and to correct an 
obsolete reference to Sec. 235.4(f) which was renamed Sec. 235.4(c) by 
an earlier regulation. This paragraph is also changed to clarify that 
funds provided under this paragraph are allocated on a State basis for 
the CACFP and the FDP, not for each State agency that administers these 
programs.

Implementation

    The provisions of section 122 affecting SAE funds were effective 
October 1, 1989. Accordingly, the Department has already implemented 
these requirements, and this rule is made effective 30 days after 
publication.

List of Subjects in 7 CFR Part 235

    Administrative practice and procedure, Child and Adult Care Food 
Program, Food assistance programs, Grant administration, 
Intergovernmental relations, National School Lunch Program, Reporting 
and recordkeeping requirements, School Breakfast Program, Special Milk 
Program.

    Accordingly, 7 CFR part 235 is amended as follows:

PART 235--STATE ADMINISTRATIVE EXPENSE FUNDS

    1. The authority citation for part 235 continues to read as 
follows:

    Authority: Secs. 7 and 10 of the Child Nutrition Act of 1966, 80 
Stat. 888, 889, as amended (42 U.S.C. 1776, 1779).


Sec. 235.1  [Amended]

    2. In Sec. 235.1, the second sentence is amended by removing the 
words ``the Food Service Equipment Assistance Program (7 CFR Part 
230)''.


Sec. 235.2  [Amended]

    3. In Sec. 235.2:
    a. Paragraph (r) is amended by removing the words ``American Samoa, 
or the Trust Territory of the Pacific Islands'' and adding in their 
place the words ``or the Republic of Palau''.
    b. Paragraph (s)(2) is amended by removing the reference to part 
230 in the first sentence.
    4. In Sec. 235.4:
    a. Paragraph (a) is redesignated as paragraph (a)(1), and new 
paragraph (a) introductory text is added, the introductory text of 
paragraph (b) is redesignated as paragraph (a)(2); and 
[[Page 15462]] new paragraph (b) introductory text is added.
    b. The first sentence of newly redesignated paragraph (a)(1) is 
amended by removing the words ``For each fiscal year, FNS shall 
allocate'' and the word ``agency'' the first time it occurs; the first 
sentence is further amended by removing the words ``by such agency'' 
and adding in their place the words ``by such State''.
    c. The first sentence of newly redesignated paragraph (a)(2) is 
amended by removing the words ``For each fiscal year, FCS shall 
allocate'' and by removing the words ``to each State agency'' and 
adding in their place the words ``to each State''.
    d. Paragraph (b)(1) is amended by removing the words ``For each 
fiscal year, FCS shall allocate'' and the word ``agency''.
    e. Paragraph (b)(2) is revised in its entirety.
    f. The introductory text of paragraph (b)(3) is revised in its 
entirety.
    g. Paragraph (b)(3)(iv) is amended by removing the second sentence.
    h. Paragraph (b)(4) is revised in its entirety.
    i. Paragraphs (c) through (e) are redesignated as paragraphs (d) 
through (f), respectively; and a new paragraph (c) is added.
    j. Newly redesignated paragraphs (d) through (f) are amended by 
adding paragraph headings.
    k. In newly redesignated paragraph (f), the references to 
paragraphs ``(a)'' and ``(b)'' are removed and references to paragraphs 
``(a)(1)'' and ``(a)(2)'' are added in their place.
    l. A new paragraph (g) is added.
    The additions read as follows:


Sec. 235.4  Allocation of funds to States.

    (a) Nondiscretionary SAE Funds. For each fiscal year, FCS shall 
allocate the following:
* * * * *
    (b) Discretionary SAE Funds. For each fiscal year, FCS shall 
provide the following additional allocations:
* * * * *
    (2) $30,000 to each State which administers the Food Distribution 
Program (part 250 of this chapter) in schools and/or institutions which 
participate in programs under parts 210, 220, 226 of this chapter.
    (3) Amounts derived by application of the following four-part 
formula to each State agency which is allocated funds under paragraph 
(a) of this section:
* * * * *
    (4) Funds which remain after the allocations required in paragraphs 
(a)(1), (a)(2), (b)(1), (b)(2) and (b)(3) of this section, and after 
any payments provided for under paragraph (c) of this section, as 
determined by the Secretary, to those States which administer the Food 
Distribution Program (part 250 of this chapter) in schools and/or 
institutions which participate in programs under parts 210, 220, or 226 
of this chapter and to those States which administer part 226 of this 
chapter. The amount of funds to be allocated to each State for the Food 
Distribution Program for any fiscal year shall bear the same ratio to 
the total amount of funds made available for allocation to the State 
for the Food Distribution Program under this paragraph as the value of 
USDA donated foods delivered to the State for schools and institutions 
participating in programs under parts 210, 220 and 226 of this chapter 
during the second preceding fiscal year bears to the value of USDA 
donated foods delivered to all the States for such schools and 
institutions during the second preceding fiscal year. The amount of 
funds to be allocated to each State which administers the Child and 
Adult Care Food Program for any fiscal year shall bear the same ratio 
to the total amount of funds made available for allocation to all such 
States under this paragraph as the amount of funds allocated to each 
State under paragraph (a)(2) of this section bears to the amount 
allocated to all States under that paragraph.
    (c) SAE Funds for the Child and Adult Care Food Program. If a State 
elects to have a separate State agency administer the adult care 
component of the Child and Adult Care Food Program, such separate State 
agency shall receive a pro rata share of the SAE funds allocated to the 
State under paragraphs (a)(2), (b)(1), and (b)(4) of this section which 
is equal to the ratio of funds expended by the State for the adult care 
component of the Child and Adult Care Food Program during the second 
preceding fiscal year to the funds expended by the State for the entire 
Child and Adult Care Food Program during the second preceding fiscal 
year. The remaining funds shall be allocated to the State agency 
administering the child care component of the Child and Adult Care Food 
Program.
    (d) SAE Start-up Cost Assistance for State Administration of Former 
ROAPs. * * *
    (e) SAE Funding Reduction Upon State Agency Termination of a Food 
Service Program. * * *
    (f) SAE Funds for ROAPs. * * *
    (g) Reallocation. Funds allotted to State agencies under this 
section shall be subject to the reallocation provisions of 
Sec. 235.5(d).
    5. In Sec. 235.5:
    a. The first sentence of paragraph (b)(1) is amended by removing 
the semicolon following the words ``upcoming fiscal year'' and adding 
in its place a period, and by removing the remainder of the sentence.
    b. Paragraph (e) is revised in its entirety.
    The revision reads as follows:


Sec. 235.5  Payments to States.

* * * * *
    (e) Return of funds. (1) In Fiscal Year 1991, up to 25 per cent of 
the SAE funds allocated to each State agency under Sec. 235.4 may 
remain available for obligation and expenditure in the second fiscal 
year of the grant. In subsequent fiscal years, up to 20 percent may 
remain available for obligation and expenditure in the second fiscal 
year. The maximum amount to remain available will be calculated at the 
time of the formula allocation by multiplying the appropriate 
percentage by each State agency's formula allocation as provided under 
Sec. 235.4(a) through (c). At the end of the first fiscal year, the 
amount subject to the retention limit is determined by subtracting the 
amount reported by the State agency as Total Federal share of outlays 
and unliquidated obligations on the fourth quarter Standard Form (SF) 
269, Financial Status Report, from the total amount of SAE funds made 
available for that fiscal year (i.e., the formula allocation adjusted 
for any transfers or reallocations). However, funds provided under 
Sec. 235.4(d) are not subject to the retention limit. Any funds in 
excess of the amount that remains available to each State agency shall 
be returned to FCS.
    (2) At the end of the fiscal year following the fiscal year for 
which funds were allocated, each State agency shall return any funds 
made available which are unexpended.
    (3) Return of funds by the State agency shall be made as soon as 
practicable, but in any event, not later than 30 days following demand 
by FCS.
    6. In Sec. 235.6:
    a. Paragraph (a) is amended by revising the last sentence.
    b. Paragraph (c) is revised in its entirety.
    c. Paragraphs (d) and (f), previously reserved, are removed; 
paragraphs (e), (g), and (h) are redesignated as (d), (e), and (f), 
respectively, and a new paragraph (g) is added.
    The revisions and addition read as follows:


Sec. 235.6  Use of funds.

    (a) * * * Up to 25 per cent of funds allocated under Sec. 235.4(a) 
through (c) [[Page 15463]] for Fiscal Year 1991 and up to 20 per cent 
of funds allocated in subsequent fiscal years to a State agency may, 
subject to the provisions of Sec. 235.5 of this part, remain available 
for obligation and expenditure by such State agency during the 
following fiscal year.
* * * * *
    (c) The SAE funds allocated under Sec. 235.4(b)(2), (b)(4), and (d) 
shall be used exclusively for Food Distribution Program administrative 
expenses for the programs under Parts 210, 220, and 226 of this chapter 
by any distributing agency which receives such funds. SAE funds 
allocated under Sec. 235.4(a)(1), (a)(2), (b)(1), (b)(3) and (f), and 
those funds for the Child and Adult Care Food Program under (b)(4) 
which are not otherwise redirected for the Food Distribution Program 
under Sec. 235.4(d) may be used to assist in the administration of the 
Food Distribution Program for such purposes. However, no funds 
designated for the exclusive use of the Food Distribution Program may 
be transferred by any State agency for other purposes. Furthermore, for 
each fiscal year beginning with Fiscal Year 1993, expenditures of funds 
from State sources for administrative costs incurred in the 
distribution of USDA donated foods to schools and institutions which 
participate in programs governed by parts 210, 220, and/or 226 of this 
chapter shall not be less than the amount of such funds expended in 
Fiscal Year 1991.
* * * * *
    (g) FCS shall allocate, for the purpose of providing grants on an 
annual basis to public entities and private nonprofit organizations 
participating in projects under section 18(c) of the National School 
Lunch Act, not more than $4,000,000 in each of Fiscal Years 1993 and 
1994. Subject to the maximum allocation for such projects for each 
fiscal year, at the beginning of each of Fiscal Years 1993 and 1994, 
FCS shall allocate, from funds available under Sec. 235.5(d) that have 
not otherwise been allocated to States, an amount equal to the 
estimates by FCS of the funds to be returned under paragraph (a) of 
this section, but not less than $1,000,000 in each fiscal year. To the 
extent that amounts returned to FCS are less than estimated or are 
insufficient to meet the needs of the projects, FCS may allocate 
amounts to meet the needs of the projects from funds available under 
this section that have not been otherwise allocated to States. FCS 
shall reallocate any of the excess funds above the minimum level in 
accordance with Sec. 235.5(d).


Sec. 235.7  [Amended]

    7. In Sec. 235.7,
    a. The second sentence of paragraph (b) is amended by removing the 
reference to ``Sec. 235.4(c) of this part'' and adding in its place the 
reference to ``Sec. 235.6(a)''.
    b. The first sentence of paragraph (c) is amended by removing the 
words ``directed by Congress and requested'' and adding in their place 
the word ``authorized''. Paragraph (c) is further amended by removing 
the words ``FY '80'' from the last sentence.


Sec. 235.11  [Amended]

    8. In Sec. 235.11:
    a. Paragraph (b)(2) is amended by removing the reference to 
``Sec. 235.4(a)'' and adding in its place the reference to ``Sec. 235.4 
(a)(1)''.
    b. Paragraph (b)(3) is amended by removing the reference to 
``Sec. 235.4(b)'' and addding in its place the reference to 
``Sec. 235.4(a)(2)''.
    c. Paragraph (b)(4) is amended by removing the reference to 
``Sec. 235.4(a)'' and adding in its place the reference to `` 
Sec. 235.4(a)(1)''.
    d. Paragraph (b)(7) is amended by removing the reference to 
``Sec. 235.4(e)'' and adding in its place the reference to 
``Sec. 235.5(d)''.

    Dated: March 16, 1995.
William E. Ludwig,
Administrator.
[FR Doc. 95-7310 Filed 3-23-95; 8:45 am]
BILLING CODE 3410-30-U